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

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

 

CASH Operating companies' cash generation £1,717m 2020: £1,713m

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RESILIENCE Solvency II Surplus and SCCR £5.3bn and 180% 2020: £5.3bn and 164%

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GROWTH Incremental new business long-term cash generation £1,184m 2020: £766m

 

 

Financial highlights

 

Delivering cash

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

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

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

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

 

Delivering resilience

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

·      Increased Solvency II Shareholder Capital Coverage Ratio^2,4 ('SCCR') of 180% as at 31 December 2021 (2020: 164%^3,4); SCCR is currently at the top-end of our target range of 140%-to-180%, which provides significant capacity to invest into both organic and inorganic growth opportunities.

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

 

Delivering growth

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

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

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

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

 

Other key financial metrics

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

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

 

New dividend policy

 

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

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

 

Optimising our in-force business

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

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

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

 

Enhancing our operating model and culture

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

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

 

Growing our business to support both new and existing customers

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

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

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

 

Innovating to provide our customers with better financial futures

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

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

 

Investing in a sustainable future

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

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

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

 

New targets

 

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

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

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

 

Strategic outlook

 

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

 

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

 

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

 

Enquiries

Investors/analysts:

Claire Hawkins, Director of Corporate Affairs, Phoenix Group

+44 (0)20 4559 3161

Andrew Downey, Investor Relations Director, Phoenix Group

+44 (0)20 4559 3145

Media:

Douglas Campbell, Teneo

+44 (0)7753 136 628

Shellie Wells, Corporate Communications Director, Phoenix Group

+44 (0)20 4559 3031

 

Presentation and financial supplement details

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

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

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

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

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

 

Dividend details

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

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

Footnotes

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

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

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

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

5.    Current Fitch leverage ratio is estimated by management.

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

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

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

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

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

Legal Disclaimers

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

Chairman's statement

 

Embracing our purpose

 

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

 

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

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

 

Our purpose drives our actions

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

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

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

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

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

 

Inaugural organic dividend increase

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

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

 

Board changes

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

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

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

 

Outlook

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

 

Thank you

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

 

Nicholas Lyons

Chairman

 

 

 

Chief Executive Officer's report

Phoenix is a growing, sustainable business

 

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

 

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

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

 

A pivotal year for Phoenix

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

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

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

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

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

 

Market trends offer growth opportunities

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

 

Delivering our strategy

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

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

 

Optimise our in-force business

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

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

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

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

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

 

Enhance our operating model and culture

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

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

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

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

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

 

Grow our business to support both new and existing customers

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

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

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

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

 

Innovate to provide our customers with better financial futures

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

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

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

 

Invest in a sustainable future

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

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

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

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

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

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

 

Outlook

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

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

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

 

Thank you

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

 

Andy Briggs

Group Chief Executive Officer

 

 

Business review

Delivering cash, resilience and growth

 

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

 

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

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

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

 

A strong financial performance in 2021

	Key financial metrics:				2021		2020		YOY change
	Cash		Cash generation		£1,717m		£1,713m		0%
	Solvency II Capital		PGH Solvency II surplus		£5.3bn		£5.3bn		-
			PGH Shareholder Capital Coverage Ratio ('SCCR')		180%		164%		+16%pts
	New Business		Incremental long-term cash generation		£1,184m		£766m		55%
	Dividends		Total dividend per share		48.9p		47.5p
			Final dividend per share		24.8p		24.1p		+3%
Other financial metrics:				2021		2020		YOY change
Assets		Assets under administration		£310bn		£307bn¹		+1%
Leverage		Fitch leverage ratio		28%		28%		-
IFRS		(Loss)/profit after tax		£(709)m		£834m		N/A
		Operating profit before tax		£1,230m		£1,199m		3%

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

Our key performance indicators

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

Alternative performance measures

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

Cash generation

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

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

Solvency II

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

Fitch leverage

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

Incremental long-term cash generation

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

Assets under Administration

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

Operating profit

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

 

Cash

Cash generation & group liquidity

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

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

 

Group cash flow analysis

£m			2021		2020
Cash and cash equivalents at 1 January			1,055		275
Operating companies cash generation:
	Cash receipts from life companies			1,717		1,073
	Cash remittances to Standard Life international			-		(50)
Total cash receipts¹			1,717		1,023
Uses of cash:
Operating expenses			(80)		(42)
Pension scheme contributions			(11)		(80)
Debt interest			(250)		(184)
Non-operating cash outflows			(305)		(66)
Uses of cash before debt repayments and shareholder dividend			(646)		(372)
Debt repayments			(322)		-
Shareholder dividend			(482)		(403)
Total uses of cash			(1,450)		(775)
Debt issuance (net of fees)			-		1,445
Cost of acquisitions			-		(1,265)
ReAssure Holding Company cash acquired			-		580
Support of BPA activity			(359)		(228)
Closing cash and cash equivalents at 31 December			963		1,055

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

Cash receipts

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

 

Uses of cash

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

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

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

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

 

Shareholder dividend

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

 

Debt repayments & issuance (net of fees)

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

 

Support of BPA activity

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

 

Future sources and uses of cash

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

Group Long-Term Free Cash

£bn	Group LTFC Year ended 31 December 2021	Group LTFC Pro forma Year ended 31 December 20201
Long-term in-force cash generation	17.0	17.7
Less M&A and transition costs	(0.2)	(0.3)
Plus closing Holding Company cash	1.0	1.0
Long-term Group cash	17.8	18.4
Less shareholder debt	(4.6)	(5.0)
Group Long-Term Free Cash	13.2	13.4

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

Group long-term free cash

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

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

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

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

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

 

Resilience

 

Capital management

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

 

Group Solvency II capital position

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

 

Change in Group Solvency II surplus (estimated)

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

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

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

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

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

 

Change in SCCR (estimated)

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

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

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

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

 

Sensitivity and scenario analysis

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

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

 

Illustrative risk exposure stress testing

Estimated impact1 on PGH Solvency II	Surplus	SCCR
	£bn	%
Solvency II base	5.3	180
Equities: 20% fall in markets	(0.1)	4
Long-term rates: 80bps rise in interest rates2	(0.2)	3
Long-term rates: 70bps fall in interest rates2	0.2	(3)
Long-term inflation: 70bps rise in inflation3	Nil	(1)
Property: 12% fall in values4	(0.2)	3
Credit spreads: 150bps widening with no allowance for downgrades5	(0.4)	(4)
Credit downgrade: immediate full letter downgrade on 20% of portfolio6	(0.4)	(10)
Lapse: 10% increase/decrease in rates7	(0.2)	(1)
Longevity: 6 months increase8	(0.7)	(11)

 

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

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

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

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

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

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

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

8    Applied to the annuity portfolio.

 

Unrewarded market risk sensitivities

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

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

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

Rewarded credit risk sensitivities

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

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

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

Demographic risk sensitivities

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

Life company free surplus

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

	Estimated  position as at 31 December  2021 £bn
Opening Free Surplus	2.9
Surplus generation and run-off of capital requirements	0.8
Management actions	1.2
Economics, financing and other	(0.7)
Free Surplus before cash remittances	4.2
Cash remittances to holding companies	(1.6)
Closing Free Surplus	2.6

Growth

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

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

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

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

Incremental new business long-term cash generation

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

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

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

Retirement Solutions

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

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

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

Workplace

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

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

Customer savings and investment ('CS&I')

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

Europe

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

SunLife

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

Group AUA

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

Heritage net flows

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

Retirement Solutions net flows

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

 

 

Workplace net flows

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

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

Other asset businesses net flows

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

Other movements including markets

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

 

IFRS Results

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

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

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

IFRS profit and loss statement

£m	2021	2020
Heritage	537	431
Open	788	817
Service company	(24)	6
Group costs	(71)	(55)
Operating profit before tax	1,230	1,199
Investment return variances and economic assumption changes	(1,125)	101
Amortisation and impairment of intangibles	(639)	(482)
Other non-operating items	(65)	281
Finance costs	(217)	(191)
Profit before tax attributable to non-controlling interest	128	36
(Loss)/profit before tax attributable to owners	(688)	944
Tax charge attributable to owners	(21)	(110)
(Loss)/profit after tax attributable to owners	(709)	834

 

IFRS (loss)/profit after tax

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

 

Operating profit

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

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

 

Basis of operating profit

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

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

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

 

Heritage operating profit

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

 

Open operating profit

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

Service company

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

 

Group costs

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

 

Investment return variances and economic assumption changes

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

 

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

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

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

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

 

Other non-operating items

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

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

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

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

 

Finance costs

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

 

Tax charge attributable to owners

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

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

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

 

Financial leverage

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

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

 

Dividend

Inaugural organic dividend increase

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

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

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

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

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

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

 

Future dividend policy and approach

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

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

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

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

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

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

Outlook

 

Looking ahead

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

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

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

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

 

New financial targets

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

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

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

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

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

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

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

 

Rakesh Thakrar

Group Chief Financial Officer

 

 

Principal risks and uncertainties facing the Group

 

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

 

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

Strategic priorities:

1 Optimise our in-force business

2 Enhance our operating model and culture

3 Grow our business to support both new and existing customers

4 Innovate to provide our customers with better financial futures

5 Invest in a sustainable future

Risk	Impact	Mitigation	Strategic priorities	Change from 2020 Annual Report and Accounts
STRATEGIC RISK
The Group fails to make further value adding acquisitions or effectively transition acquired businesses	The Group is exposed to the risk of failing to drive value through inorganic growth opportunities, including acquisitions of life and pensions books of business. The transition of acquired businesses into the Group, including customer migrations, could introduce structural or operational challenges that result in the Group failing to deliver the expected outcomes for customers or value for shareholders.	The Group continues to assess and execute new inorganic growth opportunities and applies a clear set of criteria to assessing these opportunities. The Group's acquisition strategy is supported by the Group's financial strength and flexibility, strong regulatory relationships and its track record of generating value and delivering good customer outcomes that are in line with expectations. The financial and operational risks of target businesses are assessed in the acquisition phase and potential mitigants are identified. Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations. Customer migrations are planned thoroughly with robust execution controls in place. Lessons learned from previous migrations are applied to future activity to continuously strengthen the Group's processes.	1 2 3	No change Significant progress has been made in 2021 on the Standard Life Assurance and ReAssure plc integrations, with further integration of a number of key business areas, including Finance and Actuarial. The Group has also made the strategic decision to re-phase the remaining legacy Standard Life migrations in order to build new capability to support future new business growth, which means the legacy Standard Life migrations will now complete by 2025. A key milestone in the Standard Life Assurance integration was delivered in September 2021 when the Group received PRA approval for its harmonised Internal Model, bringing together the Internal Models of Standard Life Assurance and Phoenix. Harmonisation brings the Group a material enhancement to its risk management and modelling capabilities. This fundamentally underpins the security of the Group's customers. The alignment to and embedding of the Group's Risk Management Framework within ReAssure plc was successfully completed in 2021. The Group's ongoing investment in technology and enhancing the technological infrastructure of the Group is informed by lessons learned from completed integration activities. Investments aim to deliver a stable and scalable environment to deliver market leading migrations and integrations as the Group delivers its strategic objectives through acquisitions.
The Group's strategic partnerships fail to deliver the expected benefits	Strategic partnerships are a core enabler for delivery the Group's strategy; they allow it to meet the needs of its customers and clients and deliver value for its shareholders. The Group's end state operating model will leverage the strengths of its strategic partners whilst retaining in-house key skills which differentiate it from the market. There is a risk that the Group's strategic partnerships do not deliver the expected benefits. Some of the Group's key strategic partnerships include: abrdn plc: Provides investment management services to the Group including the development of investment solutions for customers. abrdn plc manages c. £165 billion of the Group's assets under administration, at January 2022. TCS: The Group's enlarged partnership with TCS is expected to support growth plans for the Open business, enabling further market-leading digital and technology capabilities to be developed to support enhanced customer outcomes. HSBC: Provides fund accounting services to the Group.	The Group has in place established engagement processes with abrdn plc to oversee and develop the strategic partnership. These processes reflect the simplified and extended strategic partnership between the Group and abrdn plc that was announced in February 2021. The Group's engagement with Diligenta, and its parent TCS, adheres to a rigorous governance structure, in line with the Group's Supplier Management Model. As a result, productive and consistent relationships have been developed with TCS, which will continue to develop throughout future phases of the enlarged partnership. The Group has in place established processes to oversee services provided by HSBC.	2 3 4	No change Whilst the Group has strengthened and simplified its strategic partnerships over 2021, 'No Change' is reflective of the Group's ongoing reliance on its strategic partners to deliver the volume of change needed to deliver the Group's strategic objectives. The Group continues to develop the partnership with TCS to support its strategic deliverables. Both parties have managed the impacts of COVID-19 with actions being taken to protect strategic and BAU activity. Actions include the implementation of hybrid working models and the strengthening of change management and prioritisation processes. The simplified and extended partnership with abrdn plc continues to progress towards the Target Operating Model with key milestones such as the transfer of specialist colleagues back to the Group alongside the purchase of the Standard Life brand from abrdn plc completed in 2021.
The Group fails to deliver long-term growth in its Open business	The Open business has strong foundations and is central to the Group's purpose of helping people secure a life of possibilities. It is also fundamental to the Group's plans of proving 'the wedge' which assumes that Open business growth can offset the run-off from the in-force business and bring sustainability to organic cash generation. Confidence in the Group might be diminished if the Open business fails to deliver against its strategic objectives, particularly as the Group seeks to promote a 'customer obsessed' mind-set underpinned by strong retention and consolidation as customers journey to and through retirement.	The Group's Open Division Business Unit structure brings focus and accountability to its Open ambitions, particularly in key growth areas of Retirement Solutions (including Bulk Purchase Annuities (BPA)) and Pensions and Savings. The Open Division holds an annual strategy setting exercise to consider customer needs, interests of shareholders, the competitive landscape and the Group's overall purpose and objectives. As part of its Annual Operating Plan the Group is committed to making significant investment in its Open business that will include propositions which are driven by customer insight. The Group is established in the BPA  market and continues to invest in its operating model to further strengthen its capability to support its growth plans. For new BPA business, the Group continues to be selective and proportionate, focusing on value not volume, by applying the Group's rigorous Capital Allocation Framework.	2 3 4	No change Long-term cash generation, driven by BPA activity, in the Open business in 2021, offset the run-off of the in-force business for the year. However, 'No Change' reflects that there is still uncertainty (both in internal and external environments) around the delivery of consistent long-term growth. Over 2021 the Group completed BPA transactions with a combined premium of £5.6 billion, more than double the premiums of 2020. This demonstrates the Group has the ability to compete and win in the BPA market. In 2021 the Group purchased the Standard Life brand from abrdn plc. The brand is central to the Group's plans, will elevate its market presence and enhance the Standard Life experience for customers, clients, financial advisers and employee benefit consultants. The Group continues to develop its Workplace propositions under the Standard Life brand and strengthen the Group's position as a leading pensions provider. In addition to the brand purchase, 68 roles in marketing, retail adviser distribution and data were also transferred from abrdn plc, bringing considerable subject matter expertise into the Group and enhancing its Open business capabilities.
The Group does not have sufficient capacity and capability to fully deliver its significant change agenda which is required to execute the Group's strategic objectives	The Group's ability to deliver change on time and within budget could be adversely impacted by insufficient resource and capabilities as well as inefficient prioritisation, scheduling and oversight of projects. The risk could materialise both within the Group and its strategic partners. This could result in the benefits of change not being realised by the Group in the timeframe assumed in its business plans and may result in the Group being unable to deliver its strategic objectives.	The Group's Change Management Framework was strengthened in 2021 with an enhanced change model, consistent with ensuring empowerment and accountability within Business Units to effectively deliver change. The Group continues to assess the prioritisation of change to ensure there is clear alignment to the Group's strategy. Information setting out the levels of resource demand and supply, both a current and forecast view, will continue to be provided to accountable senior management so that informed decision-making can take place. This aims to ensure all material risks to delivery are appropriately identified, assessed, managed, monitored and reported.	1 2 3 4 5	No change In 2022, the Group will continue to manage a significant volume of change, consistent with 2021. A strengthening of the Change Management Framework has been delivered over the last 12 months. Following an external review, the Group has delivered improvements to resource management practices and introduced a new portfolio and hub model to simplify the management of a complex change stack. This promotes the delegation of responsibility; avoiding bottlenecks at senior management.
The Group fails to appropriately prepare for and manage the effects of climate change and wider ESG risks	The Group is exposed to market risks related to climate change as a result of the potential implications of a transition to a low carbon economy. In addition, there are long-term market, insurance, reputational, propositional and operational implications of physical risks resulting from climate change (e.g. the impact of physical risks on the prospects of current and future investment holdings, along with potential impacts on future actuarial assumptions). The Group is also exposed to the risk of failing to respond to wider Environmental, Social and Governance ('ESG') risks and delivering on its social purpose; for example, failing to meet its sustainability commitments. A failure to deliver could result in adverse customer outcomes, reduced colleague engagement, reduced proposition attractiveness and reputational risks.	A Group-wide project was undertaken to enhance the approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group's RMF, to meet the requirements of the PRA Supervisory Statement 3/19 (SS3/19). The Group's disclosures, in line with the Task Force on climate-related Financial Disclosures ('TCFD') are outlined in the Group's Climate Report. The report also includes planned future priorities across each of the TCFD focus areas. Consideration of material climate-related risks has been embedded into the Group's risk policies. The Group's sustainability strategy has continued to evolve to respond to the changing needs of stakeholders, resulting in the Group setting targets to monitor progress towards its sustainability commitments. Further details on the sustainability strategy are available in the Sustainability Report. The Group continues to actively engage with regulators on progress with all climate change and sustainability-related deliverables.	1 2 3 4 5	No change A number of positive initiatives are underway to deliver against the Group's Net-Zero targets and social purpose. However, 'No Change' is driven by the Group's recognition that significant work, over a number of years, is required to deliver on these commitments. In 2021 the Group made a commitment to reducing carbon intensity for £250 billion of its investment portfolio by at least 50% by 2030. In addition, an interim de-carbonisation target of a 25% reduction in the carbon emission intensity of its investments by 2025 has been set. The Group has been working with its key partners and suppliers to encourage them to adopt Science Based Targets (SBTi) carbon reduction targets. The TCFD disclosures in the Group's Climate Report provide an overview of progress to date in achieving compliance with SS3/19 and planned future priorities across each of the TCFD focus areas. This includes internal climate risk appetites linked to metrics and targets, further embedding of climate risk considerations within the Group's RMF and enhancement of internal climate risk reporting. The Group has taken an active approach in understanding the requirements to deliver on its social purpose; including the launch of a new think tank, Phoenix Insights.
CUSTOMER RISK
The Group fails to deliver fair outcomes for its customers or fails to deliver propositions that continue to meet the evolving needs of customers	The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and potential customer detriment. This could also lead to reputational damage for the Group and/or financial losses. In addition a failure to deliver propositions that meet the evolving needs of customers may result in the Group's failure to deliver its purpose of helping people secure a life of possibilities.	The Group's Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed. The Group Conduct Risk Framework, which overarches the Risk Universe and all risk policies, is designed to detect where customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions. The Group has a suite of customer policies which set out key customer risks and minimum control standards in place to mitigate them. The Group maintains a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes. The Group's Proposition Development Process ensures consideration of customer needs and conduct risk when developing propositions.	2 3 4 5	No change In 2021, the Group continued to make significant investments in its propositions; launching Investment Pathways and announcing a partnership with Key Group to launch a lifetime mortgage range, supporting customers with the later stages of financial planning. Throughout the pandemic the Group has continued to provide ongoing support to customers, including those most vulnerable, both when paying out on their protection plans and when making decisions about their life savings during this period of uncertainty. As noted in the 2020 Annual Report and Accounts and the 2021 Interim Report, following the acquisition of ReAssure plc the Group completed a Part VII transfer of business acquired from L&G. Customers in this book of business were migrated to the Group's in-house administration platform. The Group continues to monitor the service levels delivered to migrated customers to ensure there is alignment to internal customer service standards. In light of the situation in Ukraine a review of the legal and regulatory requirements from the sanctions has been performed. The review concluded that , at the time of writing, a low level of risk exists given that the Group has a low volume of customers that reside in Russia and Belarus. In addition, no Russian banks have employer schemes or products with the Group.
OPERATIONAL RISK
The Group or its outsourcers are not sufficiently operationally resilient	The Group is exposed to the risk of causing intolerable levels of disruption to its customers and stakeholders if it cannot maintain the provision of important business services when faced with a major operational disruption to core IT systems and operations. This could occur either in-house or within the Group's primary and downstream outsourcers and includes a range of environmental and climatic factors. The Group regularly conducts customer migrations as part of transition activities in delivering against its strategic objectives. The fundamental risk faced when executing migrations is an interruption to the safe, stable and secure customer services delivered by the Group. Any service interruption may result in the Group failing to deliver expected customer outcomes. Regulatory requirements in respect of operational resilience were published in March 2021, together with a timetable to achieve full compliance. Whilst the specific requirement to work within set impact tolerances takes effect in March 2025, the Group is already exposed to regulatory censure in the event of operational disruption where the Regulator determines that the cause was, fully or in part, a breach of existing regulation.	The Group has established an Operational Resilience Framework that identifies important business services, accountability, sets tolerances for disruption and describes the processes that will deliver the required level of resilience. This enhances the protection of customers and stakeholders, preventing intolerable harm and supports compliance with the regulations. The Group works closely with its outsourcers to ensure that the level of resilience delivered is aligned to the Group's impact tolerances. The Group and its outsourcers have well established business continuity management and disaster recovery frameworks that are subject to an annual refresh and regular testing. The Group continues to actively manage operational capacity and monitor service continuity required to deliver its strategy, including transition activities. Rigorous planning and stress testing is in place to identify and develop pre-emptive management strategies should services be impacted as a result of customer migrations. The Group and its outsourcer's implementated a hybrid working model significantly reducing exposure to a number of physical risks caused by COVID-19.	1 2 3	No change This principal risk was rated as 'Heightened' in the 2020 Annual Report and Accounts; there has been no change to the position since. There remain two core drivers for this risk assessment: COVID-19 uncertainty and strategic customer transformation. Whilst many potential exposures to COVID-19 can now be effectively mitigated, a large-scale loss of colleagues due to illness or incapacity, in the UK or globally, on a temporary or more permanent basis is more challenging to resolve in the short-term as there remains uncertainty around the efficacy of vaccines against future COVID-19 mutations. The Group aims to deliver considerable customer transformation activity in 2022, consistent with the quantum of change in 2021. Although the scale of change exposes the Group to significant risk, this is mitigated through strengthened Resilience and Change Management Frameworks. The Group has taken action through previous strategic transformation activity to reduce exposure to technological redundancy and key person dependency risk, increasing resilience of our customer service.
The Group is impacted by significant changes in the regulatory, legislative or political environment	Changes in regulation could lead to non-compliance with new requirements that could impact the Group's fair treatment of its customers. These could require changes to working practices and have an adverse impact on resources and financial performance.. Political uncertainty or changes in the government could see changes in policy that could impact the industry in which the Group operates.	The Group undertakes proactive horizon scanning to understand potential changes to the regulatory and legislative landscape. This allows the Group to understand the potential impact of these changes to amend working practices to meet the new requirements by the deadline.	1 2 3	Heightened There is uncertainty around future Solvency II reforms; expected to be proposed by HM Treasury in April 2022. The scope is expected to include a 60-70% reduction to the Risk Margin, a review of the Fundamental Spread component of the Matching Adjustment and a relaxation of Matching Adjustment eligibility rules. Detail on potential reforms to Solvency Capital Requirement has not yet featured. While there are potential upsides for the Group (including broader investment opportunities to advance the Group's growth and sustainability objectives), there remains significant uncertainty as to what the final package of reforms will look like, how it will impact the Group, and the timing for implementation. Broader financial services regulation is also being consulted on by HM Treasury, which aims to establish how much rule-making power will pass from legislation to the UK's regulators. The FCA has proposed a new Consumer Duty, designed to give a higher level of protection to consumers. The aim is to drive culture change and instil consumer trust, an aim welcomed by the Group. The FCA is consulting on draft rules and plans to publish final rules by 31 July 2022. An internal project has been initiated to support this work.
The Group or its Supply Chain are not sufficiently cyber resilient	As the Group continues to grow in size and profile this could lead to increased interest from cyber criminals and a greater risk of cyber-attack which could have significant impact on customer outcomes, strategic objectives, regulatory obligations and the Group's reputation and brand. Based on external events and trends, the threat posed by a cyber security breach remains high and the complexity of the Group's increasingly interconnected digital ecosystem exposes it to multiple attack vectors. These include phishing and business email compromise, hacking, data breach and supply chain compromise. Increased use of online functionality to meet customer preferences and future ways of working including remote access to business systems adds additional challenges to cyber resilience and could impact service provision and Customer security.	The Group is continually strengthening its cyber security controls, attack detection and response processes, identifying weaknesses through ongoing assessment and review. The Information/Cyber Security Strategy includes a continuous Information Security and Cyber Improvement Programme, which is driven by input from the Annual Cyber Risk Assessments. The Group continues to assess and utilise cyber security tools and capabilities. The specialist Line 2 Information Security & Cyber Risk team provides independent oversight and challenge of information security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions. Comprehensive outsourced service provider and third party oversight and assurance processes are in place. Regular Board, Executive, Risk and Audit Committee engagement occurs within the Group.	1 2	New principal risk Heightened Cyber Resilience was previously a component considered under the 'Operational Resilience' principal risk. The key driver for the heightened rating is the conflict in Ukraine which has increased cyber threat levels and the likelihood of a cyber-attack from a State actor, particularly on supply chains and the wider Financial Services industry which the Group relies upon. The Group regularly monitors National Cyber Security Centre guidance. The Group's cyber controls are designed and maintained to repel the full range of the cyber-attack scenarios; although the Group's main threat is considered to be Cyber Crime, from Individuals or Organised Crime Groups, the same controls are utilised to defend against a Nation-State level cyber-attack. In H2 2021 the Group continued to strengthen its cyber controls, including in areas such as Detect and Respond capabilities and infrastructure scanning capabilities.
The Group fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy	Delivery of the Group's strategy is dependent on a talented, diverse and engaged workforce. Periods of prolonged uncertainty can result in a loss of critical corporate knowledge, unplanned departures of key individuals or the failure to attract individuals with the appropriate skills to help deliver the Group's strategy. This risk is inherent in the Group's business model given the nature of acquisition activity and specialist risk management skillsets. Potential areas of uncertainty include: the ongoing transition of the Standard Life Assurance and ReAssure businesses into the Group, the expanded strategic partnership with TCS and the introduction of the hybrid working model.	Timely communications to colleagues aim to provide clarity around corporate activities. Communications include details of key milestones to deliver against the Group's plans. The Group regularly benchmarks terms and conditions against the market. The Group maintains and reviews succession plans for key individuals, ensuring successors bring appropriate diversity of thought, backgrounds and experiences. The Group continues to manage colleague uncertainty of integration activities through cross-organisational collaboration, health and wellbeing support and regular communications to staff. The Group conducts monthly colleague surveys to monitor engagement levels and identify any concerns; appropriate actions are taken following analysis of the results. The Group continues to actively manage operational capacity required to deliver its strategy with ongoing focus on senior bandwidth, attrition and sickness. A move to hybrid working offers colleagues greater flexibility in both where and how they choose to work in future.	1 2 3 4 5	No change Whilst there have been strong engagement scores in colleague surveys during 2021, 'No Change' is driven by uncertainty regarding the longer term social and marketplace impacts of the pandemic on colleague attrition and sickness. Skills essential to the Group are currently in high-demand in the wider marketplace and recruitment and retention has the potential to be impacted by post-Brexit, COVID-19 and inflationary factors. The Group continues to monitor this closely but remains confident in the attractiveness of its colleague proposition. The Group has opted to implement a hybrid working model. The approach is focused on empowerment by enabling leaders and colleagues to agree together the right working arrangements which meet individual, team and business needs. Strategic investments in technology and other resources have been made to maximise the efficacy of the hybrid model implementation. The increased scale and presence of the Group, and success in multi-site and remote working, gives greater access to a larger talent pool to attract in the future. In addition, the Group's Graduate Programmes restarted in 2021, helping to support the talent pipeline.
MARKET RISK
Adverse market movements can impact the Group's ability to meet its cash flow targets, along with the potential to negatively impact customer sentiment	The Group and its customers are exposed to the implications of adverse market movements. This can impact the Group's capital, solvency, profitability and liquidity position, fees earned on assets held, the certainty and timing of future cash flows and long-term investment performance for shareholders and customers. There are a number of drivers for market movements including government and central bank policies, geopolitical events, market sentiment, sector specific sentiment, global pandemics and financial risks of climate change, including risks from the transition to a low carbon economy.	The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In particular, the Group's increase in exposure to residential property and private investments, as a result of its BPA investment strategy, is actively monitored. The Group's exposures are currently relatively small in the context of the Group's AUM and remain within risk appetite. The Group continues to implement de-risking strategies to mitigate unwanted customer and shareholder outcomes from certain market movements, such as equities, interest rates, inflation and foreign currencies. The Group maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows. The Group's excess capital position continues to be closely monitored and managed. The Group regularly discusses market outlook with its asset managers.	1 2 3	No change Market stability improved in 2021, driven by a successful COVID-19 vaccine rollout. However, there remains significant market uncertainty as a result of the developing conflict in Ukraine which has resulted in economic sanctions being introduced against Russia and Belarus as well as the risks presented by further mutations of the COVID-19 virus. The Group continues to monitor its exposure to markets affected by the conflict in Ukraine and the effects of the conflict on markets in which the Group transacts. Inflation is considered a risk over the short to medium-term, with a shortage of labour in key industries and ongoing supply chain issues increasing costs. The Bank of England is faced with a balancing act of managing inflation and aiding the post-COVID recovery. Changes in inflation have, to date, followed market predictions; however, any unexpected moves in interest rates are likely to impact asset values significantly. The Group's strategy involves hedging the major market risks and in 2021 the Group's Stress and Scenario Testing Programme demonstrated the resilience of its balance sheet to market stresses. Contingency actions remain available to help manage the Group's capital and liquidity position if any unanticipated market movements occur.

INSURANCE RISK

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

The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if annuity policyholders live for longer than expected, then the Group will need to pay their benefits for longer. The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group's ability to meet its cash flow targets.

The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions. The Group regularly reviews assumptions to reflect the continued trend of reductions in future mortality improvements. The Group continues to manage its longevity risk exposures, which includes the use of longevity swaps and reinsurance contracts to maintain this risk within appetite. The Group actively monitors persistency risk metrics and exposures against appetite across the Open and Heritage businesses. Where required, the Group continues to take capital management actions to mitigate adverse demographic experience.

1 3

No change 'No Change' is driven by remaining uncertainty around future demographic experience as a result of COVID-19 impacts. Demographic experience and the latest views on future trends are considered in regular assumption reviews although, for most products, experience over the COVID-19 pandemic has been given little weight given its anomalous nature. The Group completed bulk annuity transactions with a combined premium of £5.6 billion in 2021. Consistent with previous transactions, the Group continues to reinsure the vast majority of the longevity risk with existing arrangements that are reviewed regularly.

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

The Group is exposed to the risk of downgrades and deterioration in the creditworthiness or default of investment, reinsurance or banking counterparties. This could cause immediate financial loss, or a reduction in future profits. The Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations.

The Group regularly monitors its counterparty exposures and has specific limits relating to individual counterparties, sector concentration and geography. The Group undertakes regular stress and scenario testing of the credit portfolio. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised. The Group regularly discusses market outlook with its asset managers. For mitigation of risks associated with stock-lending, additional protection is provided through indemnity insurance.

1 2

No change Over the last 12 months the Group has continued to undertake de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital. Furthermore, the Group has enhanced its counterparty concentration limits framework to better manage counterparty failure risk. This positive progress is balanced by residual uncertainty, due to the wider economic and social impacts arising from COVID-19, and the developing conflict in Ukraine which presents an increased risk of downgrades and defaults. This results in 'No Change' overall. The Group has immaterial credit exposure to Russia and no shareholder exposure to sanctioned Russian banks. The Group continues to increase investment in illiquid credit assets as a result of BPA transactions. This is in line with the Group's strategic asset allocation plan and within risk appetite.

Risk Title	Description	Risk universe category
Consumer Duty	The FCA has set out plans for a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers. Consultation underway to introduce a new 'Consumer Duty', setting higher expectations for the standard of care that firms provide to consumers.	Customer
Artificial Intelligence	Risk in late adoption of operational efficiency opportunities that AI capabilities could present, e.g. by not keeping up with emerging machine learning and perception systems.	Operational
Solvency II Reforms	HM Treasury issued Call for Evidence on potential reforms to SII for the UK, post-Brexit. The scope is expected to include a 60-70% reduction to the Risk Margin, a review of the Fundamental Spread component of the Matching Adjustment and a relaxation of Matching Adjustment eligibility rules. Detail on potential reforms to Solvency Capital Requirement has not yet featured.	Operational, Financial Soundness
Pension Superfunds	Pension Superfunds could offer a cheaper or easier option than Bulk Purchase Annuities (BPAs) for Defined Benefit schemes looking to de-risk and transfer their liabilities.	Strategic

 

 

Statement of Directors' responsibilities

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

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

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

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

In preparing these financial statements the Directors are required to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By order of the Board

 

Andy Briggs                         Rakesh Thakrar

Group Chief                          Group Chief
Executive Officer                 Financial Officer

12 March 2022

 

 

Consolidated income statement

For the year ended 31 December 2021

	Notes	2021 £m	2020 £m
Gross premiums written		7,455	4,706
Less: premiums ceded to reinsurers	F3	(2,079)	(796)
Net premiums written		5,376	3,910
Fees and commissions	C1	1,001	794
Total revenue, net of reinsurance payable		6,377	4,704
Net investment income	C2	18,001	16,935
Other operating income		76	121
Gain on completion of abrdn plc transaction	A6.1	110	-
Loss on disposal of Ark Life	H3	(23)	-
Gain on acquisition of ReAssure businesses	H2.1	-	372
Gain on L&G Part VII portfolio transfer	H2.2	-	85
Net income		24,541	22,217
Policyholder claims		(9,656)	(7,808)
Less: reinsurance recoveries		1,597	1,613
Change in insurance contract liabilities		3,076	(3,249)
Change in reinsurers' share of insurance contract liabilities		(177)	(568)
Transfer from/(to) unallocated surplus	F2	106	(113)
Net policyholder claims and benefits incurred		(5,054)	(10,125)
Change in investment contract liabilities		(16,812)	(7,991)
Amortisation and impairment of acquired in-force business	G2	(577)	(469)
Amortisation of other intangibles	G2	(20)	(18)
Impairment of goodwill	G2	(47)	-
Administrative expenses	C3	(2,056)	(1,674)
Net income/(expense) under arrangements with reinsurers	F3.3	22	(219)
Net income attributable to unitholders		(185)	(217)
Total operating expenses		(24,729)	(20,713)
(Loss)/profit before finance costs and tax		(188)	1,504
Finance costs	C5	(242)	(234)
(Loss)/profit for the year before tax		(430)	1,270
Tax charge attributable to policyholders' returns	C6	(258)	(326)
(Loss)/profit before the tax attributable to owners		(688)	944
Tax charge	C6	(279)	(436)
Add: tax attributable to policyholders' returns	C6	258	326
Tax charge attributable to owners	C6	(21)	(110)
(Loss)/profit for the year attributable to owners		(709)	834
Attributable to:
Owners of the parent		(837)	798
Non-controlling interests	D5	128	36
		(709)	834
Earnings per ordinary share
Basic (pence per share)	B3	(86.4)p	91.8p
Diluted (pence per share)	B3	(86.4)p	91.5p

 

Statement of comprehensive income

For the year ended 31 December 2021

	Notes	2021  £m	2020 £m
(Loss)/profit for the year		(709)	834
Other comprehensive income/(expense):
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value gains arising during the year		44	129
Reclassification adjustments for amounts recognised in profit or loss		(36)	(79)
Exchange differences on translating foreign operations		(45)	33
Foreign currency translation reserve recycled to profit or loss on disposal of Ark Life	H3	14	-
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability	G1	281	(21)
Tax charge relating to other comprehensive income items	C6	(138)	(37)
Total other comprehensive income for the year		120	25
Total comprehensive (expense)/income for the year		(589)	859
Attributable to:
Owners of the parent		(717)	823
Non-controlling interests	D5	128	36
		(589)	859

 

Statement of consolidated financial position

As at 31 December 2021

	Notes	2021  £m	2020 £m
Assets
Pension scheme asset	G1	36	11
Reimbursement rights	G1	212	-
Intangible assets
Goodwill		10	57
Acquired in-force business		4,323	5,013
Other intangibles		232	171
	G2	4,565	5,241
Property, plant and equipment	G3	130	119
Investment property	G4	5,283	7,128
Financial assets
Loans and deposits		475	647
Derivatives	E3	4,567	6,880
Equities		86,981	82,634
Investment in associate		431	400
Debt securities		104,761	109,455
Collective investment schemes		85,995	89,248
Reinsurers' share of investment contract liabilities		9,982	9,559
	E1	293,192	298,823
Insurance assets
Reinsurers' share of insurance contract liabilities	F1	8,587	9,542
Reinsurance receivables		69	141
Insurance contract receivables		70	94
		8,726	9,777
Current tax	G8	419	263
Prepayments and accrued income		373	343
Other receivables	G5	1,805	1,622
Cash and cash equivalents	G6	9,112	10,998
Assets classified as held for sale	A6.1	9,946	-
Total assets		333,799	334,325
Equity and liabilities
Equity attributable to owners of the parent
Share capital	D1	100	100
Share premium		6	4
Shares held by employee benefit trust	D2	(12)	(6)
Foreign currency translation reserve		71	102
Merger relief reserve	D1	1,819	1,819
Other reserves	D3	56	48
Retained earnings		3,775	4,970
Total equity attributable to owners of the parent		5,815	7,037
Tier 1 Notes	D4	494	494
Non-controlling interests	D5	460	341
Total equity		6,769	7,872
Liabilities
Pension scheme liabilities	G1	3,103	2,036
Insurance contract liabilities
Liabilities under insurance contracts	F1	128,864	133,907
Unallocated surplus	F2	1,801	1,768
		130,665	135,675
Financial liabilities
Investment contracts		160,417	165,106
Borrowings	E5	4,225	4,567
Deposits received from reinsurers		3,569	4,080
Derivatives	E3	1,248	1,001
Net asset value attributable to unitholders		3,568	3,791
Obligations for repayment of collateral received		3,442	5,205
	E1	176,469	183,750
Provisions	G7	235	282
Deferred tax	G8	1,399	1,036
Reinsurance payables		143	134
Payables related to direct insurance contracts	G9	1,864	1,669
Current tax	G8	19	-
Lease liabilities	G10	99	84
Accruals and deferred income	G11	567	521
Other payables	G12	721	1,266
Liabilities classified as held for sale	A6.1	11,746	-
Total liabilities		327,030	326,453
Total equity and liabilities		333,799	334,325

 

Statement of consolidated changes in equity

For the year ended 31 December 2021

	Share capital (note D1) £m)	Share premium (note D1) £m	Shares held by the employee benefit trust (note D2) £m	Foreign currency translation reserve £m	Merger relief reserve (note D1) £m	Other reserves (note D3) £m	Retained earnings £m	Total £m	Tier 1 Notes (note D4) £m	Non-controlling interests (note D5) £m	Total equity £m
At 1 January 2021	100	4	(6)	102	1,819	48	4,970	7,037	494	341	7,872
(Loss)/profit for the year	-	-	-	-	-	-	(837)	(837)	-	128	(709)
Other comprehensive (expense)/income for the year	-	-	-	(31)	-	8	143	120	-	-	120
Total comprehensive (expense)/income for the year	-	-	-	(31)	-	8	(694)	(717)	-	128	(589)
Issue of ordinary share capital, net of associated commissions and expenses	-	2	-	-	-	-	-	2	-	-	2
Dividends paid on ordinary shares	-	-	-	-	-	-	(482)	(482)	-	-	(482)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	-	(9)	(9)
Credit to equity for equity-settled share-based payments	-	-	-	-	-	-	14	14	-	-	14
Shares distributed by the employee benefit trust	-	-	10	-	-	-	(10)	-	-	-	-
Shares acquired by the employee benefit trust	-	-	(16)	-	-	-	-	(16)	-	-	(16)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	-	(23)	(23)	-	-	(23)
At 31 December 2021	100	6	(12)	71	1,819	56	3,775	5,815	494	460	6,769

 

Statement of consolidated changes in equity

For the year ended 31 December 2020

	Share capital (note D1) £m	Share premium (note D1) £m	Shares held by employee benefit trust  (note D2) £m	Foreign currency translation reserve £m	Merger relief reserve (note D1) £m	Other reserves (note D3) £m	Retained earnings £m	Total £m	Tier 1 Notes (note D4) £m	Non-controlling interests (note D5) £m	Total equity £m
At 1 January 2020	72	2	(7)	69	-	(2)	4,651	4,785	494	314	5,593
Profit for the year	-	-	-	-	-	-	798	798	-	36	834
Other comprehensive income/(expense) for the year	-	-	-	33	-	50	(58)	25	-	-	25
Total comprehensive income for the year	-	-	-	33	-	50	740	823	-	36	859
Issue of ordinary share capital, net of associated commissions and expenses	28	2	-	-	1,819	-	-	1,849	-	-	1,849
Dividends paid on ordinary shares	-	-	-	-	-	-	(403)	(403)	-	-	(403)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	-	(9)	(9)
Credit to equity for equity-settled share-based payments	-	-	-	-	-	-	13	13	-	-	13
Shares distributed by employee benefit trust	-	-	8	-	-	-	(8)	-	-	-	-
Shares acquired by employee benefit trust	-	-	(7)	-	-	-	-	(7)	-	-	(7)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	-	(23)	(23)	-	-	(23)
At 31 December 2020	100	4	(6)	102	1,819	48	4,970	7,037	494	341	7,872

 

Statement of consolidated cash flows

For the year ended 31 December 2021

	Notes	2021 £m	2020 £m
Cash flows from operating activities
Cash (utilised)/generated by operations	I2	(871)	7,316
Taxation paid		(149)	(562)
Net cash flows from operating activities		(1,020)	6,754
Cash flows from investing activities
Proceeds from completion of abrdn plc transaction	A6	115	-
Disposal of Ark Life, net of cash disposed	H3	189	-
Acquisition of ReAssure businesses, net of cash acquired	H2.1	-	(979)
Net cash flows from investing activities		304	(979)
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and expenses		2	2
Ordinary share dividends paid	B4	(482)	(403)
Dividends paid to non-controlling interests	D5	(9)	(9)
Repayment of policyholder borrowings	E5.2	(18)	(55)
Repayment of shareholder borrowings	E5.2	(322)	-
Repayment of lease liabilities	G10	(16)	(18)
Proceeds from new shareholder borrowings, net of associated expenses	E5.2	-	1,445
Proceeds from new policyholder borrowings, net of associated expenses	E5.2	17	-
Coupon paid on Tier 1 Notes		(29)	(29)
Interest paid on policyholder borrowings		-	(5)
Interest paid on shareholder borrowings		(237)	(171)
Net cash flows from financing activities		(1,094)	757
Net (decrease)/increase in cash and cash equivalents		(1,810)	6,532
Cash and cash equivalents at the beginning of the year		10,998	4,466
Less: cash and cash equivalents of operations classified as held for sale	A6.1	(76)	-
Cash and cash equivalents at the end of the year		9,112	10,998

 

Notes to the consolidated financial statements

A. Significant accounting policies

A1. Basis of preparation

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

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

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

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

Statement of compliance

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

Basis of consolidation

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

•  power over the investee;

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

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

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

Going concern

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

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

A2. Accounting policies

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

A2.1 Foreign currency transactions

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

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

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

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

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

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

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

A3. Critical accounting estimates and judgements

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

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

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

A3.1 Insurance and investment contract liabilities

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

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

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

A3.2 Fair value of financial assets and liabilities

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

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

A3.3 Pension scheme obligations

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

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

A3.4 Recognition of pension scheme surplus

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

A3.5 Operating profit

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

A3.6 Acquisition of the ReAssure businesses

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

A3.7 Control and consolidation

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

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

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

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

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

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

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

A4. Adoption of new accounting pronouncements in 2021

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

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

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

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

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

A5. New accounting pronouncements not yet effective

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

A6. Significant transactions during the year

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

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

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

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

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

	2021  £m
Sale of Wrap SIPP, Onshore and TIP business	(51)
Transfer of marketing services and termination of CSPA1	14
Value attributed to acquisition of the brand (note G2.5)	111
Resolution of legacy issues and project costs	36
Gain on completion of abrdn plc transaction	110
Attributable tax charge	(21)
	89

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

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

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

	2021 £m
Acquired in-force business	54
Investment property	3,309
Financial assets	6,507
Cash and cash equivalents	76
Assets classified as held for sale	9,946
Assets in consolidated funds1	1,788
Total assets of the disposal group	11,734
Investment contract liabilities	(11,676)
Other financial liabilities	(4)
Provisions	(2)
Deferred tax liabilities	(10)
Accruals and deferred income	(54)
Liabilities classified as held for sale	(11,746)

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

A6.2 Disposal of Ark Life

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

B. Earnings performance

B1. Segmental analysis

The Group defines and presents operating segments in accordance with IFRS 8 'Operating Segments' which requires such segments to be based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group. As at 31 December 2020, following the acquisition of the ReAssure businesses, a separate operating segment was reported which included all of the ReAssure businesses. During the year, the Group has again reassessed its operating segments to reflect that the management and reporting of the ReAssure businesses have been aligned with that of the other Group businesses. Consequently, the results previously reported within the ReAssure segment are all now reported within the UK Heritage and UK Open segments and within Unallocated Group. The Group now has four reportable segments comprising UK Heritage, UK Open, Europe and Management Services, as set out in note B1.1. For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. No such aggregation has been required in the current year. The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. These businesses will accept incremental premiums on in-force policies. The UK Open segment includes new and in-force life insurance and investment policies in respect of products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and Self-Invested Personal Pensions ('SIPPs') distributed through the Group's Strategic Partnership with abrdn plc, products sold under the SunLife brand, and annuities, including Bulk Purchase Annuity contracts. The Europe segment includes business written in Ireland and Germany. This includes products that are actively being marketed to new policyholders, and legacy in-force products that are no longer being sold to new customers. The Management Services segment comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. Unallocated Group includes consolidation adjustments and Group financing (including finance costs) which are managed on a Group basis and are not allocated to individual operating segments. Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segmental results include those transfers between business segments which are then eliminated on consolidation. The business of Ark Life, which was disposed of during the year (see note H3), was allocated to the Heritage operating segment. The Wrap SIPP, Onshore Bond and TIP businesses that have been classified as a disposal group held for sale as at 31 December 2021 (see note A6.1) are allocated to the Open operating segment. Segmental measure of performance: Operating Profit The Group uses a non-GAAP measure of performance, being operating profit, to evaluate segment performance. Operating profit is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movement in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Group's expected longer-term asset allocation backing the business). Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group's core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax.

 

 

Operating profit excludes the impact of the following items: •  the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.1 and B2.2); •  amortisation and impairments of intangible assets (net of policyholder tax); •  finance costs attributable to owners; •  gains or losses on the acquisition or disposal of subsidiaries (net of related costs); •  the financial impacts of mandatory regulatory change; •  the profit or loss attributable to non-controlling interests; •  integration, restructuring or other significant one-off projects; and •  any other items which, in the Directors' view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies. Whilst the excluded items are important to an assessment of the consolidated financial performance of the Group, management considers that the presentation of the operating profit metric provides useful information for assessing the performance of the Group's operating segments on an ongoing basis. The IFRS results are significantly impacted by the amortisation of intangible balances arising on acquisition, the one-off costs of integration activities and the costs of servicing debt used to finance acquisition activity, which are not indicative of the underlying operational performance of the Group's segments. Furthermore, the hedging strategy of the Group is calibrated to protect the Solvency II capital position and cash generation capability of the operating companies, as opposed to the IFRS financial position. This can create additional volatility in the IFRS result which is excluded from the operating profit metric. The Group therefore considers that operating profit provides a good indicator of the ability of the Group's operating companies to generate cash available for the servicing of the Group's debts and for distribution to shareholders. Accordingly, the measure is more closely aligned with the business model of the Group and how performance is managed by those charged with governance. Restatement of prior period information As noted above, during the year the Group reassessed its operating segments to reflect the way the ReAssure businesses are now managed and reported. Consequently, the results previously reported within the ReAssure segment are now reported within the UK Heritage and UK Open segments and within Unallocated Group. UK Heritage and UK Open operating profit for the year ended 30 December 2020 has been increased by £153 million to £431 million and £301 million to £773 million respectively and Unallocated Group has decreased by £10 million to an operating loss of £55 million. UK Heritage segmental revenue has been increased by £251 million to £939 million and UK Open segmental revenue has been decreased by £69 million to £2,529 million.

 

B1.1 Segmental result

	Notes	2021 £m	2020 restated1 £m
Operating profit
UK Heritage		537	431
UK Open		701	773
Europe		87	44
Management Services		(24)	6
Unallocated Group		(71)	(55)
Total segmental operating profit		1,230	1,199
Investment return variances and economic assumption changes on long-term business and owners' funds	B2.2	(1,125)	101
Amortisation and impairment of acquired in-force business		(572)	(464)
Amortisation and impairment of other intangibles and goodwill	G2	(67)	(18)
Other non-operating items		(65)	281
Finance costs on borrowing attributable to owners		(217)	(191)
(Loss)/profit before the tax attributable to owners of the parent		(816)	908
Profit before tax attributable to non-controlling interests		128	36
(Loss)/profit before the tax attributable to owners		(688)	944

1    See note B1 for details of the restatement

Other non-operating items in respect of 2021 include:

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

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

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

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

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

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

•  £44 million of other corporate project costs; and

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

Other non-operating items in respect of 2020 include:

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

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

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

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

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

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

•  £34 million of other corporate project costs; and

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

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

B1.2 Segmental revenue

2021	UK Heritage £m	UK Open £m	Europe  £m	Management Services £m	Unallocated Group £m	Total  £m
Revenue from external customers:
Gross premiums written	880	5,034	1,541	-	-	7,455
Less: premiums ceded to reinsurers	(284)	(1,739)	(56)	-	-	(2,079)
Net premiums written	596	3,295	1,485	-	-	5,376
Fees and commissions	634	297	70	-	-	1,001
Income from other segments	-	-	-	1,146	(1,146)	-
Total segmental revenue	1,230	3,592	1,555	1,146	(1,146)	6,377

 

2020 restated1	UK Heritage £m	UK Open £m	Europe £m	Management Services £m	Unallocated Group  £m	Total £m
Revenue from external customers:
Gross premiums written	765	2,726	1,215	-	-	4,706
Less: premiums ceded to reinsurers	(267)	(500)	(29)	-	-	(796)
Net premiums written	498	2,226	1,186	-	-	3,910
Fees and commissions	441	303	50	-	-	794
Income from other segments	-	-	-	737	(737)	-
Total segmental revenue	939	2,529	1,236	737	(737)	4,704

1    See note B1 for details of the restatement

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

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

B2. Investment return variances and economic assumption changes

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

B2.1 Calculation of the long-term investment return

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

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

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

	2021 %	2020 %
Equities	4.1	4.7
Properties	3.1	3.7
Gilts	0.8	1.4
Corporate bonds	1.2	1.8

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

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

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

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

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

	2021 £m	2020  £m
Investment return variances and economic assumption changes on long-term business and owners' funds	(1,125)	101

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

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

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

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

B3. Earnings per share

The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees. The basic and diluted earnings per share calculations are also presented based on the Group's operating profit net of financing costs. Operating profit is a non-GAAP performance measure that is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.

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

2021	Operating profit £m	Financing costs £m	Operating earnings net of financing costs £m	Other non-operating items  £m	Total  £m
Profit/(loss) before the tax attributable to owners	1,230	(217)	1,013	(1,701)	(688)
Tax (charge)/credit attributable to owners	(243)	44	(199)	178	(21)
Profit/(loss) for the year attributable to owners	987	(173)	814	(1,523)	(709)
Coupon paid on Tier 1 notes, net of tax relief	-	(23)	(23)	-	(23)
Deduct: Share of result attributable to non-controlling interests	-	-	-	(128)	(128)
Profit/(loss) for the year attributable to ordinary equity holders of the parent	987	(196)	791	(1,651)	(860)

 

2020	Operating profit £m	Financing costs £m	Operating earnings net of financing costs £m	Other non-operating items  £m	Total  £m
Profit/(loss) before the tax attributable to owners	1,199	(191)	1,008	(64)	944
Tax (charge)/credit attributable to owners	(199)	48	(151)	41	(110)
Profit/(loss) for the year attributable to owners	1,000	(143)	857	(23)	834
Coupon paid on Tier 1 notes, net of tax relief	-	(23)	(23)	-	(23)
Deduct: Share of result attributable to non-controlling interests	-	-	-	(36)	(36)
Profit/(loss) for the year attributable to ordinary equity holders of the parent	1,000	(166)	834	(59)	775

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

	2021 Number million	2020 Number million
Issued ordinary shares at beginning of the year	999	722
Effect of ordinary shares issued	-	123
Own shares held by the employee benefit trust	(1)	(1)
Weighted average number of ordinary shares	998	844

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

Earnings per share disclosures are as follows:

	2021 pence	2020 pence
Basic earnings per share	(86.4)	91.8
Diluted earnings per share	(86.4)	91.5
Basic operating earnings net of financing costs per share	79.2	98.8
Diluted operating earnings net of financing costs per share	79.0	98.5

B4. Dividends

Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group's owners. Interim dividends are deducted from equity when they are paid. Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period. Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.

 

	2021 £m	2020 £m
Dividends declared and paid in the year	482	403

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

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

C. Other income statement notes

C1. Fees and commissions

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

The table below disaggregates fees and commissions by segment.

2021	UK Heritage £m	UK Open  £m	Europe £m	Total £m
Fee income from investment contracts without DPF	606	291	81	978
Initial fees deferred during the year	-	-	(11)	(11)
Revenue from investment contracts without DPF	606	291	70	967
Other revenue from contracts with customers	28	6	-	34
Fees and commissions	634	297	70	1,001

 

2020 restated1	UK Heritage  £m	UK Open  £m	Europe £m	Total £m
Fee income from investment contracts without DPF	429	293	58	780
Initial fees deferred during the year	-	-	(8)	(8)
Revenue from investment contracts without DPF	429	293	50	772
Other revenue from contracts with customers	12	10	-	22
Fees and commissions	441	303	50	794

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

Remaining performance obligations

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

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

C2. Net investment income

Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the Group defined benefit pension scheme asset/(liability), fair value gains and losses on financial assets (except for reinsurers' share of investment contract liabilities without DPF, see note E1), financial liabilities and investment property at fair value and impairment losses on loans and receivables. Interest income is recognised in the consolidated income statement as it accrues using the effective interest method. Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date. Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.

 

	2021 £m	2020 £m
Investment income
Interest income on loans and deposits at amortised cost	1	8
Interest income on financial assets designated at FVTPL on initial recognition	2,647	2,313
Dividend income	4,384	3,525
Rental income	365	325
Net interest expense on Group defined benefit pension scheme (liability)/asset	(37)	(29)
	7,360	6,142
Fair value gains/(losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition	12,354	8,021
Held for trading - derivatives	(2,908)	2,824
Investment property	1,195	(52)
	10,641	10,793
Net investment income	18,001	16,935

C3. Administrative expenses

Administrative expenses Administrative expenses are recognised in the consolidated income statement as incurred. Deferred acquisition costs For insurance and investment contracts with DPF, acquisition costs which include both incremental acquisition costs and other direct costs of acquiring and processing new business, are deferred. For investment contracts without DPF, incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit-linked investment contracts are deferred. Trail or renewal commission on investment contracts without DPF where the Group does not have an unconditional legal right to avoid payment is deferred at inception of the contract and an offsetting liability for contingent commission is established. Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.

 

	2021 £m	2020 £m
Employee costs	531	433
Outsourcer expenses	209	175
Movement in provision for transition and transformation programme (see note G7)	-	(31)
Professional fees	321	230
Commission expenses	178	152
Office and IT costs	150	124
Investment management expenses and transaction costs	528	437
Direct costs of life companies	-	4
Direct costs of collective investment schemes	28	25
Depreciation	18	28
Pension service costs	-	2
Pension administrative expenses	6	5
Advertising and sponsorship	58	58
Stamp duty payable on acquisition of ReAssure businesses	-	16
Other	59	45
	2,086	1,703
Acquisition costs deferred during the year	(38)	(34)
Amortisation of deferred acquisition costs	8	5
Total administrative expenses	2,056	1,674

Employee costs comprise:

	2021  £m	2020 £m
Wages and salaries	483	390
Social security contributions	48	43
	531	433

 

	2021 Number	2020 Number
Average number of persons employed	7,885	5,752

C4. Auditor's remuneration

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

	2021 £m	2020 £m
Audit of the consolidated financial statements	1.8	2.1
Audit of the Company's subsidiaries	9.8	9.6
	11.6	11.7
Audit-related assurance services	2.3	2.3
Reporting accountant assurance services	-	0.1
Total fee for assurance services	13.9	14.1
Other non-audit services	-	0.4
Total fees for other services	-	0.4
Total auditor's remuneration	13.9	14.5

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

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

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

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

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

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

C5. Finance costs

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

 

	2021 £m	2020 £m
Interest expense
On financial liabilities at amortised cost	239	230
On leases	3	4
	242	234
Attributable to:
·  policyholders	2	10
·  owners	240	224
	242	234

C6. Tax charge

Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements. Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years. The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.

C6.1 Current year tax charge

	2021 £m	2020 £m
Current tax:
UK corporation tax	(9)	306
Overseas tax	114	59
	105	365
Adjustment in respect of prior years	(66)	(4)
Total current tax charge	39	361
Deferred tax:
Origination and reversal of temporary differences	120	111
Change in the rate of UK corporation tax	147	(37)
Adjustments in respect of prior years	(27)	1
Total deferred tax charge	240	75
Total tax charge	279	436
Attributable to:
·  policyholders	258	326
·  owners	21	110
Total tax charge	279	436

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

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

C6.2 Tax charged to other comprehensive Income

	2021 £m	2020 £m
Current tax charge	1	12
Deferred tax charge on defined benefit schemes	137	25
	138	37

C6.3 Tax credited to equity

	2021 £m	2020 £m
Current tax credit on Tier 1 Notes	(6)	(6)
Deferred tax credit on share schemes	(1)	-
	(7)	(6)

C6.4 Reconciliation of tax charge

	2021 £m	2020 £m
(Loss)/profit for the year before tax	(430)	1,270
Policyholder tax charge	(258)	(326)
(Loss)/profit before the tax attributable to owners	(688)	944
Tax (credit)/charge at standard UK rate of 19%1	(131)	179
Non-taxable income, gains and losses2	(10)	(78)
Disallowable expenses3	19	9
Prior year tax credit for shareholders4	(7)	(17)
Movement on acquired in-force amortisation at less than 19%	34	77
Profits taxed at rates other than 19%5	(22)	(10)
Recognition of previously unrecognised deferred tax assets6	(13)	(25)
Deferred tax rate change7	147	(37)
Current year losses not valued	1	9
Other	3	3
Owners' tax charge	21	110
Policyholder tax charge	258	326
Total tax charge for the year	279	436

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

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

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

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

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

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

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

D. Equity

D1. Share capital

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

 

	2021 £m	2020 £m
Issued and fully paid:
999.5 million ordinary shares of £0.10 each (2020: 999.2 million)	100	100

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

Movements in issued share capital during the year:

2021	Number	£
Shares in issue at 1 January	999,232,144	99,923,214
Ordinary shares issued in the year	303,914	30,391
Shares in issue at 31 December	999,536,058	99,953,605

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

2020	Number	£
Shares in issue at 1 January	721,514,944	72,151,494
Ordinary shares issued to Swiss Re and MS&AD	277,277,138	27,727,714
Other ordinary shares issued in the year	440,062	44,006
Shares in issue at 31 December	999,232,144	99,923,214

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

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

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

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

D2. Shares held by the employee benefit trust

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

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

	2021 £m	2020 £m
At 1 January	6	7
Shares acquired by the EBT	16	7
Shares awarded to employees by the EBT	(10)	(8)
At 31 December	12	6

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

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

D3. Other reserves

The other reserves comprise the owner-occupied property revaluation reserve and the cash flow hedging reserve. Owner-occupied property revaluation reserve This reserve comprises the revaluation surplus arising on revaluation of owner-occupied property. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain. Any excess impairment will then be recorded as an impairment expense in the consolidated income statement. Cash flow hedging reserve Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement, and is reported in net investment income. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss. Further details of the Group's hedge accounting policy are included in note E1.

 

2021	Owner-occupied property revaluation reserve £m	Cash flow hedging reserve £m	Total other reserves £m
At 1 January 2021	5	43	48
Other comprehensive income for the year	-	8	8
At 31 December 2021	5	51	56

 

2020	Owner-occupied property revaluation reserve £m	Cash flow hedging reserve £m	Total other reserves £m
At 1 January 2020	5	(7)	(2)
Other comprehensive income for the year	-	50	50
At 31 December 2020	5	43	48

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

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

D4. Tier 1 notes

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

 

	2021 £m	2020 £m
Tier 1 Notes	494	494

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

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

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

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

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

D5. Non-controlling interests

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

 

	SLPET  £m
At 1 January 2021	341
Profit for the year	128
Dividends paid	(9)
At 31 December 2021	460

 

	SLPET  £m
At 1 January 2020	314
Profit for the year	36
Dividends paid	(9)
At 31 December 2020	341

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

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

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

SLPET	2021 £m	2020 £m
Statement of financial position:
Financial assets	452	335
Other assets	19	9
Total assets	471	344
Total liabilities	11	3
Income statement:
Net income	134	41
Profit after tax	128	36
Comprehensive income	128	36
Cash flows:
Net increase/(decrease) in cash equivalents	10	(19)

E. Financial assets & liabilities

E1. Fair values

Financial assets Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Loans and deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and only include assets where a security has not been issued. These loans and deposits are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method. Derivative financial instruments are largely classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated and effective as a hedging instrument. For such instruments, the timing of the recognition of any gain or loss that arises on remeasurement to fair value in profit or loss depends on the nature of the hedge relationship. Equities, debt securities and collective investment schemes are designated at FVTPL and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at FVTPL because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing. Reinsurers share of investment contracts liabilities without DPF are valued, and associated gains and losses presented, on a basis consistent with investment contracts liabilities without DPF as detailed under the 'Financial liabilities' section below. Impairment of financial assets The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost are impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in the collective assessment of impairment. Fair value estimation The fair values of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments. For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.

 

Associates Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investments in associates which are of a strategic nature. Derecognition of financial assets A financial asset (or part of a group of similar financial assets) is derecognised where: •  the rights to receive cash flows from the asset have expired; •  the Company retains the right to receive cash flows from the assets, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or •  the Company has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Financial liabilities On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at FVTPL for which all transaction costs are expensed). Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at FVTPL) are measured at amortised cost using the effective interest method. Financial liabilities are designated upon initial recognition at FVTPL and where doing so results in more meaningful information because either: •  it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or •  a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group's key management personnel. Investment contracts without DPF Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts and accounted for as financial liabilities. Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder. The valuation of liabilities on unit-linked contracts are held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges. Movements in the fair value of investment contracts without DPF and reinsurers' share of investment contract liabilities are included in the 'change in investment contract liabilities' in the consolidated income statement. Investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. 'Front end' fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided.

 

 

Deposits received from reinsurers It is the Group's practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'deposits received from reinsurers' in the statement of consolidated financial position. The 'deposits received from reinsurers' are measured at amortised cost. Net asset value attributable to unitholders The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at FVTPL and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group. Obligations for repayment of collateral received It is the Group's practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral received is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received. Further details of the Group's collateral arrangements are included in note E4. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, or cancelled or expires. Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement. Hedge accounting The Group designates certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in net investment income. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.

E1.1 Fair values analysis

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

	Carrying value
2021	Total £m	Amounts due for settlement after 12 months £m	Fair value £m
Financial assets
Financial assets at fair value through profit or loss:
Held for trading - derivatives	4,571	3,208	4,571
Designated upon initial recognition:
Equities1	87,059	-	87,059
Investment in associate (see note H4)1	431	-	431
Debt securities	106,990	88,965	106,990
Collective investment schemes1	90,164	-	90,164
Reinsurers' share of investment contract liabilities1	10,009	-	10,009
Financial assets measured at amortised cost:
Loans and deposits	475	48	475
Total financial assets	299,699		299,699
Less amounts classified as financial assets held for sale (see note A6.1)2	(6,507)		(6,507)
Total financial assets less financial assets classified as held for sale	293,192		293,192

 

	Carrying value
	Total £m	Amounts due for settlement after 12 months £m	Fair value £m
Financial liabilities
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives	1,252	989	1,252
Designated upon initial recognition:
Borrowings	70	70	70
Net asset value attributable to unitholders1	3,568	-	3,568
Investment contract liabilities1	172,093	-	172,093
Financial liabilities measured at amortised cost:
Borrowings	4,155	3,688	4,564
Deposits received from reinsurers	3,569	3,150	3,569
Obligations for repayment of collateral received	3,442	-	3,442
Total financial liabilities	188,149		188,558
Less amounts classified as financial liabilities held for sale3	(11,680)		(11,680)
Total financial liabilities less financial liabilities held for sale	176,469		176,878

1    These assets and liabilities have no specified settlement date.

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

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

 

	Carrying value
2020	Total £m	Amounts due for settlement after 12 months £m	Fair value £m
Financial assets
Financial assets at fair value through profit or loss:
Held for trading - derivatives	6,880	6,429	6,880
Designated upon initial recognition:
Equities1	82,634	-	82,634
Investment in associate (see note H4)1	400	-	400
Debt securities	109,455	94,070	109,455
Collective investment schemes1	89,248	-	89,248
Reinsurers' share of investment contract liabilities1	9,559	-	9,559
Financial assets measured at amortised cost:
Loans and deposits	647	60	647
Total financial assets	298,823		298,823

 

	Carrying value
	Total £m	Amounts due for settlement after 12 months £m	Fair value £m
Financial liabilities
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives	1,001	727	1,001
Designated upon initial recognition:
Borrowings	84	84	84
Net asset value attributable to unitholders1	3,791	-	3,791
Investment contract liabilities1	165,106	-	165,106
Financial liabilities measured at amortised cost:
Borrowings	4,483	4,161	5,016
Deposits received from reinsurers	4,080	3,381	4,080
Obligations for repayment of collateral received	5,205	-	5,205
Total financial liabilities	183,750		184,283

1    These assets and liabilities have no specified settlement date.

E1.2 IFRS 9 Temporary exemption disclosures

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

 

	2021 £m	2020  £m
Financial assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis:
Loans and deposits	475	647
Cash and cash equivalents1	9,112	10,998
Accrued income	282	251
Other receivables2	1,697	1,541
All other financial assets that are measured at fair value through profit or loss3	292,717	298,176

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

2    Other receivables excludes deferred acquisition costs.

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

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

2021 Carrying value	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated1 £m	Unit-linked £m	Total £m	Less amounts classified as held for sale (see note A6.1) £m	Total £m
Loans and deposits	-	6	-	-	-	414	55	475	-	475
Cash and cash equivalents	382	1,686	5,161	181	-	3	1,775	9,188	(76)	9,112
Accrued income	-	-	-	-	-	282	-	282	-	282
Other receivables	-	-	-	-	-	1,697	-	1,697	-	1,697
	382	1,692	5,161	181	-	2,396	1,830	11,642	(76)	11,566

 

2020 Carrying value	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated1 £m	Unit-linked £m	Total £m
Loans and deposits	-	6	195	-	-	368	78	647
Cash and cash equivalents	30	1,728	7,049	173	-	10	2,008	10,998
Accrued income	-	-	-	-	-	251	-	251
Other receivables	-	-	-	-	-	1,541	-	1,541
	30	1,734	7,244	173	-	2,170	2,086	13,437

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

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

Level 1 financial instruments The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicate higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices. Level 2 financial instruments Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified as Level 2, only where there is a sufficient range of available quotes. The fair value of over the counter derivatives is estimated using pricing models or discounted cash flow techniques. Collective investment schemes where the underlying assets are not priced using active market prices are determined to be Level 2 instruments. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument. Level 3 financial instruments The Group's financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements is used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible. For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) during each reporting period.

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

E2. Fair value hierarchy

E2.2 Fair value hierarchy of financial instruments

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

2021	Level 1 £m	Level 2 £m	Level 3  £m	Total fair value £m
Financial assets measured at fair value
Derivatives	161	4,173	237	4,571
Financial assets designated at FVTPL upon initial recognition:
Equities	85,108	52	1,899	87,059
Investment in associate	431	-	-	431
Debt securities	57,992	36,546	12,452	106,990
Collective investment schemes	86,244	3,634	286	90,164
Reinsurers' share of investment contract liabilities	10,009	-	-	10,009
	239,784	40,232	14,637	294,653
Total financial assets measured at fair value	239,945	44,405	14,874	299,224
Less amounts classified as held for sale (see note A6.1)	(5,194)	(421)	(892)	(6,507)
Total financial assets measured at fair value, excluding amounts classified as held for sale	234,751	43,984	13,982	292,717
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	464	11	475
	234,751	44,448	13,993	293,192

 

2021	Level 1 £m	Level 2 £m	Level 3  £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	155	972	125	1,252
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	70	70
Net asset value attributable to unit-holders	3,568	-	-	3,568
Investment contract liabilities	-	172,093	-	172,093
	3,568	172,093	70	175,731
Total financial liabilities measured at fair value	3,723	173,065	195	176,983
Less amounts classified as held for sale (see note A6.1)	-	(11,680)	-	(11,680)
Total financial liabilities measured at fair value, excluding amounts classified as held for sale	3,723	161,385	195	165,303
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	4,564	-	4,564
Deposits received from reinsurers	-	3,484	85	3,569
Obligations for repayment of collateral received	-	3,442	-	3,442
Total financial liabilities for which fair values are disclosed	-	11,490	85	11,575
	3,723	172,875	280	176,878

 

 

2020	Level 1 £m	Level 2 £m	Level 3  £m	Total fair value £m
Financial assets measured at fair value
Derivatives	320	6,362	198	6,880
Financial assets designated at FVTPL upon initial recognition:
Equities	81,024	47	1,563	82,634
Investment in associate	400	-	-	400
Debt securities	74,043	25,248	10,164	109,455
Collective investment schemes	86,677	2,170	401	89,248
Reinsurers' share of investment contract liabilities	8,962	597	-	9,559
	251,106	28,062	12,128	291,296
Total financial assets measured at fair value	251,426	34,424	12,326	298,176
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	632	15	647
	251,426	35,056	12,341	298,823

 

2020	Level 1 £m	Level 2 £m	Level 3  £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	119	720	162	1,001
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	84	84
Net asset value attributable to unitholders	3,791	-	-	3,791
Investment contract liabilities	-	165,106	-	165,106
	3,791	165,106	84	168,981
Total financial liabilities measured at fair value	3,910	165,826	246	169,982
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	4,812	204	5,016
Deposits received from reinsurers	-	3,983	97	4,080
Obligations for repayment of collateral received	-	5,205	-	5,205
Total financial liabilities for which fair values are disclosed	-	14,000	301	14,301
	3,910	179,826	547	184,283

E2.3 Level 3 financial instrument sensitivities

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

E2.3.1 Debt securities

Analysis of Level 3 debt securities	2021 £m	2020  £m
Unquoted corporate bonds:
Local authority loans	917	646
Private placements	3,120	2,297
Loans guaranteed by export credit agencies	159	54
Infrastructure loans	1,491	1,564
Equity release mortgages	4,214	3,484
Commercial real estate loans	1,317	1,075
Income strips	886	692
Bridging loans to private equity funds	339	320
Corporate transactions	-	29
Other	9	3
Total Level 3 debt securities	12,452	10,164
Less amounts classified as held for sale	(892)	-
Total Level 3 debt securities excluding amounts classified as held for sale	11,560	10,164

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

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

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

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

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

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

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

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

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

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

E2.3.2 Borrowings

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

E2.3.3 Longevity swap contracts

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

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

E2.3.4 Derivatives

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

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

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

2021	From Level 1 to Level 2 £m	From Level 2 to Level 1 £m
Financial assets measured at fair value
Derivatives	51	-
Financial assets designated at FVTPL upon initial recognition:
Equities	33	17
Debt securities	1,742	1,006
Collective investment schemes	32	42
	1,807	1,065
Total financial assets measured at fair value	1,858	1,065

 

2020	From Level 1 to Level 2 £m	From Level 2 to Level 1 £m
Financial assets measured at fair value
Financial assets designated at FVTPL upon initial recognition:
Debt securities	492	10,174
Collective investment schemes	1	-

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

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

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

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

2021	At 1 January 2021 £m	Net (losses)/gains in income statement £m	Purchases £m	Sales £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 20211 £m	Unrealised (losses)/gains on assets held at end of period £m
Financial assets
Derivatives	198	(74)	113	-	-	-	237	(82)
Financial assets designated at FVTPL upon initial recognition:
Equities	1,563	436	269	(368)	-	(1)	1,899	278
Debt securities	10,164	88	6,394	(4,210)	26	(10)	12,452	115
Collective investment schemes	401	(70)	34	(94)	15	-	286	22
	12,128	454	6,697	(4,672)	41	(11)	14,637	415
Total financial assets	12,326	380	6,810	(4,672)	41	(11)	14,874	333

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

 

2021	At 1 January 2021 £m	Net (gains)/losses in income statement £m	Purchases £m	Sales/ repayments £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 2021 £m	Unrealised (gains)/losses on liabilities held at end of period £m
Financial liabilities
Derivatives	162	(19)	-	(18)	-	-	125	(29)
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	84	4	-	(18)	-	-	70	5
Total financial liabilities	246	(15)	-	(36)	-	-	195	(24)

 

2020	At 1 January 2020 £m	Net gains/(losses) in income statement £m	Effect of acquisitions/ purchases £m	Sales £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 2020 £m	Unrealised gains/(losses) on assets held at end of period £m
Financial assets
Derivatives	175	23	-	-	-	-	198	36
Financial assets designated at FVTPL upon initial recognition:
Equities	1,596	113	213	(361)	2	-	1,563	44
Debt securities	6,026	432	6,301	(2,635)	63	(23)	10,164	471
Collective investment schemes	646	(161)	1	(85)	-	-	401	(100)
	8,268	384	6,515	(3,081)	65	(23)	12,128	415
Total financial assets	8,443	407	6,515	(3,081)	65	(23)	12,326	451

 

2020	At 1 January 2020 £m	Net gains in income statement	Effect of acquisitions/ purchases £m	Sales/ Repayments £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 2020 £m	Unrealised losses on liabilities held at end of period £m
Financial liabilities
Derivatives	74	17	78	(7)	-	-	162	13
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	99	4	-	(19)	-	-	84	4
Total financial liabilities	173	21	78	(26)	-	-	246	17

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

E3. Derivatives

The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives to hedge financial liabilities denominated in foreign currency. Derivative financial instruments are largely classified as held for trading. Such instruments are recognised initially at fair value and are subsequently remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated as a hedging instrument and where the resultant hedge is assessed as effective. For such instruments, any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. See note E1 for further details of the Group's hedging accounting policy.

E3.1 Summary

The fair values of derivative financial instruments are as follows:

	Assets 2021 £m	Liabilities 2021 £m	Assets 2020 £m	Liabilities 2020 £m
Forward currency	180	58	286	134
Credit default swaps	63	39	108	13
Contracts for difference	8	2	7	4
Interest rate swaps	1,509	506	2,754	98
Total return bond swaps	3	-	52	-
Swaptions	1,722	11	2,643	27
Inflation swaps	232	98	59	132
Equity options	408	254	543	322
Stock index futures	41	122	53	90
Fixed income futures	46	33	63	20
Retrocession contracts	-	-	-	1
Longevity swap contracts	230	49	155	85
Currency futures	7	1	1	-
Cross-currency swaps	122	12	156	-
Equity Release Income Plan total return swap	-	67	-	75
	4,571	1,252	6,880	1,001
Less amounts classified as held for sale (see note A6.1)	(4)	(4)	-	-
	4,567	1,248	6,880	1,001

E3.2 Corporate transactions

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

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

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

E4. Collateral arrangements

The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty, but is usually in the form of cash and marketable securities. Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated and is available to the Group for investment purposes, is recognised as a financial asset in the statement of consolidated financial position with a corresponding financial liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement. Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of consolidated financial position and a corresponding receivable is recognised for its return.

E4.1 Financial instrument collateral arrangements

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

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

		Related amounts not offset
2021 Financial assets	Gross and net amounts of recognised financial assets £m	Financial instruments and cash collateral received £m	Derivative liabilities £m	Net amount £m
OTC derivatives	4,394	3,600	487	307
Exchange traded derivatives	177	5	6	166
Stock lending	1,587	1,587	-	-
Total	6,158	5,192	493	473

 

		Related amounts not offset
Financial liabilities	Gross and net amounts of recognised financial liabilities  £m	Financial instruments and cash collateral pledged £m	Derivative assets £m	Net amount £m
OTC derivatives	1,096	319	487	290
Exchange traded derivatives	156	24	6	126
Total	1,252	343	493	416

 

 

		Related amounts not offset
2020 Financial assets	Gross and net amounts of recognised financial assets £m	Financial instruments and cash collateral received £m	Derivative liabilities £m	Net amount £m
OTC derivatives	6,523	5,389	219	915
Exchange traded derivatives	357	9	17	331
Stock lending	2,435	2,435	-	-
Total	9,315	7,833	236	1,246

 

		Related amounts not offset
Financial liabilities	Gross and net amounts of recognised financial liabilities  £m	Financial instruments and cash collateral pledged £m	Derivative assets £m	Net amount £m
OTC derivatives	886	328	219	339
Exchange traded derivatives	115	31	17	67
Total	1,001	359	236	406

E4.2 Derivative collateral arrangements

Assets accepted

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

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

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

	OTC derivatives
	2021 £m	2020 £m
Financial assets	3,442	5,205
Financial liabilities	(3,442)	(5,205)

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

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

Assets pledged

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

E4.3 Stock lending collateral arrangements

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

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

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

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

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

E4.4 Other collateral arrangements

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

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

E5. Borrowings

The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method. Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred. Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group's with-profit operations.

E5.1 Analysis of borrowings

	Carrying value			Fair value
	2021 £m	2020 £m		2021 £m	2020 £m
£200 million multi-currency revolving credit facility (note a)	17	-		17	-
Property reversions loan (note b)	70	84		70	84
Total policyholder borrowings	87	84		87	84
£200 million 7.25% unsecured subordinated loan (note c)	-	200		-	204
£300 million senior unsecured bond (note d)	-	122		-	125
£428 million Tier 2 subordinated notes (note e)	427	426		498	517
£450 million Tier 3 subordinated notes (note f)	450	449		457	470
US $500 million Tier 2 bonds (note g)	368	364		408	416
€500 million Tier 2 bonds (note h)	416	442		490	516
US $750 million Contingent Convertible Tier 1 notes (note i)	551	545		581	585
£500 million Tier 2 notes (note j)	485	484		593	622
US $500 million Fixed Rate Reset Tier 2 notes (note k)	368	364		389	395
£500 million 5.867% Tier 2 subordinated notes (note l)	550	556		598	620
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note m)	266	272		269	280
£250 million 4.016% Tier 3 subordinated notes (note n)	257	259		264	266
Total shareholder borrowings	4,138	4,483		4,547	5,016
Total borrowings	4,225	4,567		4,634	5,100
Amount due for settlement after 12 months	3,758	4,245

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E5.2 Reconciliation of liabilities arising from financing activities

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

 

		Cash movements			Non-cash movements
	At 1 January 2021 £m	New borrowings, net of costs £m	Repayments £m		Changes in fair value £m	Movement in foreign exchange £m	Other movements1 £m	Movements in fair value £m	At 31 December 2021 £m
£200 million multi-currency revolving credit facility	-	17	-		-	-	-	-	17
Property Reversions loan	84	-	(18)		4	-	-	-	70
£200 million 7.25% unsecured subordinated loan	200	-	(200)		-	-	-	-	-
£300 million senior unsecured bond	122	-	(122)		-	-	-	-	-
£428 million Tier 2 subordinated notes	426	-	-		-	-	1	-	427
£450 million Tier 3 subordinated notes	449	-	-		-	-	1	-	450
US $500 million Tier 2 bonds	364	-	-		-	4	-	-	368
€500 million Tier 2 notes	442	-	-		-	(26)	-	-	416
US $750 million Contingent Convertible Tier 1 notes	545	-	-		-	5	1	-	551
£500 million Tier 2 notes	484	-	-		-	-	1	-	485
US $500 million Fixed Rate Reset Tier 2 notes	364	-	-		-	4	-	-	368
£500 million 5.867% Tier 2 subordinated notes	556	-	-		-	-	(6)	-	550
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes	272	-	-		-	-	(6)	-	266
£250 million 4.016% Tier 3 subordinated notes	259	-	-		-	-	(2)	-	257
Derivative assets 2	-	-	-		-	-	-	48	48
Derivative liabilities 2	-	-	-		-	-	-	(5)	(5)
	4,567	17	(340)		4	(13)	(10)	43	4,268

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

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

 

		Cash movements			Non-cash movements
	At 1 January 2020 £m	New borrowings, net of costs £m	Repayments £m		Changes in fair value £m	Movement in foreign exchange £m	Other movements1 £m	Movements in fair value £m	At 31 December 2020 £m
Limited recourse bonds 2022 7.59%	35	-	(36)		-	-	-	1	-
Property Reversions loan	99	-	(19)		-	4	-	-	84
£200 million 7.25% unsecured subordinated loan	196	-	-		-	-	-	4	200
£300 million senior unsecured bond	121	-	-		-	-	-	1	122
£428 million Tier 2 subordinated notes	426	-	-		-	-	-	-	426
£450 million Tier 3 subordinated notes	449	-	-		-	-	-	-	449
US $500 million Tier 2 bonds	376	-	-		-	-	(12)	-	364
€500 million Tier 2 notes	417	-	-		-	-	24	1	442
US $750 million Contingent Convertible Tier 1 notes	-	566	-		-	-	(23)	2	545
£500 million Tier 2 notes	-	483	-		-	-	-	1	484
US $500 million Fixed Rate Reset Tier 2 notes	-	396	-		-	-	(32)	-	364
£500 million 5.867% Tier 2 subordinated notes	-	-	-		559	-	-	(3)	556
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes	-	-	-		275	-	-	(3)	272
£250 million 4.016% Tier 3 subordinated notes	-	-	-		259	-	-	-	259
	2,119	1,445	(55)		1,093	4	(43)	4	4,567

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

E6. Risk management - financial and other risks

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

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

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

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

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

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

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

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

LIBOR transition

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

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

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

E6.2 Financial risk analysis

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

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

E6.2.1 Credit risk

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

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

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

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

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

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

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

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

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

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

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

Credit quality of assets

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

2021	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated  £m	Unit-linked £m	Total £m	Less amounts classified as held for sale £m	Total £m
Loans and deposits	-	6	-	-	-	414	55	475	-	475
Derivatives	-	965	1,737	388	-	1,343	138	4,571	(4)	4,567
Debt securities1,2	9,097	40,142	22,782	16,290	3,292	6,788	8,599	106,990	(2,229)	104,761
Reinsurers' share of insurance contract liabilities	-	4,963	3,539	37	-	48	-	8,587	-	8,587
Reinsurers' share of investment contract liabilities	-	-	-	-	-	-	10,009	10,009	(27)	9,982
Cash and cash equivalents	382	1,686	5,161	181	-	3	1,775	9,188	(76)	9,112
	9,479	47,762	33,219	16,896	3,292	8,596	20,576	139,820	(2,336)	137,484

1    For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring of credit risk. £110 million of AAA, £1,110 million of AA, £2,556 million of A, £2,480 million of BBB and £518 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as 'non-rated'.

2    Non-rated debt securities includes equity release mortgages with a value of £4,214 million (further details are set out in note E2.3) and non-rated bonds.

2020	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated £m	Unit-linked £m	Total £m
Loans and deposits	-	6	195	-	-	368	78	647
Derivatives	-	1,220	2,263	1,967	-	1,231	199	6,880
Debt securities1,2	9,041	35,184	24,747	14,960	2,497	6,658	16,368	109,455
Reinsurers' share of insurance contract liabilities	-	6,524	2,966	-	-	52	-	9,542
Reinsurers' share of investment contract liabilities	-	16	-	1	-	-	9,542	9,559
Cash and cash equivalents	30	1,728	7,049	173	-	10	2,008	10,998
	9,071	44,678	37,220	17,101	2,497	8,319	28,195	147,081

1    For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring of credit risk. £117 million of AAA, £963 million of AA, £2,446 million of A, £1,741 million of BBB and £219 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as 'non-rated'.

2    Non-rated debt securities includes equity release mortgages with a value of £3,484 million (further details are set out in note E2.3) and non-rated bonds.

Credit ratings have not been disclosed in the above tables for the assets of the unit-linked funds since the shareholder is not directly exposed to credit risks from these assets. Included in unit-linked funds are assets which are held as reinsured external fund links. Under certain circumstances, the shareholder may be exposed to losses relating to the default of the reinsured external fund link.

Credit ratings have not been disclosed in the above tables for holdings in unconsolidated collective investment schemes and investments in associates. The credit quality of the underlying debt securities within these vehicles is managed by the safeguards built into the investment mandates for these vehicles.

The Group maintains accurate and consistent risk ratings across its asset portfolio. This enables management to focus on the applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All risk ratings are tailored to the various categories of assets and are assessed and updated regularly.

The Group operates an Internal Credit Rating Committee and a Portfolio Credit Committee to perform oversight and monitoring of internal credit ratings for externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessments from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular, equity release mortgages) determined by the Life Companies. The Committees review the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes, in line with regulatory requirements.

Throughout 2021, the Group has continued to take de-risking action to increase the overall credit quality of its asset portfolio and mitigate the impact of future downgrades on risk capital. Further details are included in the Risk Management section of the Strategic Report.

The Group has increased exposure to an array of illiquid credit assets such as equity release mortgages, local authority loans, social housing, infrastructure and commercial real estate loans with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board.

A further indicator of the quality of the Group's financial assets is the extent to which they are neither past due nor impaired. All of the amounts in the table above for the current and prior year are neither past due nor impaired.

Additional life company asset disclosures are included on page 313 and include information on the Group's market exposure analysed by credit rating, sector and country of exposure for the shareholder debt portfolio. In light of developments regarding the Russia-Ukraine conflict, this includes the shareholders' debt exposure to Russia and Ukraine. The Group's exposure to Russia and Ukraine is small when compared to the size of its overall investment portfolio.

Concentration of credit risk

Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limit framework contained within the Group Credit Risk Policy and further provided in investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate counterparty exposures across the Group against additional Group counterparty limits. Counterparty risk in respect of OTC derivative counterparties is monitored using a Potential Future Exposure ('PFE') value metric.

The Group is also exposed to concentration risk with outsource partners. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees and measured through stress and scenario testing.

Reinsurance

The Group is exposed to credit risk as a result of insurance risk transfer contracts with reinsurers. The Group's policy is to place reinsurance only with highly rated counterparties. The Group is restricted from assuming concentrations of risk with individual external reinsurers by specifying limits on ceding and minimum conditions for acceptance and retention of reinsurers. However, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings, some concentration risk does arise with individual reinsurers. The Group manages its exposure to reinsurance credit risk through the operation of a credit policy, collateralisation where appropriate, and regular monitoring of exposures at the Reinsurance Management Committee.

Collateral

The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained in respect of stock lending, certain reinsurance arrangements and to provide security against the daily mark to model value of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4 for further information on collateral arrangements.

E6.2.2 Market risk

Market risk is defined as the risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market movements. The risk typically arises from exposure to equity, property and fixed income asset classes and the impact of changes in interest rates, inflation rates and currency exchange rates.

The Group is mainly exposed to market risk as a result of:

•  the mismatch between liability profiles and the related asset investment portfolios;

•  the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with-profit funds and assets held to meet regulatory capital and solvency requirements; and

•  the income flow of management charges derived from the value of invested assets of the business.

The Group manages the levels of market risk that it accepts through the operation of a market risk policy and an approach to investment management that determines:

•  the constituents of market risk for the Group;

•  the basis used to fair value financial assets and liabilities;

•  the asset allocation and portfolio limit structure;

•  diversification from and within benchmarks by type of instrument and geographical area;

•  the net exposure limits by each counterparty or group of counterparties, geographical and industry segments;

•  control over hedging activities;

•  reporting of market risk exposures and activities; and

•  monitoring of compliance with market risk policy and review of market risk policy for pertinence to the changing environment.

All operations comply with regulatory requirements relating to the taking of market risk.

Markets remain volatile, particularly given concerns over inflation and how quickly central banks will act to reduce these pressures on economies whilst balancing the need to aid post pandemic recovery. This is discussed in more detail on page 64 of the Risk Management section of the Annual Report and Accounts.

Interest rate and inflation risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance. The paragraphs in this section also apply to inflation risk, but references to fixed rate assets and liabilities would be replaced with index-linked assets and liabilities.

The Group is required to manage its interest rate exposures in line with qualitative risk appetite statements, quantitative risk metrics and any additional hedging benchmarks. Interest rate risk is managed by matching assets and liabilities where practicable and by entering into derivative arrangements for hedging purposes where appropriate. This is particularly the case for the non-participating funds and supported participating funds. For unsupported participating business, some element of investment mismatching is permitted where it is consistent with the principles of treating customers fairly. The with-profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.

The sensitivity analysis for interest rate and inflation risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest and inflation rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest and inflation rates on all assets and liabilities that contribute to the Group's reported profit after tax and in equity. Changes in the value of the Group's holdings in swaptions as a result of time decay or changes to interest rate volatility are not captured in the sensitivity analysis.

With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For unsupported with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of unsupported participating business to the Group result is largely limited to the shareholders' share of the declared annual bonus. The contribution of the supported participating business to the Group result is determined by the shareholders' interest in any change in value in the capital advanced to the with-profit funds.

In the non-participating funds, policy liabilities' sensitivity to interest rates are matched primarily with debt securities and hedging if necessary to match duration, with the result that sensitivity to changes in interest rates is very low. The Group's exposure to interest rates principally arises from the Group's hedging strategy to protect the regulatory capital position, which results in an adverse impact on profit on an increase in interest rates.

The Group is exposed to inflation risk through certain contracts, such as annuities, which may provide for future benefits to be paid taking account of changes in the level of experienced and implied inflation, and also through the Group's cost base. The Group seeks to manage inflation risk within the ALM framework through the holding of derivatives, such as inflation swaps, or physical positions in relevant assets, such as index-linked gilts, where appropriate.

Due to the correlation between interest rates and inflation, a combined sensitivity has been presented. Comparative information has been restated to incorporate a movement in the rate of inflation.

An increase of 1% in interest rates and 0.6% in the rate of inflation, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £364 million (2020 restated: £399 million).

A decrease of 1% in interest rates and 0.6% in the rate of inflation, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £415 million (2020 restated: £585 million).

Equity and property risk

The Group has exposure to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.

The portfolio of marketable equity securities and property investments which is carried in the statement of consolidated financial position at fair value, has exposure to price risk. The Group's objective in holding these assets is to earn higher long-term returns by investing in a diverse portfolio of equities and properties. Portfolio characteristics are analysed regularly and price risks are actively managed in line with investment mandates. The Group's holdings are diversified across industries and concentrations in any one company or industry are limited.

Equity and property price risk is primarily borne in respect of assets held in with-profit funds, unit-linked funds or equity release mortgages in the non-profit funds. For unit-linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with-profit funds policyholders' future bonuses will be impacted by the investment returns achieved and hence the price risk, whilst the Group also has exposure to the value of guarantees provided to with-profit policyholders. In addition some equity investments are held in respect of shareholders' funds. For the non-profit fund property price risk from equity release mortgages is borne by the Group with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds; this is primarily managed through the use of derivatives.

Equity and property price risk is managed through the agreement and monitoring of financial risk profiles that are appropriate for each of the Group's life funds in respect of maintaining adequate regulatory capital and treating customers fairly. This is largely achieved through asset class diversification and within the Group's ALM framework through the holding of derivatives or physical positions in relevant assets where appropriate.

The sensitivity analysis for equity and property price risk illustrates how a change in the fair value of equities and properties affects the Group result. It takes into account the effect of such changes in equity and property prices on all assets and liabilities that contribute to the Group's reported profit after tax and in equity (but excludes the impact on the Group's pension schemes).

A 10% decrease in equity prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £294 million (2020: £281 million).

A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £263 million (2020: £263 million).

A 10% decrease in property prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £6 million (2020: £25 million).

A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £4 million (2020: £16 million).

The sensitivity to changes in equity prices is primarily driven by the Group's equity hedging arrangements over the value of future management charges that are linked to asset values.

Currency risk

Currency risk is the risk that changes in the value of currencies could lead to reductions in asset values which may result in losses for policyholders and shareholders. With the exception of Standard Life International business sold in Germany and the Republic of Ireland, some historic business written in the Republic of Ireland and Ark Life business (until sold on 1 November 2021), the Group's principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.

The Group's financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus, the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the non-UK earnings of UK companies.

Some of the Group's with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks

During the year, the Group entered into four hedging relationships to hedge the currency risk on its Euro and US dollar denominated hybrid debt (US $500 million Tier 2 bonds, €500 million Tier 2 notes, US $750 million contingent convertible Tier 1 notes and US $500 million Fixed Rate Reset Tier 2 notes as set out in note E5) through cross currency rate swaps.

Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2021, since unhedged exposure to foreign currency was relatively low (2020: not considered significant).

E6.2.3 Financial soundness risk

Financial soundness risk is a broad risk category encompassing capital management risk, tax risk and liquidity and funding risk.

Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The Group has exposure to capital management risk through the requirements of the Solvency II capital regime, as implemented by the PRA, to calculate regulatory capital adequacy at a Group level. The Group's UK life subsidiaries have exposure to capital management risk through the Solvency II regulatory capital requirements mandated by the PRA at the solo level. The Group's approach to managing capital management risk is described in detail in note I3.

Tax risk is defined as the risk of financial failure, reputation damage, loss of earnings/value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording, reporting, understanding of tax legislation and disclosure of financial, taxation and regulatory information. Tax risk can be caused by:

•  the Group, or one of its subsidiaries, making a material error in its tax reporting;

•  incorrect calculation of tax provisions;

•  failure to implement the optimum financial arrangements to underpin a commercial transaction; and

•  incorrect operation of policyholder tax requirements.

Tax risk is managed by maintaining an appropriately staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. In addition, the Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks.

Liquidity risk is defined as failure to maintain adequate levels of financial resources to meet obligations as they fall due. Funding risk relates to the potential inability to raise additional capital or liquidity when required in order to maintain the resilience of the balance sheet. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group's subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term cash flow requirements and to meet obligations to policy liabilities. The Board of Phoenix Group Holdings plc has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that:

•  liquidity risk is managed in a manner consistent with the subsidiary company boards' strategic objectives, risk appetite and Principles and Practices of Financial Management ('PPFM');

•  cash flows are appropriately managed and the reputation of the Group is safeguarded; and

•  appropriate information on liquidity risk is available to those making decisions.

The Group's liquidity risk management strategy is based on a risk appetite of less than a 1 in 200 chance of having insufficient liquid or tangible assets to meet financial obligations as they fall due and is supported by:

•  holding appropriate assets to meet liquidity buffers;

•  holding high quality liquid assets to support day to day operations;

•  an effective stress testing framework to ensure survival horizons are met under different plausible scenarios;

•  effective liquidity portfolio management; and

•  liquidity risk contingency planning.

The Group's funding strategy aims to maintain the appropriate level of debt and equity in order to support the Group's acquisition ambitions, while maintaining sufficient headroom for hybrid capital under Solvency II rules.

Liquidity forecasts showing headroom against liquidity buffers are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances. In the event of a liquidity shortfall, this would be managed in line with the Group's Contingency Liquidity Plan where the latest available contingency management actions would be considered.

In extreme circumstances, the Group could be exposed to liquidity risk in its unit-linked funds. This could occur where a high volume of surrenders coincides with a tightening of liquidity in a unit-linked fund to the point where assets of that fund have to be sold to meet those withdrawals. Where the fund affected consists of less liquid assets such as property, it can take several months to complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of all investors in those funds and to protect the Group's own risk exposure.

The vast majority of the Group's derivative contracts are traded OTC and have a two-day collateral settlement period. The Group's derivative contracts are monitored daily, via an end-of-day valuation process, to assess the need for additional funds to cover margin or collateral calls.

Some of the Group's commercial property investments, cash and cash equivalents are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity.

The following table provides a maturity analysis showing the remaining contractual maturities of the Group's undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts:

2021	1 year or less or on demand £m	1-5 years £m	Greater than 5 years  £m	No fixed term £m	Total £m	Less amounts classified as held for sale (see note A6.1)  £m	Total £m
Liabilities under insurance contracts	14,319	36,061	78,484	-	128,864	-	128,864
Investment contracts	172,093	-	-	-	172,093	(11,676)	160,417
Borrowings1	664	1,380	2,772	70	4,886	-	4,886
Deposits received from reinsurers1	419	834	2,355	-	3,608	-	3,608
Derivatives1	259	517	583	-	1,359	(4)	1,355
Net asset value attributable to unitholders	3,568	-	-	-	3,568	-	3,568
Obligations for repayment of collateral received	3,442	-	-	-	3,442	-	3,442
Reinsurance payables	80	13	50	-	143	-	143
Payables related to direct insurance contracts	1,864	-	-	-	1,864	-	1,864
Lease liabilities1	11	59	72	-	142	-	142
Accruals and deferred income	548	59	7	7	621	(54)	567
Other payables	721	-	-	-	721	-	721

 

2020	1 year or less or on demand £m	1-5 years £m	Greater than 5 years  £m	No fixed term £m	Total £m
Liabilities under insurance contracts	20,027	32,703	81,177	-	133,907
Investment contracts	165,106	-	-	-	165,106
Borrowings1	551	1,661	3,145	84	5,441
Deposits received from reinsurers1	699	832	2,569	-	4,100
Derivatives1	274	526	224	-	1,024
Net asset value attributable to unitholders	3,791	-	-	-	3,791
Obligations for repayment of collateral received	5,205	-	-	-	5,205
Reinsurance payables	134	-	-	-	134
Payables related to direct insurance contracts	1,669	-	-	-	1,669
Lease liabilities1	12	36	84	-	132
Accruals and deferred income	509	4	8	-	521
Other payables	1,265	-	1	-	1,266

1    These financial liabilities are disclosed at their undiscounted value and therefore differ from amounts included in the statement of consolidated financial position which discloses the discounted value.

Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out within one year of the reporting date.

A significant proportion of the Group's financial assets are held in gilts, cash, supranationals and investment grade securities which the Group considers sufficient to meet the liabilities as they fall due. The vast majority of these investments are readily realisable immediately since most of them are quoted in an active market.

E6.2.4 Strategic risk

Strategic risks threaten the achievement of the Group strategy through poor strategic decision-making, implementation or response to changing circumstances. The Group recognises that core strategic activity brings with it exposure to strategic risk. However, the Group seeks to proactively review, manage and control these exposures.

The Group's strategy and business plan are exposed to external events that could prevent or impact the achievement of the strategy; events relating to how the strategy and business plan are executed; and events that arise as a consequence of following the specific strategy chosen. The identification and assessment of strategic risks is an integrated part of the Risk Management Framework. Strategic risk should be considered in parallel with the Risk Universe as each of the risks within the Risk Universe can impact the Group's strategy.

A Strategic Risk Policy is maintained and reported against regularly, with a particular focus on risk management, stakeholder management, corporate activity and overall reporting against the Group's strategic ambitions.

E6.2.5 Operational risk

Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events. Operational risk arises due to failures in one or more of the following aspects of our business:

•  indirect exposures through outsourcing service providers and suppliers;

•  direct exposures through internal practices, actions or omissions;

•  external threats from individuals or groups focused on malicious or criminal activities, or on external events occurring which are not within the Group's control; and

•  negligence, malpractice or failure of employees, or suppliers to follow good practice in delivering operational processes and practices.

It is accepted that it is neither possible, appropriate nor cost effective to eliminate operational risks from the business as operational risk is inherent in any operating environment particularly given the regulatory framework under which the Group operates. As such the Group will tolerate a degree of operational risk subject to appropriate and proportionate levels of control around the identification, management and reporting of such risks. A set of operational risk policies are maintained that set out the nature of the operational risk exposure and minimum control standards in place to control the risk.

E6.2.6 Customer risk

Customer risk is the risk of financial failure, reputational loss, loss of earnings and/or value through inappropriate or poor customer treatment (including poor advice). It can arise as a result of:

•  Customer Treatment: Failure to have a customer centric culture which drives appropriate behaviours and decisions leading to customer interactions and outcomes which meet or exceed reasonable customer and regulator expectations and which take account of potential customer vulnerability.

•  Customer Transformation: The design, governance and oversight of Strategic Customer Transformation Activity in retained functions and service providers, fails to deliver on reasonable customer expectations, taking account of the Group's customer treatment risk appetite and regulatory requirements.

•  Product and Propositions: Failure to design and/or manage products/propositions appropriately, or failure of the manufacturer to ensure that products/propositions are distributed to the appropriate target market, perform as intended and in line with the expectations set.

•  Sales and Distribution: Inappropriate (unclear, unfair or misleading) financial promotions, sales practices and/or distribution agreements resulting in poor customer outcomes leading to reputational, financial and/or operational detriment.

The Group's Conduct Risk Appetite, sets the boundaries within which the Group expect customer outcomes to be managed. In addition, the Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, consists of a set of outcomes, intents and standards for all staff to follow to ensure that we have embedded and effective controls in place across our business activities to detect where our customers are at risk of poor outcome, minimise conduct risks, and respond with timely and appropriate mitigating actions. From a qualitative perspective, the customer risks for the Group are regularly reported to management oversight committees.

F. Insurance contracts, investment contracts with DPF and reinsurance

F1. Liabilities under insurance contracts

Classification of contracts Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder. Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts or derivatives and accounted for as financial liabilities (see notes E1 and E3 respectively). Some insurance and investment contracts contain a Discretionary Participation Feature ('DPF'). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts. Contracts with reinsurers are assessed to determine whether they contain significant insurance risks. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are classified as financial instruments and are valued at fair value through profit or loss. Insurance contracts and investment contracts with DPF Insurance liabilities Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies: •  where there are no guaranteed surrender values; or •  in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time. For unit-linked insurance contract liabilities the provision is based on the fund value, together with an allowance for any excess of future expenses over charges, where appropriate. For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: •  liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners' share of projected future bonuses; •  acquisition costs are not deferred; and •  reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies. The With-Profit Benefit Reserve ('WPBR') for an individual contract is determined by either a retrospective calculation of 'accumulated asset share' approach or by way of a prospective 'bonus reserve valuation' method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account future trends. The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The cost of future policy-related liabilities includes the unallocated surplus attributable to policyholders for the Group's with-profit funds. Where policyholders have valuable guarantees, options or promises in respect of the with-profit business, these costs are generally valued using a stochastic model. In calculating the realistic liabilities, account is taken of the future management actions consistent with those set out in the Principles and Practices of Financial Management ('PPFM').

 

Standard Life Assurance Limited ('SLAL'), a wholly owned subsidiary of the Group, includes the Heritage With Profits Fund ('HWPF'). In 2006, the Standard Life Assurance Company demutualised. The demutualisation was governed by its Scheme of Demutualisation ('the Scheme'). Under the Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company were transferred to SLAL. The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund ('SHF') or the Proprietary Business Fund ('PBF') of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL. Under the realistic valuation, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the cost of future policy related liabilities (as a reduction where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure of non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to the cost of future policy related liabilities. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders. Applying the policy noted above for the HWPF: •  The value of participating investment contract liabilities on the consolidated statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts. •  Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF on the consolidated statement of financial position. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to reduce the value of participating insurance and participating investment contract liabilities on the consolidated statement of financial position Present value of future profits on non-participating business in the with-profit funds For UK with-profit life funds, an amount may be recognised for the present value of future profits ('PVFP') on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. Where the value of future profits can be shown to be due to policyholders, this amount is recognised as a reduction in the liability rather than as an intangible asset. This is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus. Where it is not possible to apportion the future profits on this non-participating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement (see note G2). The value of the PVFP is determined in a manner consistent with the realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note F4. Embedded derivatives Embedded derivatives, including options to surrender insurance contracts, that meet the definition of insurance contracts or are closely related to the host insurance contract, are not separately measured. All other embedded derivatives are separated from the host contract and measured at fair value through profit or loss.

 

 

Liability adequacy At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared to the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement. The Group's accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4 Insurance Contracts, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement. Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy. Reinsurance ceded The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers' share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies. Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers' share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies. Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments and are accounted for on a payable basis. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related payables are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement. Reinsurance accepted The Group accepts insurance risk under reinsurance contracts. Amounts paid to cedants at the inception of reinsurance contracts in respect of future profits on certain blocks of business are recognised as a reinsurance asset. Changes in the value of the reinsurance assets created from the acceptance of reinsurance are recognised as an expense in the consolidated income statement, consistent with the expected emergence of the economic benefits from the underlying blocks of business. At each reporting date, the Group assesses whether there are any indications of impairment. When indications of impairment exist, an impairment test is carried out by comparing the carrying value of the asset with the estimate of the recoverable amount. When the recoverable amount is less than the carrying value, an impairment charge is recognised as an expense in the consolidated income statement. Reassurance assets are also considered in the liability adequacy test for each reporting period. Consolidated income statement recognition Gross premiums In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written. Reinsurance premiums Outward reinsurance premiums are accounted for on a payable basis. Reinsurance premiums include amounts receivable as refunds of premiums in cases where the Group cancels arrangements for the reinsurance of risk to another reinsurer.

 

Gross benefits and claims Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement. Reinsurance 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.

The table below shows a summary of the liabilities under insurance contracts and the related reinsurers' share included within assets in the statement of consolidated financial position.

	Gross liabilities 2021 £m	Reinsurers' share 2021  £m	Gross liabilities 2020 £m	Reinsurers' share 2020 £m
Life assurance business:
Insurance contracts	99,169	8,587	103,012	9,542
Investment contracts with DPF	29,695	-	30,895	-
	128,864	8,587	133,907	9,542
Amounts due for settlement after 12 months	114,545	7,472	113,880	8,546

 

	Gross liabilities 2021 £m	Reinsurers' share 2021  £m	Gross liabilities 2020 £m	Reinsurers' share 2020 £m
At 1 January	133,907	9,542	95,643	7,324
Premiums	7,455	2,079	4,706	796
Claims	(9,656)	(1,597)	(7,808)	(1,613)
Foreign exchange adjustments	(1,168)	(48)	851	4
Disposal of Ark Life (see note H3)	(799)	(730)	-	-
Acquisition of ReAssure businesses (see note H2.1)	-	-	24,606	2,782
L&G Part VII portfolio transfer (see note H2.2)	-	-	9,558	-
Other changes in liabilities1	(875)	(659)	6,351	249
At 31 December	128,864	8,587	133,907	9,542

1    Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience.

F2. Unallocated surplus

The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group's life operations. For the Group's with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts. If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil. In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF. •  The unallocated surplus of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the realistic value and the IFRS accounting policy value of all assets and liabilities other than participating contract liabilities recognised in the HWPF. •  The recourse cash flows are recognised as they emerge as an addition to shareholders' profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German branch business they are recognised as an addition to equity holders' profits.

 

	2021 £m	2020 £m
At 1 January	1,768	1,367
Transfer (to)/from consolidated income statement	(106)	113
Acquisition of ReAssure businesses (see note H2.1)	-	136
L&G Part VII transfer (see note H2.2)	-	261
Foreign exchange movements	139	(109)
At 31 December	1,801	1,768

F3. Reinsurance

This section includes disclosures in relation to reinsurance. Further disclosures and accounting policies relating to reinsurance are included in note F1.

F3.1 Premiums ceded to reinsurers

Premiums ceded to reinsurers during the period were £2,079 million (2020: £796 million).

F3.2 Collateral arrangements

It is the Group's practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments.

Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,882 million (2020: £4,324 million).

Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as 'Deposits received from reinsurers'. Where there is interest payable on such collateral, it is recognised within 'Net expense under arrangements with reinsurers' (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2021 are set out below.

	Reinsurance transactions
	2021 £m	2020 £m
Financial assets	373	427
Financial liabilities	373	427

F3.3 Net income/(expense) under arrangements with reinsurers

The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. The amount recognised in the statement of consolidated financial position in respect of this deposit is £3.2 billion as at 31 December 2021 (31 December 2020: £3.7 billion). Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring-fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring-fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring-fenced assets. This has the effect of ensuring that the investment risk on the ring-fenced pool of assets falls on the reinsurer. The investment return on the ring-fenced assets included within net investment return in the consolidated income statement is equal to an equivalent amount recognised in net expense under arrangements with reinsurers.

	2021 £m	2020 £m
Interest payable on deposits from reinsurers	(11)	(13)
Premium adjustments	33	(206)
Net income/(expense) under arrangements with reinsurers	22	(219)

F4. Risk management - insurance risk

This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group's approach to risk management is outlined in note I3 and the Group's management of financial and other risks is detailed in note E6.

Insurance risk refers to the risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to customer behaviour. The Life businesses are exposed to the following elements of insurance risk:

Mortality	higher than expected death claims on assurance products or lower than expected improvements in mortality;
Longevity	lower than expected number of deaths experienced on annuity products or greater than expected improvements in annuitant mortality;
Morbidity/Disability	higher than expected number of inceptions on critical illness or income protection policies and lower than expected termination rates on income protection policies;
Expenses	unexpected timing or value of expenses incurred;
Persistency	adverse movement in surrender rates, premium paying rates, premium indexation rates, cash withdrawal/drawdown rates, GAO surrender rates, GAO take-up rates, policyholder retirement dates, propensity to commute benefits, transfer out rates or the occurrence of a mass lapse event leading to losses;
New business pricing	inappropriate pricing of new business that is not in line with the underlying risk factors for that business.

Objectives and policies for mitigating insurance risk

Insurance risks are managed by monitoring risk exposure against predefined appetite limits. If a risk is moving out of appetite, the Group can choose to mitigate it via reinsurance in the case of longevity, mortality and morbidity risks, or by taking other risk reducing actions.

This is supported by additional methods to assess and monitor insurance risk exposures for both individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes.

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

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

For the Group's Open business, longevity risk exposures continue to increase as a result of the Bulk Purchase Annuity deals it has successfully acquired, however the vast majority of these exposures are reinsured to third parties. New business growth driven by product segments such as Workplace unit-linked pensions exposes the Group to persistency and expense risks.

There remains uncertainty around future demographic experience as a result of COVID-19, as outlined in page 64 of the Annual Report and Accounts. The impact over the longer term continues to be monitored, however given the uncertainty no adjustments to assumptions as a result of the impacts of COVID-19 have been deemed necessary to date.

Sensitivities

Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non economic sensitivities arise from mortality, longevity and lapse risk.

A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £70 million (2020: £70 million).

An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £70 million (2020: £70 million).

A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £517 million (2020: £619 million).

An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £530 million (2020: £627 million).

A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £27 million (2020: £40 million).

An increase of 10% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £27 million (2020: £44 million).

F4.1 Assumptions

For participating business which is with-profit business (insurance and investment contracts with DPF), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.

The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.

The assumptions used to determine the liabilities, under these valuation methods are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. The principal assumptions are as follows:

Discount rates

The Group discounts participating and non-participating insurance contract liabilities at a risk-free rate derived from the swap yield curve, plus an illiquidity premium of 36bps.

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

Expenses

Insurance contract liabilities include an allowance for the best estimate of future expenses associated with the administration of in-force policies. This requires the allocation of the Group's future expenses between those that relate to the administration of in-force policies, those attributable to the acquisition of new business and other costs, such as corporate costs. There is a level of judgement applied in the analysis that supports this allocation. Additionally, judgement is applied in the determination of the projected costs of the Group, in particular where those projections include the impact of transition and integration activity.

Expenses are assumed to increase at either the rate of increase in the Retail Price Index ('RPI'), or a rate derived from the UK inflation swaps curve, plus fixed margins in accordance with the various management service agreements ('MSAs') the Group has in place with outsource partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation or RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.

Mortality and longevity rates

Mortality rates are based on company experience and published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.

Lapse and surrender rates (persistency)

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

Discretionary participating bonus rate

For realistic basis funds, the regular bonus rates assumed in each scenario are determined in accordance with each company's PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM and the value of guaranteed benefits.

Policyholder options and guarantees

Some of the Group's products give potentially valuable guarantees, or give options to change policy benefits which can be exercised at the policyholders' discretion. These products are described below.

Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates. For pensions contracts, the specified date is the policyholder's chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with-profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with-profit contracts usually increase the guaranteed amount.

There are guaranteed surrender values on a small number of older contracts.

Some pensions contracts include guaranteed annuity options. The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,968 million (2020: £2,590 million) and £111 million (2020: £131 million) respectively.

In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £349 million (2020: £374 million) and £6 million (2020: £6 million) respectively.

With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder to commute the annuity benefit into cash on guaranteed terms.

Demographic prudence margin

For non-participating insurance contract liabilities, the Group sets assumptions at management's best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis funds, the assumptions about future demographic trends represent 'best estimates'.

Assumption changes

During the year a number of changes were made to assumptions to reflect changes in expected experience or to reflect transition activity. The impact of material changes during the year was as follows:

	(Decrease)/ increase in insurance liabilities 2021 £m	(Decrease)/ increase in insurance liabilities 2020 £m
Change in longevity assumptions	(272)	(369)
Change in persistency assumptions	(12)	6
Change in mortality assumptions	(7)	31
Change in expenses assumptions	275	(36)

2021:

The £272 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2020 projection tables.

The £12 million and £7 million positive impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £275 million negative impact of changes in expense assumptions principally reflects the impact of investment in the Group's growth agenda on the maintenance cost base, including the development of capabilities within the Group's Open business, asset management capabilities and within certain Group functions. The increase in reserves also reflects provision for the anticipated costs associated with the implementation of IFRS 17 and delivery of the Group Target Operating Model for IT and Operations.

2020:

The £369 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2019 projection tables.

The £6 million and £31 million negative impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £36 million positive impact of changes in expense assumptions principally reflects synergies generated upon the completion of the Part VII transfer of the L&G Mature Savings business, partially offset by an increase in reserves in respect of expected costs associated with the delivery of the Group Target Operating Model for IT and Operations and updates to investment expense assumptions, principally reflecting changes to asset mix.

F4.2 Managing product risk

The following sections give an assessment of the risks associated with the Group's main life assurance products and the ways in which the Group manages those risks.

	Gross1			Reinsurance
2021	Insurance contracts £m	Investment contracts with DPF £m		Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	8,746	53		728	-
Deferred annuities - without guarantees	1,753	341		-	-
Immediate annuities	6,506	-		3,787	-
Unitised with-profit	13,344	27,078		-	-
Total pensions	30,349	27,472		4,515	-
Life:
Immediate annuities	348	-		1	-
Unitised with-profit	9,364	1,137		-	-
Life with-profit	2,166	-		6	-
Total life	11,878	1,137		7	-
Other	1,245	(1)		192	-
Non-profit funds:
Deferred annuities - with guarantees	555	-		-	-
Deferred annuities - without guarantees	983	-		158	-
Immediate annuities	37,329	-		2,885	-
Protection	2,076	-		876	-
Unit-linked	14,891	1,084		22	-
Other	(137)	3		(68)	-
	99,169	29,695		8,587	-

1    £9,864 million (2020: £7,883 million) of liabilities are subject to longevity swap arrangements.

 

	Gross			Reinsurance
2020	Insurance contracts £m	Investment contracts with DPF  £m		Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	10,095	62		917	-
Deferred annuities - without guarantees	1,835	340		-	-
Immediate annuities	7,478	-		4,377	-
Unitised with-profit	14,375	28,210		-	-
Total pensions	33,783	28,612		5,294	-
Life:
Immediate annuities	365	-		2	-
Unitised with-profit	9,869	1,210		-	-
Life with-profit	2,445	-		7	-
Total life	12,679	1,210		9	-
Other	1,348	-		212	-
Non-profit funds:
Deferred annuities - with guarantees	636	-		-
Deferred annuities - without guarantees	1,966	-		(115)	-
Immediate annuities	35,641	-		2,459	-
Protection	3,012	-		1,713	-
Unit-linked	14,062	1,064		31	-
Other	(115)	9		(61)	-
	103,012	30,895		9,542	-

With-profit fund (unitised and traditional)

The Group operates a number of with-profit funds in which the with-profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates ('GAR').

The investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property and other asset classes in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.

The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by with-profit committees. Advice is also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the PRA, Financial Conduct Authority ('FCA') and policyholders.

The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others. For the HWPF, under the Scheme, shareholders are entitled to receive certain defined cash flows arising on specified blocks of UK and Irish business.

Unitised and traditional with-profit policies are exposed to equivalent risks, the main difference being that unitised with-profit policies purchase notional units in a with-profit fund whereas traditional with-profit policies do not. Benefit payments for unitised policies are then dependent on unit prices at the time of a claim, although charges may be applied. A unitised with-profit fund price is typically guaranteed not to fall and increases in line with any discretionary bonus payments over the course of one year.

Deferred annuities

Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option ('GCO') policies. In addition, certain unit prices in the HWPF are guaranteed not to decrease.

During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than originally anticipated. The guaranteed terms on GAR policies are more favourable than the annuity rates currently available in the market available for cash benefits. The guaranteed terms on GCO policies are currently not valuable. Deferred annuity policies which are written to provide annuity benefits are managed in a similar manner to immediate annuities and are exposed to the same risks.

The option provisions on GAR policies are particularly sensitive to downward movements in interest rates, increasing life expectancy and the proportion of customers exercising their option. Adverse movements in these factors could lead to a requirement to increase reserves which could adversely impact profit and potentially require additional capital. In order to address the interest rate risk (but not the risk of increasing life expectancy or changing customer behaviour with regard to exercise of the option), insurance subsidiaries within the Group have purchased derivatives that provide protection against an increase in liabilities and have thus reduced the sensitivity of profit to movements in interest rates (see note E6.2.2).

The Group seeks to manage this risk in accordance with both the terms of the issued policies and the interests of customers, and has obtained external advice supporting the manner in which it operates the long-term funds in this respect.

Immediate annuities

This type of annuity is purchased with a single premium at the outset, and is paid to the policyholder for the remainder of their lifetime. Payments may also continue for the benefit of a surviving spouse or partner after the annuitant's death. Annuities may be level, or escalate at a fixed rate, or may escalate in line with a price index and may be payable for a minimum period irrespective of whether the policyholder remains alive.

The main risks associated with this product are longevity and investment risks. Longevity risk arises where the annuities are paid for the lifetime of the policyholder, and is managed through the initial pricing of the annuity and through reinsurance (appropriately collateralised) or transfer of existing liabilities. Annuities may also be a partial 'natural hedge' against losses incurred in protection business in the event of increased mortality (and vice versa) although the extent to which this occurs will depend on the similarity of the demographic profile of each book of business. In addition, the Group has in place longevity swaps that provide downside protection over longevity risk.

The pricing assumption for mortality risk is based on both historic internal information and externally generated information on mortality experience, including allowances for future mortality improvements. Pricing will also include a contingency margin for adverse deviations in assumptions.

Market and credit risk is influenced by the extent to which the cash flows under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.

Protection

These contracts are typically secured by the payment of a regular premium payable for a period of years providing benefits payable on certain events occurring within the period. The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness.

The main risk associated with this product is the claims experience and this risk is managed through the initial pricing of the policy (based on actuarial principles), the use of reinsurance and a clear process for administering claims.

Market and credit risk is influenced by the extent to which the cash flows under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.

G. Other statement of consolidated financial position notes

G1. Pension schemes

Defined contribution pension schemes Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred. Defined benefit pension schemes The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contract liabilities and investment contract liabilities. As required by IFRIC 14, IAS 19 - 'The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', to the extent that the economic surplus (prior to the elimination of the insurance policies issued by Group entities) will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust. Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the Scheme, a liability is recognised when the obligation arises. The net pension scheme asset/liability represents the economic surplus net of all adjustments noted above. The Group determines the net interest expense or income on the net pension scheme asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net pension scheme asset/liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method. The movement in the net pension scheme asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net pension scheme asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net pension scheme asset/liability (recognised in other comprehensive income) and employer contributions.

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

An analysis of the pension scheme (liability)/asset for each pension scheme is set out in the table below and also includes the net pension scheme liability in respect of the Group operated unapproved retirement benefit scheme ('ReAssure Private Retirement Trust'):

	2021 £m	2020 £m
Pearl Group Staff Pension Scheme
Economic surplus	263	527
Adjustment for insurance policies eliminated on consolidation	(1,680)	(596)
Net economic deficit	(1,417)	(69)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(92)	(185)
Net pension scheme liability, as reported	(1,509)	(254)
Reimbursement right in respect of reinsurance, as reported	212	-
Add: value attributed to assets held by PLL within financial assets1	1,896	756
Adjusted net pension scheme asset	599	502
PGL Pension Scheme
Economic surplus	26	30
Adjustment for insurance policies eliminated on consolidation	(1,618)	(1,749)
Net pension scheme liability, as reported	(1,592)	(1,719)
Add: assets held by PLL within financial assets1	2,084	2,177
Adjusted net pension scheme asset	492	458
Abbey Life Staff Pension Scheme
Economic surplus/(deficit)	12	(61)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(4)	-
Minimum funding requirement obligation	(7)	-
Net pension scheme asset/(liability)	1	(61)
ReAssure Staff Pension Scheme
Economic surplus	54	16
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(19)	(5)
Net pension scheme asset	35	11
ReAssure Private Retirement Trust
Net pension scheme liability	(2)	(2)

1    The Pearl Scheme and the PGL Pension Scheme have both executed buy-in transactions with a Group life company and subsequently assets supporting the Group's actuarial liabilities are recognised on a line by line basis within financial assets in the statement of consolidated financial position. Further details are included in notes G1.1 and G1.2 below.

      In the current and prior periods, an adjusted net pension scheme asset has been presented for the first time in relation to both the pension schemes. The value of the assets held by PLL within financial assets in respect of the PGL Pension Scheme buy-ins is equal to the assets posted to a ring-fenced collateral account. For the Pearl Scheme the assets held by PLL supporting the buy-ins are not ring-fenced and the value has been determined as the value of the insurance contract liability within the PLL financial statements less the value of the associated reinsurance asset.

Risks

The Group's defined benefit schemes typically expose the Group to a number of risks, the most significant of which are:

Asset volatility - the value of the schemes' assets will vary as market conditions change and as such is subject to considerable volatility. The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. The majority of the assets are held within a liability driven investment strategy which is linked to the funding basis of the schemes (set with reference to government bond yields). As such, to the extent that movements in corporate bond yields are out of line with movements in government bond yields, volatility will arise.

Inflation risk - a significant proportion of the schemes' benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are held within a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.

Life expectancy - the majority of the schemes' obligations are to provide benefits for the life of the member therefore increases in life expectancy will result in an increase in the liabilities. For the Pearl and PGL schemes, this is partially offset by the buy-in policies that move in line with the liabilities. These buy-in policies are eliminated on consolidation (see sections G1.1 and G1.2 for further details).

Information on each of these schemes is set out below.

Guaranteed Minimum Pension ('GMP') equalisation

GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs needed to be equalised. A further ruling in November 2020 clarified requirements in respect of transfers out. During 2020, the Group updated the initial assessment of its allowance for the potential cost of equalising GMP for the impact between males and females included its IAS 19 actuarial liabilities. At 31 December 2021 the GMP equalisation reserve was calculated as a percentage uplift to the defined benefit obligation for each scheme as follows: PGL Scheme: 0.5% (2020: 0.5%); Pearl Scheme: 0.37% (2020: 0.37%); Abbey Life Scheme: 0.37% (2020: 0.37%); and the ReAssure Scheme: 0.1% (2020: 0.1%).

G1.1 Pearl Group Staff Pension Scheme

Scheme details

The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The Pearl Scheme is closed to new members and has no active members.

Defined benefit scheme

The Pearl Scheme is established under, and governed by, the trust deeds and rules and has been funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited ('PGH2'), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The trustee company is comprised of four representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company's articles of association. The trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.

To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be settled by the scheme administrators when the refund is made.

The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2021, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

A triennial funding valuation of the Pearl Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £104 million, on the agreed technical provisions basis. The triennial funding valuation of the Scheme as at 30 June 2021 commenced during the year and is ongoing as at 31 December 2021. The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are derived from government bond yields for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high quality AA-rated corporate bonds. In addition the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.

Pension scheme commitment agreement and buy-in

On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with PGH2 to complete a series of buy-ins that are scheduled to be executed by 31 December 2023. At the same time, the Pearl Scheme completed the first buy-in with Phoenix Life Limited ('PLL') covering 25% of the Scheme's pensioner and deferred member liabilities, transferring the associated risks, including longevity improvement risk, to PLL effective from 30 September 2020.

Two further buy-in transactions were completed in July 2021 and October 2021 covering 35% and 15% respectively of the Scheme's pensioner and deferred member liabilities. Risks, including longevity improvement risk, were transferred to PLL effective from 28 May 2021 and 31 August 2021 respectively.

Upon completion of each buy-in transaction the Scheme transferred the following plan assets to PLL:

•  in November 2020, £731 million of plan assets were transferred to PLL in satisfaction of the premium of £735 million and was net of a £4 million payment by PLL to the Scheme in respect of members' benefits for October and November 2020;

•  in July 2021, £1,049 million of plan assets were transferred to PLL in satisfaction of the premium and a further £12 million cash payment was paid by the Scheme in August 2021. PLL paid £5 million to the Scheme in respect of members' benefits for June and July 2021; and

•  in October 2021, £433 million of plan assets were transferred to PLL in satisfaction of the premium of £435 million and was net of a £2 million payment by PLL to the Scheme in respect of members' benefits for September and October 2021. A further £1 million cash payment in respect of the premium was paid by the Scheme in December 2021.

The assets transferred to PLL are recognised in the relevant line within financial assets in the consolidated statement of financial position. The economic effect of the buy-in transactions in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement right asset which is subsequently eliminated on consolidation. The value of this insurance policy at 31 December 2021 was £1,680 million (2020: £596 million) which includes an amount owed by PLL of £12 million (2020: £nil).

The Commitment Agreement replaced the 2012 Pensions Agreement, which had previously included provisions covering contribution payments, additional contributions payable should agreed funding targets not be met, share charge over certain Group entities and covenant tests. The main terms of the Commitment Agreement are detailed below.

The new agreement contains provisions under which payments by PGH2 to the Scheme are required in the event that the Group does not meet the minimum buy-in completion schedule. There are two different types of payments as detailed below:

•  gilts deficit recovery contributions: These operate in a similar way to the security under the 2012 Pension Agreement. Contributions calculated as amounts required to reach full funding on a gilts-basis by 30 June 2027; and

•  contingent contributions: These represent a new form of security for the trustee. The amount of these contributions was initially capped at £200 million, with the cap running off in line with completion of the buy-ins. Following the completion of the recent buy-in transactions the cap is £50 million.

The new agreement also introduces a new form of security provided by PGH2 to the trustee which will be in place until the final buy-in is completed. The share charges over certain Group entities have been replaced by a new surety bond arrangement. The surety bonds have been written by two external third-party insurers, each providing £100 million of cover payable to the Scheme following any one of the following trigger events:

•  insolvency of the Company, PGH2, PGS, Standard Life Assurance Limited, PLL, or Phoenix Life Assurance Limited; and

•  failure to pay any contributions to the Scheme due under the terms of the Commitment Agreement.

The cover provided by the surety bonds will be reduced from £200 million to £100 million (in aggregate) once the completed aggregate buy-in proportion exceeds 75%. The cover remains at £200 million following completion of the October 2021 buy-in transaction. The agreements between the trustee and the surety providers are backed by a guarantee and an indemnity from the Company, PGH2 and PGS to the surety providers to repay them in the event of a claim under the surety bond.

Contributions totalling £70 million were paid into the Pearl Scheme in 2020. Following the signing of the new Commitment Agreement PGH2 paid the balance of the remaining contributions under the 2012 Pensions Agreement (£37 million) in addition to the monthly instalments paid up to the date of the agreement. No further contributions are to be paid to the Pearl Scheme however, PGH2 will continue to meet the administrative and non-investment running expenses of the Scheme as set out in the schedule of contributions.

Reimbursement right asset in respect of reinsurance arrangement

In November 2021, PLL entered into a quota share reinsurance arrangement with an external insurer to reinsure c.64% of the risks transferred to PLL upon completion of the third buy-in transaction with the Pearl Scheme. A premium of £261 million was paid by PLL to the reinsurer. As PLL expects to use the claims received to pay for its obligations under the insurance contract between it and the Pearl scheme (i.e. to settle the defined benefit obligation) the reinsurance arrangement is considered to be a non-qualifying insurance policy and is classified as a reimbursement right. The reinsurance arrangement is expected to match a proportion of the defined benefit obligation of the Pearl Scheme therefore the valuation of the reimbursement right is consistent with the valuation of the associated defined benefit obligation.

Summary of amounts recognised in the consolidated financial statements

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

2021	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Pension Scheme Liability £m	Reimburse-ment right asset £m
At 1 January	2,315	(2,384)	(185)	(254)	-
Interest income/(expense)	24	(33)	(2)	(11)	-
Included in profit or loss	24	(33)	(2)	(11)	-
Remeasurements:
Return on plan assets excluding amounts included in interest income	27	-	-	27	(49)
Gain from changes in demographic assumptions	-	22	-	22	-
Gain from changes in financial assumptions	-	89	-	89	-
Experience loss	-	(26)	-	(26)	-
Change in provision for tax on economic surplus available as a refund	-	-	95	95	-
Included in other comprehensive income	27	85	95	207	(49)
Income received from insurance policies	46	-	-	46	-
Benefit payments	(108)	108	-	-	-
Assets transferred as premium for Scheme buy-in	(1,497)	-	-	(1,497)	-
Assets transferred as premium for reinsurance arrangement	-	-	-	-	261
At 31 December	807	(2,224)	(92)	(1,509)	212

 

 

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Minimum funding requirement obligation £m	Total £m
At 1 January	2,834	(2,313)	(183)	(24)	314
Interest income/(expense)	53	(45)	(4)	(1)	3
Past service cost	-	(1)	-	-	(1)
Included in profit or loss	53	(46)	(4)	(1)	2
Remeasurements:
Return on plan assets excluding amounts included in interest income	198	-	-	-	198
Gain from changes in demographic assumptions	-	51	-	-	51
Loss from changes in financial assumptions	-	(205)	-	-	(205)
Experience gain	-	19	-	-	19
Change in provision for tax on economic surplus available as a refund	-	-	2	-	2
Change in minimum funding requirement obligation	-	-	-	25	25
Included in other comprehensive income	198	(135)	2	25	90
Employer's contributions	70	-	-	-	70
Income received from insurance policies	5	-	-	-	5
Benefit payments	(110)	110	-	-	-
Assets transferred as premium for Scheme buy-in	(735)	-	-	-	(735)
At 31 December	2,315	(2,384)	(185)	-	(254)

Scheme assets

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

	2021			2020
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Hedging portfolio	438	23		1,505	(30)
Fixed interest gilts	-	-		50	-
Other debt securities	349	-		1,301	-
Properties	104	104		140	140
Private equities	4	4		5	5
Hedge funds	4	4		5	5
Cash and other	67	-		98	-
Obligations for repayment of stock lending collateral received	(159)	-		(789)	-
Reported scheme assets	807	135		2,315	120
Add back:
Insurance policies eliminated on consolidation	1,680	1,680		596	596
Economic value of assets	2,487	1,815		2,911	716

The Group ensures that the investment positions are managed within an Asset Liability Matching ('ALM') framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge 100% of the interest rate and inflation rate risk measured on a gilts-basis.

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

Defined benefit obligation

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

•  deferred scheme members: 40% (2020: 40%); and

•  pensioners: 60% (2020: 60%)

The weighted average duration of the defined benefit obligation at 31 December 2021 is 16 years (2020: 16 years).

Principal assumptions

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

	2021 %	2020  %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	3.20	2.85
Rate of increase for deferred pensions ('CPI')	2.70	2.10
Discount rate	2.00	1.40
Inflation - RPI	3.30	2.90
Inflation - CPI	2.70	2.10

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

The post-retirement mortality assumptions are in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2021 are based on amended CMI 2020 Core Projections (2020: From 1 January 2017 based on amended CMI 2019 Core Projections) and a long-term rate of improvement of 1.70% (2020: 1.70%) per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.8 years and 30.6 years for male and female members respectively (2020: 30.1 years and 31.0 years respectively).

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

2021
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	2,224		(87)	93		70	(68)		80	(80)
2020
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	2,384		(95)	98		76	(87)		86	(86)

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

G1.2 PGL Pension Scheme

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

Scheme details

Defined contribution scheme

On 1 July 2020 the Group closed the defined contribution section of the PGL Scheme and ceased making contributions from this date. Contributions in the period to 1 July 2020 were £5 million.

Defined benefit scheme

The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has no active members.

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

The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2021, undertaken by independent qualified actuaries.

To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made.

A triennial funding valuation of the PGL Pension Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £246 million. The IFRS valuation cash flows reflect current available data and are not limited to being updated following the completion of each funding valuation.

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

Insurance policies with Group entities

In March 2019, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL which covered the remaining pensioner and deferred members of the Scheme not covered by the first such agreement concluded in December 2016. The plan assets transferred to PLL as premium are held in a collateral account and are recognised in the relevant line within financial assets in the statement of consolidated financial position. The economic effect of these transactions in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation along with the relevant insurance contract liabilities in PLL.

The value of the insurance policies with Group entities at 31 December 2021 is £1,618 million (2020: £1,749 million).

Summary of amounts recognised in the consolidated financial statements

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

2021	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	35	(1,754)	(1,719)
Interest income/(expense)	-	(25)	(25)
Administrative expenses	(4)	-	(4)
Past service cost	-	-	-
Included in profit or loss	(4)	(25)	(29)
Remeasurements:
Return on plan assets excluding amounts included in interest income	-	-	-
Gain from changes in demographic assumptions	-	16	16
Gain from changes in financial assumptions	-	70	70
Experience loss	-	(3)	(3)
Included in other comprehensive income	-	83	83
Income received from insurance policies	73	-	73
Benefit payments	(73)	73	-
At 31 December	31	(1,623)	(1,592)

 

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	54	(1,691)	(1,637)
Interest income/(expense)	1	(31)	(30)
Administrative expenses	(3)	-	(3)
Past service costs	-	(1)	(1)
Included in profit or loss	(2)	(32)	(34)
Remeasurements:
Return on plan assets excluding amounts included in interest income	(4)	-	(4)
Gain from changes in demographic assumptions	-	7	7
Loss from changes in financial assumptions	-	(154)	(154)
Experience gain	-	41	41
Included in other comprehensive income	(4)	(106)	(110)
Income received from insurance policies	75	-	75
Benefit payments	(75)	75	-
Assets transferred as premium for 2019 scheme buy-in	(13)	-	(13)
At 31 December	35	(1,754)	(1,719)

Scheme assets

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

	2021			2020
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Cash and other	31	-		35	-
Reported scheme assets	31	-		35	-
Add back:
Insurance policies eliminated on consolidation	1,618	1,610		1,749	1,749
Economic value of assets	1,649	1,610		1,784	1,749

Defined benefit obligation

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

•  deferred scheme members: 36% (2020: 36%); and

•  pensioners: 64% (2020: 64%)

The weighted average duration of the defined benefit obligation at 31 December 2021 is 16 years (2020: 16 years).

Principal assumptions

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

	2021 %	2020 %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower)	3.30	2.90
Rate of increase for deferred pensions ('CPI')	2.70	2.10
Discount rate	2.00	1.40
Inflation - RPI	3.30	2.90
Inflation - CPI	2.70	2.10

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

The post-retirement mortality assumptions are in line with 86%/94% of S1P Light base tables for males and females. Future longevity improvements from 1 January 2017 to 31 December 2020 are based on modified CMI 2019 Core Projections and from 1 January 2021 are based on modified CMI 2020 Core Projections (2020: From 1 January 2017 based on modified CMI 2019 Core Projections) with a long-term rate of improvement of 1.70% (2020: 1.70%) per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.0 years (2020: 28.4 years) and 28.9 years (2020: 29.3 years) for male and female members respectively.

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

2021
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	1,623		(62)	66		54	(52)		60	(60)
2020
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	1,754		(67)	70		55	(53)		65	(65)

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

G1.3 Abbey Life Staff Pension Scheme

Scheme details

On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the trustee), a corporate trustee. There are three trustee directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The trustee is responsible for administering the scheme in accordance with the trust deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants and has no active members.

The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2021 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

Funding

The last funding valuation of the Abbey Life Scheme was carried out by a qualified actuary as at 31 March 2021 and showed a deficit of £86 million. Following completion of the funding valuation a recovery plan was agreed between the Group and the trustee of the Abbey Life Scheme and a revised schedule of contributions was agreed effective from November 2021, for PeLHL to pay the following amounts in respect of deficit contributions:

•  fixed monthly contributions of £400,000 payable from 30 April 2021 to 30 June 2026;

•  monthly contributions in respect of administration expenses of £106,295 payable up to 31 March 2022, then increasing annually in line with the Retail Prices Index assumption to 30 June 2028; and

•  annual payments of £4 million into the New 2016 Charged Account by 31 July each year, with the next payment being made by 31 July 2022, and the last payment due by 31 July 2025.

The charged accounts are Escrow accounts which were created in 2010 to provide the trustees with additional security in light of the funding deficit. The amounts held in the charged accounts do not form part of Abbey Life Scheme assets.

Under the terms of the 2013 Funding Agreement the funding position of the Scheme was assessed as at 31 March 2021 and this assessment revealed a shortfall, calculated in accordance with the terms of the New 2013 Funding Agreement, which exceeded the amount held in the New 2013 Charged Account. As such, the entire balance of £42 million was paid from the New 2013 Charged Account to the Abbey Life Scheme in December 2021.

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

An additional liability of £7 million (2020: £nil) has been recognised reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £21 million in accordance with the minimum funding requirement. A deferred tax asset of £4 million (2020: £nil) has also been recognised to reflect tax relief at a rate of 19% that is expected to be available on the contributions once paid into the Scheme.

Summary of amounts recognised in the consolidated financial statements

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

2021	Fair value of scheme assets  £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Minimum funding requirement obligation £m	Total £m
At 1 January	280	(341)	-	-	(61)
Interest income/(expense)	4	(5)	-	-	(1)
Administration expenses	(1)		-	-	(1)
Included in profit or loss	3	(5)	-	-	(2)
Remeasurements:
Return on plan assets excluding amounts included in interest income	11	-	-	-	11
Experience loss	-	(5)	-	-	(5)
Gain from changes in demographic assumptions	-	6	-	-	6
Gain from changes in financial assumptions	-	15	-	-	15
Change in minimum funding requirement obligation	-	-	-	(7)	(7)
Change in provision for tax on economic surplus available as a refund	-	-	(4)	-	(4)
Included in other comprehensive income	11	16	(4)	(7)	16
Employer's contributions	48	-	-	-	48
Benefit payments	(12)	12	-	-	-
At 31 December	330	(318)	(4)	(7)	1

 

 

2020	Fair value of scheme assets £m	Defined benefit obligation  £m	Total £m
At 1 January	254	(329)	(75)
Interest income/(expense)	5	(7)	(2)
Administrative expenses	(1)	-	(1)
Included in profit or loss	4	(7)	(3)
Remeasurements:
Return on plan assets excluding amounts included in interest income	28	-	28
Gain from changes in demographic assumptions	-	6	6
Loss from changes in financial assumptions	-	(31)	(31)
Experience gain	-	8	8
Included in other comprehensive income	28	(17)	11
Employer's contributions	6	-	6
Benefit payments	(12)	12	-
At 31 December	280	(341)	(61)

Scheme assets

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

	2021			2020
	Total £m	Of which not quoted in an active market  £m		Total £m	Of which not quoted in an active market £m
Diversified income fund	139	-		118	-
Fixed interest government bonds	68	-		70	-
Corporate bonds	118	-		86	-
Derivatives	1	1		2	2
Cash and cash equivalents	4	-		4	-
Pension scheme assets	330	1		280	2

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: 44% (2020: 49%); and

•  pensioners: 56% (2020: 51%)

The weighted average duration of the defined benefit obligation at 31 December 2021 is 16 years (2020: 17 years).

Principal assumptions

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

	2021 %	2020 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	3.20	2.85
Rate of increase for deferred pensions ('CPI' subject to caps)	2.70	2.10
Discount rate	2.00	1.40
Inflation - RPI	3.30	2.90
Inflation - CPI	2.70	2.10

The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the 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.

The post-retirement mortality assumptions are 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 2021, using the SAPS S3 'Light' tables for males and for females based on year of use. Future longevity improvements from 1 January 2020 are based on amended CMI 2020 Core Projections (2020: From 1 January 2017 based on amended CMI 2019 Core Projections) and a long-term rate of improvement of 1.70% (2020: 1.70%) per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 24.9 years and 25.7 years for male and female members respectively (2020: 25.4 years and 26.5 years respectively).

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

2021
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	318		(12)	13		8	(9)		12	(12)
2020
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	341		(14)	15		10	(11)		13	(13)

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.

G1.4 ReAssure Life Staff Pension Scheme

Scheme details

The ReAssure Scheme was consolidated within the Group financial statements following the acquisition of the ReAssure businesses on 22 July 2020. The ReAssure Scheme is a registered occupational pension scheme, set up under trust, and legally separate from the employer ReAssure Midco Limited ('RML'). The scheme is administered by ReAssure Pension Trustees Limited, a corporate trustee. There are six trustee directors, two of whom are nominated by the ReAssure Scheme members and four of whom are appointed by RML. The trustee is responsible for administering the scheme in accordance with the trust deed and rules and pensions laws and regulations. The ReAssure Scheme is closed to new entrants and to future accrual for active members.

The valuation has been based on an assessment of the liabilities of the ReAssure Scheme as at 31 December 2020 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 ReAssure Scheme was carried out by a qualified actuary as at 31 December 2020 and showed a deficit of £77 million.

Following the completion of the 2020 valuation a recovery plan was agreed in September 2021 between the trustee and RML in order to make good the deficit. RML has agreed to pay contributions of £17.7 million into the existing Custody Account spread over four annual payments of £4.425 million payable on 1 April 2022, 1 April 2023, 1 April 2024 and 1 April 2025. It is anticipated that these payments will be sufficient to cover the difference between the funding shortfall and the balance of the Custody Account at 31 December 2020 and to remove any remaining deficit at 31 December 2025.

The amounts held in this account do not form part of the Scheme's plan assets and instead are held in the Custody Account and are included within financial assets in the statement of consolidated financial position.

The Group agrees to cover those expenses incurred by the ReAssure Scheme and the cost of the death-in-service benefits for those members of the scheme entitled to those benefits. Payments of £1 million (2020: £1 million) have been made during the year to cover these costs.

Summary of amounts recognised in the consolidated financial statements

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

2021	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Total £m
At 1 January	477	(461)	(5)	11
Interest income/(expense)	6	(6)	-	-
Administrative expenses	(1)	-	-	(1)
Included in profit or loss	5	(6)	-	(1)
Remeasurements:
Return on plan assets excluding amounts included in interest income	19	-	-	19
Gain from changes in demographic assumptions	-	1	-	1
Gain from changes in financial assumptions	-	20	-	20
Experience loss	-	(2)	-	(2)
Change in provision for tax on economic surplus available as a refund	-	-	(14)	(14)
Included in other comprehensive income	19	19	(14)	24
Employer's contributions	1	-	-	1
Benefit payments	(10)	10	-	-
At 31 December	492	(438)	(19)	35

 

 

2020	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	-	-	-	-
Acquisition of ReAssure businesses	459	(424)	(12)	23
Interest income/(expense)	4	(4)	-	-
Administrative expenses	(1)	-	-	(1)
Included in profit or loss	3	(4)	-	(1)
Remeasurements:
Return on plan assets excluding amounts included in interest income	19	-	-	19
Loss from changes in demographic assumptions	-	(15)	-	(15)
Loss from changes in financial assumptions	-	(25)	-	(25)
Experience gain	-	2	-	2
Change in provision for tax on economic surplus available as a refund	-	-	7	7
Included in other comprehensive income	19	(38)	7	(12)
Employer's contributions	1	-	-	1
Benefit payments	(5)	5	-	-
At 31 December	477	(461)	(5)	11

Scheme assets

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

	2021			2020
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Equities	62	-		56	-
Government bonds	151	-		121	-
Corporate bonds	173	-		181	-
Real Estate	-	-		41	-
Managed funds	60	-		-	-
Other Quoted Securities	43	-		70	-
Cash and cash equivalents	3	-		8	-
Pension scheme assets	492	-		477	-

Defined benefit obligation

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

•  deferred scheme members: 66% (2020: 74%); and

•  pensioners: 34% (2020: 26%).

The weighted average duration of the defined benefit obligation at 31 December 2021 is 21 years (2020: 21 years).

Principal assumptions

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

	2021 %	2020 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	3.20	2.85
Rate of increase for deferred pensions	2.70	2.10
Rate of increase in salaries	3.70	3.10
Discount rate	2.00	1.40
Inflation - RPI	3.30	2.90
Inflation - CPI	2.70	2.10

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

The post-retirement mortality assumptions are in line with SAPS Series 3 light base tables with a 102% (2020: 96%) multiplier for males and a 95% (2020: 92%) multiplier for females, with CMI 2019 projections in line with a 1.50% per annum long-term trend up to and including 31 December 2020. Future longevity improvements from 1 January 2021 onwards are in line with CMI 2020 Core Projections (2020: From 1 January 2015 in line with CMI 2019 Core Projections) with a long-term trend of 1.7% per annum (2020: 1.5%) for males and 1.2% (2020: 1.5%) for females.

Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 60 is 30.1 years and 31.4 years for male and female members respectively (2020: 29.8 years and 31.4 years for male and female members respectively).

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

2021
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	438		(21)	23		18	(17)		18	(17)
2020
Assumptions	Base		Discount rate			RPI			Life expectancy
Sensitivity level			25bps increase	25bps decrease		25bps increase	25bps decrease		1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	461		(25)	25		21	(21)		18	(18)

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. Goodwill is not amortised but is tested for impairment annually or when there is evidence of possible impairment. 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 are measured on initial recognition at cost. The cost of an intangible asset acquired in a business combination is the fair value as at the date of the acquisition. The cost of an intangible asset acquired in exchange for a non-monetary asset is measured at fair value as at the date of the transaction. Following initial recognition, the brand and other contractual arrangement intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. 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
2021	Goodwill £m	Acquired in-force business £m	Customer relationships £m	Brands and other £m	Total other intangibles £m	Total £m
Cost or valuation
At 1 January	57	7,028	297	56	353	7,438
Additions	-	-	-	111	111	111
Disposal of Ark Life	-	(21)	-	-	-	(21)
Termination of Client Services and Proposition Agreement	-	-	-	(36)	(36)	(36)
At 31 December	57	7,007	297	131	428	7,492
Amortisation and impairment
At 1 January	-	(2,015)	(168)	(14)	(182)	(2,197)
Amortisation charge for the year	-	(537)	(15)	(5)	(20)	(557)
Impairment charge for the year1	(47)	(99)	-	-	-	(146)
Disposal of Ark Life	-	21	-	-	-	21
Termination of Client Services and Proposition Agreement	-	-	-	6	6	6
At 31 December	(47)	(2,630)	(183)	(13)	(196)	(2,873)
Carrying amount	10	4,377	114	118	232	4,619
Less amounts classified as held for sale (see note A6.1)	-	(54)	-	-	-	(54)
Carrying amount at 31 December	10	4,323	114	118	232	4,565
Amount recoverable after 12 months	10	3,834	99	112	211	4,055

1    An impairment charge of £59 million to acquired in-force business has been included within the 'gain on completion of abrdn plc transaction' in the consolidated income statement, see note G2.2 for further details.

 

			Other intangibles
2020	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	82	56	435	5,689
Acquisition of ReAssure businesses	-	1,831	-	-	-	-	1,831
Reclassification to investment contract liabilities	-	-	-	(82)	-	(82)	(82)
At 31 December	57	7,028	297	-	56	353	7,438
Amortisation and impairment
At 1 January	-	(1,546)	(154)	-	(10)	(164)	(1,710)
Amortisation charge for the year	-	(469)	(14)	-	(4)	(18)	(487)
At 31 December	-	(2,015)	(168)	-	(14)	(182)	(2,197)
Carrying amount at 31 December	57	5,013	129	-	42	171	5,241
Amount recoverable after 12 months	57	4,457	115	-	10	125	4,639

G2.1 Goodwill

The carrying value of goodwill has been tested for impairment at the year end and the results of this exercise are detailed below.

Goodwill with a cost of £47 million is attributable to the Management Services segment. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk adjusted discount rate of 9.5% (2020: 9.2%) and are consistent with those adopted by management in the Group's 5 year operating plan and, for the period 2027 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, expenses, mortality and morbidity, determined on the basis as described in note F4.1.

The Management Services segment generates income solely from the services provided to other operating segments within the Group. As a result of planned investment in the Group's growth agenda, including the development of capabilities of the Open segment and certain Group functions, it is anticipated that the Management Services segment will generate short-term losses in the period until service agreements can be renegotiated. Together with the effect of the expected run-off of the relevant Phoenix Life insurance business, these anticipated short-term losses resulted in an assessment that the recoverable amount of the goodwill was £nil as at 31 December 2021. Accordingly, an impairment charge of £47 million has been recognised in the year. Management considers that any reasonable change in key assumptions would not cause the recoverable amount to exceed its carrying value.

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 cash flows associated with that business. The cash flows used in the calculation are consistent with those adopted by management in the Group's 5 year operating plan, and for the period 2027 and beyond, assume a zero growth rate. The underlying assumptions of these projections include market share, customer numbers, commission rates and expense inflation. The cash flows have been valued at a risk adjusted discount rate of 11% (2020:11%) that makes prudent allowance for the risk that future cash flows may differ from that assumed.

This test demonstrated that value in use was greater than carrying value. 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 ('AVIF') 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.

AVIF on investment contracts without DPF is amortised in line with emergence of economic benefits.

AVIF balances are assessed for impairment where an indicator of impairment has been identified. The following paragraphs set out the impairment indicators identified and the results of the impairment tests carried out.

On 23 February 2021, the Group entered into an agreement with abrdn plc to simplify the arrangements of their Strategic Partnership (see note A6 for further details). Under the terms of the transaction, the Group will sell its UK investment and platform related products, comprising Wrap SIPP, Onshore bond and UK TIP to abrdn plc and this will be effected through a Part VII transfer. The balances in the statement of consolidated financial position relating to this business were classified as a disposal group held for sale in February 2021. The total proceeds of disposal for this business are not expected to exceed the carrying value of the related net assets and accordingly the disposal group has been recognised at fair value less costs to sell. The value of the AVIF at 23 February 2021 was £122 million and an impairment charge of £59 million was recognised on classification of the AVIF balance as held for sale. This charge has been included within the 'gain on completion of abrdn plc transaction' in the consolidated income statement. A further impairment of £8 million has been recognised at 31 December 2021. The AVIF balance classified as held for sale is not being amortised.

In June 2021, following the Group Board's approval to dispose of Ark Life Assurance Company DAC, the entity was initially classified as a disposal group held for sale. The proceeds of disposal were not expected to exceed the carrying value of the related net assets and accordingly the disposal group was measured at fair value less costs to sell. An impairment charge of £18 million has been recognised in respect of the AVIF upon classification of the business as held for sale and recognised within 'amortisation and impairment of acquired in-force business' in the consolidated income statement.

During the year, updates to the reserving methodology in respect of a certain block of unit-linked insurance contracts within the Europe operating segment resulted in a release of reserves of £20 million. This release of reserves was considered to be an indicator of impairment in relation to a component of the AVIF recognised on acquisition of the Standard Life Assurance businesses as it represented an acceleration of the recognition of profits that had been capitalised within the AVIF asset. Accordingly, an impairment test was performed.

The value in use of the AVIF was determined using present value techniques applied to the best estimate cash flows expected to arise from the relevant policies that were in-force at the date of initial recognition of the AVIF, adjusted to reflect an internal view of the required compensation for bearing the uncertainty associated with those cash flows. The key underlying assumptions were management's best estimates with regards to persistency and expenses, which were determined on the basis as described in note F4.1. It was determined that the carrying value exceeded value in use by £14 million and consequently an impairment charge has been recognised in the year, the impact of which partly offsets the release of reserves described above. The resultant net carrying value of this component of the Standard Life Assurance AVIF was £49 million.

Acquired in-force business of £1,831 million was recognised during the prior year upon acquisition of the ReAssure businesses (see note H2.1).

G2.3 Customer relationships

The customer relationships intangible at 31 December 2021 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 2021 of 7.9 years (2020: 8.9 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 ('PVFP') are the same as those used in calculating the insurance contract liabilities given in note F4.1.

The PVFP held in intangibles represented future profits on specific blocks of business in the NPL with-profit fund that was partly attributable to the holders of the limited recourse bonds (see note E5). As a consequence, the value of future profits was not attributable solely to policyholders and the PVFP was therefore presented as a separate intangible asset.

Following the repayment of the limited recourse bonds during the prior year, the PVFP is shown as fully attributable to policyholders and consequently in 2020 the PVFP has been represented within investment contract liabilities.

G2.5 Brands and 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.

Following the acquisition of the Standard Life Assurance businesses in 2018 an intangible asset was recognised in respect of the Client Services and Proposition Agreement ('CSPA') with abrdn plc and represented the value of the Group's contractual rights to use the Standard Life brand. The CSPA formalised the Strategic Partnership between the two companies and established the contractual terms by which abrdn plc was previously to continue to market and distribute certain products to be manufactured by Group companies.

On 23 February 2021, the Group entered into an agreement to acquire ownership of the Standard Life brand as part of the transaction with abrdn plc, which transferred to the Group in May 2021. At 31 December 2021, 'brands and other intangibles' includes £111 million in respect of the Standard Life brand and represents the fair value attributable to the brand as at the transaction date. The intangible asset was valued on a 'multi-period excess earnings' basis and is being amortised over a period of 30 years. The carrying value of the Standard Life brand as at 31 December 2021 is £108 million.

As part of the transaction with abrdn plc, the CSPA has been significantly amended prior to being dissolved. As a consequence, the CSPA intangible included within 'other intangibles' has been derecognised. At that time, its carrying value was £30 million and this has been included in the calculation of the 'gain on completion of abrdn plc transaction' recognised in the consolidated income statement. This intangible was valued on a 'multi-period excess earnings' basis and was being amortised over a period of 15 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. Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the owner-occupied property and the net amount is restated to the revalued amount of the asset. 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 (2020: 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.

 

2021	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 2021	33	78	2	54	167
Additions	1	22	-	12	35
Remeasurement of Right-of-use assets	-	3	-	-	3
Disposals	(5)	(9)	-	(7)	(21)
At 31 December 2021	29	94	2	59	184
Depreciation
At 1 January 2021	-	(23)	-	(25)	(48)
Depreciation	-	(9)	(1)	(8)	(18)
Disposals	-	8	-	4	12
At 31 December 2021	-	(24)	(1)	(29)	(54)
Carrying amount at 31 December 2021	29	70	1	30	130

 

2020	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 2020	25	75	2	27	129
Acquisition of ReAssure businesses	8	3	-	4	15
Additions	-	-	-	23	23
At 31 December 2020	33	78	2	54	167
Depreciation
At 1 January 2020	-	(11)	-	(9)	(20)
Depreciation	-	(12)	-	(16)	(28)
At 31 December 2020	-	(23)	-	(25)	(48)
Carrying amount at 31 December 2020	33	55	2	29	119

Owner-occupied properties have been valued by accredited independent valuers at 31 December 2021 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 £29 million (2020: £33 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 initially recognised at cost, including any directly attributable transaction costs. Subsequently investment property is measured 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. Fair value is determined without any deduction for transaction costs that may be incurred on sale or disposal. Gains and losses arising from the change in fair value are recognised as income or an expense in the statement of comprehensive income. Investment property includes right-of-use assets, where the Group acts as lessee. 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.

 

	2021 £m	2020 £m
At 1 January	7,128	5,943
Acquisition of ReAssure businesses	-	556
L&G Part VII portfolio transfer	-	1,221
Additions	819	157
Improvements	22	9
Disposals	(550)	(709)
Remeasurement of right-of-use asset	(1)	(1)
Movement in foreign exchange	(22)	4
Gains/(losses) on adjustments to fair value (recognised in consolidated income statement)	1,196	(52)
	8,592	7,128
Less amounts classified as held for sale (see note A6.1)	(3,309)	-
At 31 December	5,283	7,128
Unrealised gains/(losses) on properties held at end of year	529	(43)

As at 31 December 2021, a property portfolio including amounts classified as held for sale of £8,412 million (2020: £6,927 million) is held by the life companies in a mix of commercial sectors and spread geographically throughout the UK and Europe.

Investment properties also includes £73 million (2020: £86 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details) and £86 million (2020: 98 million) from the Group's interest in the residential property of policyholders who have previously entered into an Equity Release Income Plan ('ERIP') policy.

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. 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 value of the ground rent right-of-use asset as at 31 December 2021 was £21 million (2020: £17 million). The remeasurement gives rise to a reduction of £1 million (2020: £1 million). There were no disposals of ground rent right-of-use assets during the period (2020: £nil).

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 NPI residential property reversions, an interest in customers' properties which the Group will realise upon their death, are valued using a discounted cash flow 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 3.7% (2020: 3.7%). 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 ERIP residential property reversions, an interest in the residential property of policyholders who have previously entered into an ERIP policy and been provided with a lifetime annuity in return for the legal title to their property, are valued using unobservable inputs and management's best estimates. As the inward cash flows on these properties will not be received until the lifetime lease is no longer in force, which is usually upon the death of the policyholder, these interests are valued on a reversionary basis which is a discounted current open market value.

The open market values of the properties are independently revalued every two years by members of the Royal Institution of Chartered Surveyors and in the intervening period are adjusted by reference to the Nationwide Building Society regional indices of house prices. The discount period is based on the best estimates of the likely date the property will become available for sale and the discount rate applied is determined by the general partner as its best estimate of the appropriate discount rate. The mortality assumption is based on the PMLO8HAWP table for males and the PFLO8HAWP table for females, adjusted to reflect the historic experience of the business concerned. The mortality rates are projected using future mortality improvements from the CMI Mortality Projection Model. No explicit allowance is made for house price inflation in the year through to their realisation. Therefore, the key assumptions used in the valuation of the reversionary interests are the interest discount rate and the mortality assumption. The interest discount rate was 5% (2020: 5%).

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 2021	Weighted average 2020
Commercial Investment Property	RICS valuation	Expected income per sq. ft.	£21.36	£22.55
		Estimated rental value per hotel room	£8,534	£8,689
		Estimated rental value per parking space	£1,097	£1,169
		Capitalisation rate	4.65%	5.26%

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 NPI residential property reversions would increase (decrease) if:

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

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

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

•  the discount 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 £41 million (2020: £13 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £1 million (2020: £1 million).

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

	2021 £m	2020 £m
Not later than 1 year	323	304
Later than 1 year and not later than 5 years	1,032	959
Later than 5 years	3,128	2,820

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.

 

	2021 £m	2020 £m
Investment broker balances	249	362
Cash collateral pledged and initial margins posted	958	608
Property related receivables	177	139
Deferred acquisition costs	108	81
Other debtors	313	432
	1,805	1,622
Amount recoverable after 12 months	100	76

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.

 

	2021 £m	2020 £m
Bank and cash balances	5,246	6,355
Short-term deposits (including notice accounts and term deposits)	3,942	4,643
	9,188	10,998
Less amounts classified as held for sale (see note A6.1)	(76)	-
	9,112	10,998

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 £8,707 million (2020: £10,584 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 is recognised as a separate asset within other receivables and will not exceed the amount of the provision.

 

							Restructuring provisions
2021	Leasehold properties £m	Staff related £m	Known incidents £m	Input VAT recovery provision £m	FCA thematic reviews provision £m	Operational tax provision £m	Transition and Transformation provision £m	Transfer of policy administration provision £m	ReAssure provision £m	Other1,2 £m	Total1 £m
At 1 January	10	17	35	15	4	12	109	35	7	38	282
Additions in the year	-	-	30	2	-	-	-	9	-	27	68
Utilised during the year	(1)	-	(12)	-	(1)	-	(17)	(9)	(3)	(28)	(71)
Released during the year	(1)	(8)	(7)	-	(3)	-	-	-	(2)	(23)	(44)
At 31 December	8	9	46	17	-	12	92	35	2	14	235

1    Other and total provisions excludes amounts classified as held for sale as at 31 December 2021 of £2 million (2020: £nil).

2    Other provisions includes PA(GI) provision of £2 million (2020: £1 million) previously shown separately.

Leasehold properties

The leasehold properties provision includes a £7 million (2020: £9 million) dilapidations provision in respect of obligations under operating leases and £1 million (2020: £1 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 £5 million (2020: £13 million), and private medical and other insurance costs for former employees of £4 million (2020: £4 million).

Known incidents

The known incidents provision was created for historical data quality and administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced. These balances represent the best estimates of costs payable to customers. Additional information has been given below in respect of the more significant balances within this provision.

During the year, a £15 million provision was recognised in relation to errors in final encashment calculations for With-Profits Trustee Investment Plans. It is expected that the provision will be utilised within one year. In addition, an £11 million provision was recognised following identification that certain customers who have a protected pension age or a protected tax free lump sum may not have had their benefits settled correctly. The provision is expected to be utilised within one year.

In 2020, following completion of the Part VII transfer of the Legal & General business, a £12 million provision was recognised in respect of amounts owed to customers due to various system and processing errors resulting in incorrect rules having been applied to policies. During the year, £2 million of the provision was utilised and a further £1 million was released. It is expected that the remaining balance of £9 million will be fully utilised within one year.

The balance also includes a provision of £1 million (2020: £10 million) which reflects the Group's exposure in relation to a an historical underpayment of guaranteed payments to certain pension customers as a result of a systems error. During the year, £7 million was utilised and a further £2 million was released. It is expected that the remaining balance will be fully utilised within one year.

The remaining provisions of £10 million as at 31 December 2021 (2020: £13 million) are expected to be utilised within one to five years. As at the balance sheet date, there are no significant uncertainties which could give rise to a material change in the value of the provisions held for current known incidents.

Input VAT recovery provision

The provision of £17 million (2020: £15 million) reflects the potential outcome of ongoing negotiations with HMRC in relation to the changes to the Partial Exemption Special Method (PESM) necessitated by the addition of the Standard Life Entities to the Phoenix VAT Group. The provision reflects the fact that whilst Phoenix considers its proposal for the recovery of VAT on costs incurred by SLAESL to be fair and reasonable, the revised PESM remains to be agreed and HMRC may take a different view. The current provision is based upon a likely alternative basis for recovery considered to reflect the Group's maximum exposure as at the reporting date, and was increased by £2 million in the year to reflect input VAT recovered in the period. It is currently expected that the provision will be utilised within one to two years.

FCA thematic reviews provision - ReAssure

On acquisition of the ReAssure businesses on 22 July 2020, £9 million of obligations were recognised on a fair value basis, in respect of ReAssure Life Limited ('RLL') to reflect the costs of voluntary remediation to customers of certain legacy products. Following the acquisition, £2 million of the provision was utilised and £3 million was released. During the year, £1 million of this provision was utilised as final remediation payments were made and the remaining provision of £3 million was released.

Operational tax provision

The operational tax provision relates to potential tax penalties payable to HMRC following failure to notify certain customers of changes to their lifetime allowance usage. The Group is currently in discussion with HMRC in respect of these items and the provision represents the Group's best estimate of the maximum exposure as at the reporting date. The balance at 31 December 2021 of £12 million is expected to be utilised within one to two years.

Restructuring provisions

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 2019, 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.

An initial provision of £159 million was established in 2019 and included migration costs, severance costs and other expenses. Migration costs are considered a direct expenditure necessarily entailed by the restructuring and represent an obligation arising from arrangements entered into with TCS during 2019. No costs have been provided for that relate to the ongoing servicing of policies. 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. A 10% increase in the number of staff subject to redundancy, based on an average length of service and salary, would increase the provision by £4 million.

During the year, £17 million of the provision has been utilised, and the remaining £92 million is expected to be utilised within two years.

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 to transfer a further 2 million of the Group's legacy policies to Diligenta by 31 December 2021.

An initial provision of £76 million was recognised in 2018 for the expected cost of the platform migration and for severance and other costs associated with exiting from the current arrangements. Migration costs are considered a direct expenditure necessarily entailed by the restructuring and represent an obligation arising from arrangements entered into with TCS during 2018. No costs have been provided for that relate to the ongoing servicing of policies. The migration elements of the provision are subject to limited uncertainty as a consequence of the signed agreements that are in place. There is a higher degree of uncertainty in relation to the severance and associated exit costs which will be impacted by the number of staff that ultimately transfer to Diligenta. A 10% increase in the level of severance and exit costs would increase the provision by £1 million. During the year the provision was increased by £9 million and a further £9 million was utilised. The remaining provision of £35 million is expected to be utilised within one year.

ReAssure restructuring provision

During 2020 a £7 million restructuring provision was established in respect of RLL to cover severance costs. £3 million of the provision was utilised and a further £2 million was released during the year. The remaining balance of £2 million is expected to be utilised within one year.

Other provisions

During the year, the £23 million provision in respect of indemnities and obligations arising under agreements entered into by the Group in association with corporate activity was released following completion of the transaction with abrdn plc in February 2021. Further details of this transaction are included in note A6.1.

Other provisions includes £4 million (2020: £6 million) of 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.

The remaining other provisions of £10 million (2020: £8 million) consist of a number of small balances all of which are less than £2 million in value.

Discounting

The impact of discounting on all provisions during the year from either the passage of time or from a change in the discount rate is not material.

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.

 

	2021 £m	2020  £m
Current tax:
Current tax receivable	419	263
Current tax payable	(19)	-
Deferred tax:
Deferred tax liabilities	(1,399)	(1,036)

Movement in deferred tax liabilities

2021	1 January £m	Recognised in consolidated income statement £m	Recognised in other comprehensive income £m	Other movements £m	Less amounts classified as held for sale (see note A6.1)  £m	31 December £m
Trading losses	30	80	-	(1)	-	109
Capital losses	36	(4)	-	-	-	32
Expenses and deferred acquisition costs carried forward	42	15	-	-	-	57
Provisions and other temporary differences	129	5	-	1	-	135
Non-refundable pension scheme surplus	(128)	13	(140)	-	-	(255)
Pension scheme deficit	13	(16)	3	-	-	-
Accelerated capital allowances	8	8	-	-	-	16
Intangibles	39	(2)	-	(2)	-	35
Acquired in-force business	(798)	(90)	-	-	10	(878)
Customer relationships	(33)	(24)	-	-	-	(57)
Unrealised gains	(365)	(230)	-	2	-	(593)
IFRS transitional adjustments	(10)	5	-	-	-	(5)
Other	1	-	-	4	-	5
	(1,036)	(240)	(137)	4	10	(1,399)

 

2020	1 January £m	Recognised in consolidated income statement £m	Recognised in other comprehensive income £m	Acquisition of ReAssure businesses £m	L&G Part VII transfer £m	Other movements £m	31 December £m
Trading losses	14	15	-	-	-	1	30
Capital losses	-	14	-	22	-	-	36
Expenses and deferred acquisition costs carried forward	20	(90)	-	102	10	-	42
Provisions and other temporary differences	32	(27)	-	124	-	-	129
Non-refundable pension scheme surplus	(68)	(36)	(24)	-	-	-	(128)
Committed future pension contributions	12	(13)	1	-	-	-	-
Pension scheme deficit	14	1	(2)	-	-	-	13
Accelerated capital allowances	8	(1)	-	1	-	-	8
Intangibles	40	(3)	-	-	-	2	39
Acquired in-force business	(691)	123	-	(230)	-	-	(798)
Customer relationships	(33)	-	-	-	-	-	(33)
Unrealised gains	(199)	(65)	-	(72)	(28)	(1)	(365)
IFRS transitional adjustments	(24)	5	-	9	-	-	(10)
Other	2	2	-	(3)	-	-	1
	(873)	(75)	(25)	(47)	(18)	2	(1,036)

The standard rate of UK Corporation tax for the year ended 31 December 2021 is 19% (2020: 19%).

An increase from the current 19% UK corporation tax rate to 25%, effective from 1 April 2023, was announced in the Budget on 3 March 2021, and substantively enacted on 24 May 2021. Accordingly, shareholder deferred tax assets and liabilities, where provided, are reflected at rates between 19% and 25% depending on the expected timing of the reversal of the relevant temporary difference. Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable.

	2021 £m	2020 £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward	55	52
Excess expenses and deferred acquisition costs	9	7
Intangibles	9	14
Deferred tax assets not recognised on capital losses1	29	42

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

There is a technical matter which is currently being discussed with HMRC in relation to the Legal and General Assurance Society Limited transfer to ReAssure Limited. These discussions are not sufficiently progressed at this stage for recognition of any potential tax benefit arising.

There is an ongoing tax dispute with HMRC in relation to the tax treatment of an asset formerly held by Guardian Assurance Limited (before the business was transferred to ReAssure Limited). The current tax liability includes an accrual for the total tax under dispute on the basis that there is sufficient risk that the tax treatment will not be accepted. The matter is scheduled to be heard in the First Tier Tribunal in May 2022.

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.

In July 2018, the Supreme Court concluded in favour of the tax payer 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. As a result of the insurance business transfer from Legal and General Assurance Society during 2020, the tax refund for the benefit of the Group's with-profit and unit-linked funds increased to £45 million and £23 million respectively. In the case of the with-profit funds there was an increase in unallocated surplus and for the unit-linked funds there was a corresponding increase in investment contract liabilities as a result of the recognition of the tax asset.

In January 2020, HMRC issued a communication to taxpayers who are affected by the dividend GLO but are not direct participants of it, setting out HMRC's intended approach to settling enquiries into the amount of double tax relief available for statutory protective or other claims. The Group has been progressing claims with HMRC during the course of 2021, but due to the significant number of cases and years affected, no amounts have as yet been repaid. The level of tax refund expected is currently unchanged as at the end of 2021.

Some companies of the Group were late joiners or not members of the GLO but have made statutory protective tax claims totalling circa £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. Some progress through the courts has been made in the course of 2021, but it is expected that the litigation will continue to run. 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.

 

	2021 £m	2020 £m
Payables related to direct insurance contracts	1,864	1,669

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 ground rent 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.

 

	2021 £m	2020 £m
At 1 January	84	84
Acquisition of ReAssure businesses	-	5
Leases incepted during the year	27	10
Termination of leases following the disposal of associated investment properties	(1)	-
Interest expense	3	4
Lease payments	(16)	(18)
Remeasurement of leases	2	(1)
At 31 December	99	84
Amount due within 12 months	10	11
Amount due after 12 months	89	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 £nil (2020: £1 million). Details of the related right-of-use assets are included in notes G3 and G4.

G11. Accruals and deferred income

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

 

	2021 £m	2020 £m
Accruals	498	452
Deferred income	123	69
Accruals and deferred income including amounts classified as held for sale	621	521
Less amounts classified as held for sale (see note A6.1)	(54)	-
At 31 December	567	521
Amount due for settlement after 12 months	26	12

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.

 

	2021 £m	2020 £m
Investment broker balances	228	746
Property related payables	73	37
Investment management fees	77	3
Amount due to abrdn plc on deed of indemnity	-	68
Other payables	343	412
	721	1,266
Amount due for settlement after 12 months	-	1

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 Investment 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. Portfolio transfers When completing an acquisition, the Group first considers whether the acquisition meets the definition of a business combination under IFRS 3 Business Combinations. IFRS 3, and the use of acquisition accounting, does not apply in circumstances where the acquisition of an asset or a group of assets does not constitute a business, and is instead a portfolio of assets and liabilities. In such cases, the Group's policy is to recognise and measure the assets acquired and liabilities assumed in accordance with the Group's accounting policies for those assets and liabilities. The difference between the consideration and the net assets or liabilities acquired is recognised in the consolidated income statement.

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 relevant national supervisory authority. 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:

•  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 2021, PeLHL held £11 million (2020: £50 million) within debt securities and £14 million (2020: £13 million) within cash and cash equivalents in respect of these charged accounts. In December 2021, following completion of the 31 March 2021 funding valuation £42 million of assets were transferred from the charged accounts to the Abbey Life Pension Scheme. Further details of when the remaining amounts may become payable to the pensions scheme are included in note G1.3.

•  ReAssure Midco Limited ('RML') is required to make payments of contributions into a ring-fenced account on behalf of the ReAssure Staff Pension Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2021, RML held £57 million (2020: £57 million) within debt securities and £1 million (2020: £2 million) within cash and cash equivalents in respect of this account. Further details of when these amounts may become payable to the pensions scheme are included in note G1.4.

The Pearl Pension Scheme funding agreement included certain covenants which restricted the transfer of funds within the Group. As detailed further in note G1.1, these covenants were terminated under the Commitment Agreement entered into with the Pearl Pension Scheme in November 2020.

H2. Acquisitions and portfolio transfers

H2.1 Acquisition of ReAssure businesses

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

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

H2.2 L&G portfolio transfer

On 6 December 2017, ReAssure Limited, a subsidiary of ReAssure Group plc, entered into an agreement to acquire the mature savings business of Legal and General Assurance Society ('LGAS'). The mature savings book consists of a block of unit-linked and with-profit business, predominantly comprising traditional insurance based pensions, savings and protection products which are closed and in
run-off. On that date, ReAssure Limited entered into a risk transfer agreement ('RTA') under which it assumed the risk and rewards associated with the business for cash consideration of £650 million. The RTA was in-force as at the date of the Group's acquisition of the ReAssure businesses.

On 7 September 2020, the Group completed a Part VII transfer of the mature savings liabilities and associated assets with LGAS, which resulted in the cancellation of the RTA. No further consideration was payable in respect of the Part VII transfer. This transfer was not deemed to be an acquisition of a business and consequently the requirements of IFRS 3 have not been applied.

The Part VII transfer directly resulted in an increase in net assets of £85 million, which included £110 million associated with reduced expense assumptions used for insurance contract liabilities arising upon migration of the business to the Group's operating model partially offset by the recognition of net liabilities transferred of £25 million. The gain arising upon the transfer has been recognised in the consolidated income statement.

H3. Disposal of Ark Life

On 1 November 2021, the Group completed the sale of its entire interest in Ark Life Assurance Company DAC ('Ark Life') to Irish Life Group Limited for gross cash consideration of €230 million (£198 million). The carrying value of the net assets disposed of was £201 million which is after an impairment loss of £18 million in respect of AVIF that was recognised upon classification of the business as held for sale.

	2021 £m
Carrying value of net assets disposed of
Financial assets	1,880
Reinsurers' share of insurance contract liabilities	730
Reinsurance receivables	5
Other receivables	9
Cash and cash equivalents	9
Insurance contract liabilities	(799)
Investment contract liabilities	(1,598)
Deferred tax liabilities	(4)
Other liabilities	(31)
Net assets disposed of	201
Cash consideration received	198
Less: transaction costs	(6)
Net consideration received	192
Foreign currency translation reserves recycled to the consolidated income statement	(14)
Loss on disposal	(23)

H4. 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 2021, the Group held 44.5% (2020: 44.6%) of the issued share capital of UKCPT and the value of this investment, measured at fair value and included within financial assets, was £431 million (2020: £400 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 voting is subject to certain restrictions in accordance with the terms of an existing relationship agreement it has with UKCPT.

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

	2021 £m	2020 £m
Non-current assets	1,508	1,183
Current assets	90	170
Non-current liabilities	(248)	(198)
Current liabilities	(25)	(28)
	1,325	1,127
Revenue	58	65
Profit/(loss) for the year after tax	236	(10)

H5. 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 investments listed above are susceptible to market price risk arising from uncertainties about future values. Holdings in investment funds are subject to the terms and conditions of the respective fund's prospectus and 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.

H5.1 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 £16 million (2020: £7 million).

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

H5.2 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.

	2021 Carrying value of financial assets £m	2020 Carrying value of financial assets restated £m
Equities	871	467
Collective investment schemes	85,995	89,248
Debt securities1	10,991	12,613
	97,857	102,328

1    Comparative figures have been restated to include £4,545 million debt securities that have been classified as structured entities.

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.

H6. Group entities

The table below sets out the Group's subsidiaries (including consolidated collective investment schemes), associates and significant holdings in undertakings (including undertakings in which the 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)	Edinburgh3		Ordinary Shares	100.00%
Standard Life International Designated Activity Company (life assurance company - directly owned by the Company)	Dublin4		Ordinary Shares	100.00%
Standard Life Pension Funds Limited (life assurance company)	Edinburgh3		Limited by Guarantee	100.00%
ReAssure Life Limited (life assurance company)	Telford5		Ordinary Shares	100.00%
ReAssure Limited (life assurance company)	Telford5		Ordinary Shares	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)	Edinburgh3		Ordinary Shares	100.00%
ReAssure Companies Services Limited (management services company)	Telford5		Ordinary Shares	100.00%
PGMS (Ireland) Limited (management services company)	Dublin6		Ordinary Shares	100.00%
ReAssure UK Services Limited (management services company)	Telford5		Ordinary Shares	100.00%

 

PA (GI) Limited (non-trading company)	Wythall2		Ordinary Shares	100.00%
103 Wardour Street Retail Investment Company Limited (investment company)	Telford5		Ordinary Shares	100.00%
3 St Andrew Square Apartments Limited (property management company)	Edinburgh7		Ordinary Shares	100.00%
Abbey Life Assurance Company Limited (non-trading company) 1	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) 1	Wythall2		Ordinary Shares	100.00%
Alba LAS Pensions Management Limited (dormant company) 1	Glasgow8		Ordinary Shares	100.00%
Alba Life Trustees Limited (non-trading company)	Edinburgh3		Ordinary Shares	100.00%
Axial Fundamental Strategies (US Investments) LLC (investment company)	Delaware9		Limited Liability Company	100.00%
BA (FURBS) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
BL Telford Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
Britannic Finance Limited (finance and insurance services company) 1	Wythall2		Ordinary Shares	100.00%
Britannic Group Services Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Britannic Money Investment Services Limited (investment advice company) 1	Wythall2		Ordinary Shares	100.00%
Century Trustee Services Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
CH Management Limited (investment company)	Delaware10		Ordinary Shares	100.00%
Cityfourinc (dormant company) 1	Wythall2		Unlimited with Shares	100.00%
ERIP General Partner Limited (General Partner to ERIP Limited Partnership)	Telford5		Ordinary Shares	80.00%
ERIP Limited Partnership (Limited Partnership)	Telford5		Ordinary Shares	100.00%
G Assurance & Pensions Services Limited (non-trading company) 1	Telford5		Ordinary Shares	100.00%
G Financial Services Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
G Life H Limited (holding company)1	Telford5		Ordinary Shares	100.00%
G Park Management Company Limited (property management company)	London11		Ordinary Shares	100.00%
G Trustees Limited (trustee company)	Telford5		Ordinary Shares	100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company)	London11		Ordinary Shares	100.00%
Gresham Life Assurance Society Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
Iceni Nominees (No. 2) Limited (dormant company)	London11		Ordinary Shares	100.00%
IH (Jersey) Limited (dormant company)	Jersey12		Ordinary Shares	100.00%
Impala Holdings Limited (holding company)	Wythall2		Ordinary Shares	100.00%
Impala Loan Company 1 Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
Inesia SA (investment company)	Luxembourg13		Ordinary Shares	100.00%
Inhoco 3107 Limited (dormant company)	London11		Ordinary Shares	100.00%
London Life Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
London Life Trustees Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Namulas Pension Trustees Limited (dormant company)	Telford5		Ordinary Shares	100.00%
National Provident Institution (dormant company)1	Wythall2		Unlimited without Shares	100.00%
National Provident Life Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
NM Life Trustees Limited (dormant company)	Telford5		Ordinary Shares	100.00%
NM Pensions Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
Northampton General Partner Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
NP Life Holdings Limited (dormant company) 1	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%
Phoenix (Barwell 2) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix (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%
Phoenix (Moor House 1) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix (Moor House 2) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Pearl (Moor House) Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix (Printworks) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix (Stockley Park) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Pearl (WP) Investments LLC (investment company)	Delaware9		Limited Liability Company	100.00%
Pearl AL Limited (dormant company) 1	Glasgow8		Ordinary Shares	100.00%
Pearl Assurance Group Holdings Limited (investment 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)	London14		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%
Phoenix Group Management 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%
Phoenix ULA Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
PG Dormant (No 4) Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
PG Dormant (No 5) Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
PG Dormant (No 6) Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix Group Management Services Limited (dormant company)	London14		Ordinary Shares	100.00%
PGH (LC1) Limited (dormant company) 1	London15		Ordinary Shares	100.00%
PGH (LC2) Limited (dormant company)	London15		Ordinary Shares	100.00%
PGH (LCA) Limited (dormant company) 1	London15		Ordinary Shares	100.00%
PGH (LCB) Limited (dormant company) 1	London15		Ordinary Shares	100.00%
PGH (MC1) Limited (dormant company) 1	London16		Ordinary Shares	100.00%
PGH (MC2) Limited (dormant company) 1	London16		Ordinary Shares	100.00%
PGH (TC1) Limited (dormant company)	London15		Ordinary Shares	100.00%
PGH (TC2) Limited (dormant company)	London15		Ordinary Shares	100.00%
PGH Capital plc (finance company - directly owned by the Company)	Dublin17		Ordinary Shares	100.00%
PGMS (Glasgow) Limited (investment company) 1	Edinburgh3		Ordinary Shares	100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company)	Dublin6		Unlimited with Shares	100.00%
PGS 2 Limited (investment company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix & London Assurance Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix Advisers Limited (dormant company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix AW Limited (dormant company) 1	Wythall2		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%
Phoenix ER2 Limited (finance company)	Wythall2		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 ER5 Limited (finance company)	Wythall2		Ordinary Shares	100.00%
Phoenix ER6 Limited (finance company)	Wythall2		Ordinary Shares	100.00%
Phoenix Group Capital Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix Group Holdings (non-trading company)	Cayman Islands18		Private Company	100.00%
Phoenix Life Assurance Europe DAC (dormant company)	Dublin19		Ordinary Shares	100.00%
Phoenix Life Holdings Limited (holding company - directly owned by the Company)	Wythall2		Ordinary Shares	100.00%
Phoenix Pension Scheme (Trustees) Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix Pensions Trustee Services Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Phoenix SCP 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)	Edinburgh3		Ordinary Shares	100.00%
Phoenix SL Direct Limited (non-trading company) 1	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%
Phoenix Unit Trust Managers Limited (unit trust manager)	Wythall2		Ordinary Shares	100.00%
Phoenix Wealth Holdings Limited (holding company) 1	Wythall2		Ordinary Shares	100.00%
Phoenix Wealth Services Limited (financial services company)	Wythall2		Ordinary Shares	100.00%
Phoenix Wealth Trustee Services Limited (trustee company)	Wythall2		Ordinary Shares	100.00%
ReAssure FS Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
ReAssure FSH UK Limited (holding company) 1	Telford5		Ordinary Shares	100.00%
ReAssure Group plc (holding company - directly owned by the Company)	Telford5		Ordinary Shares	100.00%
ReAssure Life Pension Trustees Limited (dormant company)	Telford5		Ordinary Shares	100.00%
ReAssure LL Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
ReAssure Midco Limited (holding company)	Telford5		Ordinary Shares	100.00%
ReAssure Nominees Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
ReAssure Pension Trustees Limited (dormant company)	Telford5		Ordinary Shares	100.00%
ReAssure PM Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
ReAssure Trustees Limited (dormant company)	Telford5		Ordinary Shares	100.00%
ReAssure Two Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
ReAssure UK Life Assurance Company Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
Scottish Mutual Assurance Limited (dormant company) 1	Edinburgh3		Ordinary Shares	100.00%
Scottish Mutual Nominees Limited (dormant company) 1	Edinburgh3		Ordinary Shares	100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company)	Edinburgh3		Ordinary Shares	100.00%
SL (NEWCO) Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
SL Liverpool plc (dormant company) 1	Wythall2		Public Limited Company	100.00%
SLA Belgium No.1 SA (investment company)	Brussels20		Société Anonyme	100.00%
SLA Netherlands No.1 B.V. (investment company)	Amsterdam21		Ordinary Shares	100.00%
SLACOM (No. 10) Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
SLACOM (No. 8) Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
SLACOM (No. 9) Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
SLIF Property Investment GP Limited (General Partner to SLIF Property Investment)	Edinburgh7		Ordinary Shares	100.00%
Pilangen Logistik AB (investment company)	Stockholm22		Ordinary Shares	100.00%
Pilangen Logistik I AB (investment company)	Stockholm22		Ordinary Shares	100.00%
SLA Denmark No.1 ApS (investment company)	Copenhagen23		Ordinary Shares	100.00%
SLA Denmark No.2 ApS (investment company)	Copenhagen23		Ordinary Shares	100.00%
SLA Germany No.1 S.à.r.l. (investment company)	Luxembourg24		Ordinary Shares	100.00%
SLA Germany No.2 S.à.r.l. (investment company)	Luxembourg24		Ordinary Shares	100.00%
SLA Germany No.3 S.à.r.l. (investment company)	Luxembourg24		Ordinary Shares	100.00%
SLA Ireland No.1 S.à.r.l. (investment company)	Luxembourg24		Ordinary Shares	100.00%
Standard Life Assurance (HWPF) Luxembourg S.à.r.l. (investment company)	Luxembourg24		Ordinary Shares	100.00%
Standard Life Agency Services Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
Standard Life Investment Funds Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company)	Edinburgh3		Ordinary Shares	100.00%
Standard Life Master Trust Co. Limited (dormant company)	Wythall2		Ordinary Shares	100.00%
Standard Life Private Equity Trust plc (investment company)	Edinburgh7		Ordinary Shares	56.01%
Standard Life Property Company Limited (dormant company)	Edinburgh3		Ordinary Shares	100.00%
Standard Life Trustee Company Limited (trustee company)	Edinburgh3		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)	Edinburgh3		Ordinary Shares	100.00%
The London Life Association Limited (dormant company)	Wythall2		Limited by Guarantee	100.00%
The Pathe Building Management Company Limited (dormant company) 1	Telford5		Ordinary Shares	100.00%
The Phoenix Life SCP Institution (dormant company) 1	Edinburgh3		Limited by Guarantee	100.00%
The Scottish Mutual Assurance Society (dormant company) 1	Glasgow8		Limited by Guarantee	100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company)	Amsterdam21		Ordinary Shares	100.00%
Vebnet (Holdings) Limited (holding company) 1	Wythall2		Ordinary Shares	100.00%
Vebnet Limited (services company) 1	Wythall2		Ordinary Shares	100.00%
Welbrent Property Investment Company Limited (dormant company)	London11		Ordinary Shares	100.00%
PC Management Limited (property management company)	Dublin25		Ordinary Shares	69.00%
Phoenix Group Employee Benefit Trust	Jersey26		Trust	100.00%
330 Avenida de Aragon SL (property management company)	Madrid27		Ordinary Shares	100.00%
The Pearl Martineau Limited Partnership		Lynch Wood28	Limited Partnership	100.00%
The Pearl Martineau Galleries Limited Partnership		Wythall2	Limited Partnership	100.00%
SLIF Property Investment LP		Edinburgh7	Limited Partnership	100.00%
Pearl Private Equity LP		Edinburgh7	Limited Partnership	100.00%
Pearl Strategic Credit LP		Edinburgh7	Limited Partnership	100.00%
European Strategic Partners LP		Edinburgh7	Limited Partnership	72.70%
ASI Phoenix Global Private Equity III LP		Edinburgh7	Limited Partnership	100.00%
Janus Henderson Institutional Short Duration Bond Fund		London29	Unit Trust	100.00%
Janus Henderson Institutional Mainstream UK Equity Trust		London29	Unit Trust	100.00%
Janus Henderson Institutional UK Equity Tracker Trust		London29	Unit Trust	100.00%
Janus Henderson Institutional High Alpha UK Equity Fund		London29	Unit Trust	90.72%
Janus Henderson Global Funds - Janus Henderson Institutional Overseas Bond Fund		London29	OEIC, sub fund	96.68%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional North American Index Opportunities Fund		London29	OEIC, sub fund	85.06%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Asia Pacific ex Japan Index Opportunities Fund		London29	OEIC, sub fund	88.79%
Janus Henderson Diversified Growth Fund		London29	OEIC, sub fund	72.35%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Japan Index Opportunities Fund		London29	OEIC, sub fund	80.39%
PUTM Far Eastern Unit Trust		Wythall2	Unit Trust	99.63%
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	99.89%
PUTM UK Equity Unit Trust		Wythall2	Unit Trust	99.91%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund		Wythall2	Unit Trust	99.63%
PUTM Bothwell Emerging Market Debt Unconstrained Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell European Credit Fund		Wythall2	Unit Trust	99.58%
PUTM Bothwell Global Bond Fund		Wythall2	Unit Trust	100.00%
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	100.00%
PUTM Bothwell Long Gilt Sterling Hedged Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell Emerging Markets Equity Fund		Wythall2	Unit Trust	99.95%
PUTM Bothwell North America Fund		Wythall2	Unit Trust	99.32%
PUTM Bothwell Sterling Government Bond Fund		Wythall2	Unit Trust	99.61%
PUTM Bothwell Euro Sovereign Fund		Wythall2	Unit Trust	85.03%
PUTM Bothwell Sterling Credit Fund		Wythall2	Unit Trust	99.94%
PUTM Bothwell Tactical Asset Allocation Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell UK All Share Listed Equity Fund		Wythall2	Unit Trust	99.63%
PUTM ACS UK All Share Listed Equity Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell Uk Equity Income Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell Sub-Sovereign A Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell Short Duration Credit Fund		Wythall2	Unit Trust	100.00%
PUTM Bothwell Ultra Short Duration Fund		Wythall2	Unit Trust	100.00%
PUTM ACS Lothian North American Equity Fund		Wythall2	Unit Trust	100.00%
PUTM ACS Lothian European Ex UK Fund		Wythall2	Unit Trust	100.00%
PUTM ACS Lothian UK 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 Lothian UK Gilt Fund		Wythall2	Unit Trust	100.00%
PUTM ACS UK Smaller Companies Fund		Wythall2	Unit Trust	100.00%
PUTM ACS North American Fund		Wythall2	Unit Trust	100.00%
ASI (SLI) Strategic Bond Fund		Edinburgh7	Unit Trust	88.84%
ASI (Standard Life) Multi-Asset Trust		Edinburgh7	Unit Trust	99.99%
ASI (Standard Life) European Trust II		Edinburgh7	Unit Trust	100.00%
ASI Emerging Markets Income Equity Fund		Edinburgh7	OEIC, sub fund	82.22%
ASI (SLI) Emerging Markets Equity Fund		Edinburgh7	OEIC, sub fund	96.86%
ASI Emerging Markets Local Currency Bond Tracker Fund		Edinburgh7	OEIC, sub fund	75.77%
ASI Europe Europe ex UK Ethical Equity Fund		Edinburgh7	OEIC, sub fund	76.15%
ASI (Standard Life) European Trust		Edinburgh7	Unit Trust	96.79%
ASI (Standard Life) Japan Trust		Edinburgh7	Unit Trust	80.65%
ASI (Standard Life) North American Trust		Edinburgh7	Unit Trust	99.52%
ASI (Standard Life) Pacific Basin Trust		Edinburgh7	Unit Trust	98.11%
ASI (Standard Life) Short Dated UK Government Bond Trust		Edinburgh7	Unit Trust	100.00%
ASI (Standard Life) Global Equity Trust II		Edinburgh7	Unit Trust	100.00%
ASI (Standard Life) UK Government Bond Trust		Edinburgh7	Unit Trust	100.00%
ASI (Standard Life) UK Corporate Bond Trust		Edinburgh7	Unit Trust	100.00%
ASI (Standard Life) Active Plus Bond Trust		Edinburgh7	Unit Trust	100.00%
ASI (Standard Life) International Trust		Edinburgh7	Unit Trust	99.86%
ASI (Standard Life) UK Equity General Trust		Edinburgh7	Unit Trust	99.71%
ASI Short Dated Corporate Bond Fund		Edinburgh7	OEIC, sub fund	86.71%
ASI MyFolio Managed I Fund		Edinburgh7	OEIC, sub fund	74.49%
ASI MyFolio Managed II Fund		Edinburgh7	OEIC, sub fund	74.46%
ASI MyFolio Managed III Fund		Edinburgh7	OEIC, sub fund	82.43%
ASI MyFolio Managed V Fund		Edinburgh7	OEIC, sub fund	74.34%
ASI Dynamic Multi Asset Growth Fund		Edinburgh7	OEIC, sub fund	96.09%
ASI American Income Equity Fund		Edinburgh7	OEIC, sub fund	73.43%
Aberdeen Standard SICAV III Global Short Duration Corporate Bond Fund		Luxembourg30	SICAV, sub fund	98.12%
Aberdeen Standard SICAV II Absolute Return Global Bond Strategies Fund		Luxembourg30	SICAV, sub fund	76.39%
Aberdeen Standard SICAV II European Equities Fund		Luxembourg30	SICAV, sub fund	99.06%
Aberdeen Standard SICAV II European Equity Unconstrained Fund		Luxembourg30	SICAV, sub fund	97.54%
Aberdeen Standard SICAV II Global Equities Fund		Luxembourg30	SICAV, sub fund	81.65%
Aberdeen Standard SICAV II European Government All Stocks Fund		Luxembourg30	SICAV, sub fund	99.99%
Aberdeen Standard SICAV II Japanese Equities Fund		Luxembourg30	SICAV, sub fund	93.93%
Aberdeen Standard SICAV II Global Bond Fund		Luxembourg30	SICAV, sub fund	94.19%
Aberdeen Standard SICAV II Global High Yield Bond Fund		Luxembourg30	SICAV, sub fund	82.95%
Aberdeen Standard SICAV II Global REIT Focus Fund		Luxembourg30	SICAV, sub fund	93.41%
Aberdeen Standard SICAV II China Equities Fund		Luxembourg30	SICAV, sub fund	78.71%
Aberdeen Standard SICAV II Global Emerging Markets Unconstrained Fund		Luxembourg30	SICAV, sub fund	100.07%
Aberdeen Standard SICAV II Global Emerging Markets Local CCY Debt Fund		Luxembourg30	SICAV, sub fund	91.43%
Aberdeen Standard SICAV II Emerging Market Debt Fund		Luxembourg30	SICAV, sub fund	98.39%
Aberdeen Standard SICAV III Dynamic Multi Asset Growth Fund		Luxembourg30	SICAV, sub fund	79.28%
ASIMT American Equity Unconstrained Fund		Edinburgh7	Unit Trust	79.70%
ASIMT Japan Fund		Edinburgh7	Unit Trust	76.69%
ASIMT Global REIT Fund		Edinburgh7	Unit Trust	81.94%
ASIMT Sterling Intermediate Credit Fund Launch Fund		Edinburgh7	Unit Trust	92.67%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 3 Fund		Luxembourg31	UCITS, sub fund	100.00%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 2 Fund		Luxembourg31	UCITS, sub fund	100.00%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund		Luxembourg31	UCITS, sub fund	100.00%
Ignis Private Equity Fund LP		Cayman Islands18	Limited Partnership	100.00%
Ignis Strategic Credit Fund LP		Cayman Islands18	Limited Partnership	100.00%
ASI Phoenix Fund Financing SCSp (PLFF)		Luxembourg31	Special Limited Partnership	100.00%
North American Strategic Partners 2008 L.P.		Delaware9	Limited Partnership	100.00%
North American Strategic Partners (Feeder) 2008 Limited Partnership		Edinburgh7	Limited Partnership	100.00%
Crawley Unit Trust		Jersey32	Unit Trust	100.00%
Ignis Strategic Solutions Funds plc - Fundamental Strategies Fund		Dublin33	OEIC, sub fund	100.00%
Ignis Strategic Solutions Funds plc - Systematic Strategies Fund		Dublin33	OEIC, sub fund	100.00%
HSBC Investment Funds - Balanced Fund		London34	OEIC, sub fund	82.18%
IFSL AMR OEIC - IFSL AMR Diversified Portfolio		Bolton35	OEIC, sub fund	70.08%
iShares 350 UK Equity Index Fund UK		London36	OEIC, sub fund	90.96%
Legal & General European Equity Income Fund		London37	Unit Trust	88.43%
Legal & General Growth Trust		London37	Unit Trust	71.19%
ASI Sustainable Index World Equity Fund		Edinburgh7	Unit Trust	100.00%
ASI Sustainable Index UK Equity Fund		Edinburgh7	Unit Trust	79.36%
ASI Phoenix Venture Capital Partners LP		Edinburgh7	Limited Partnership	100.00%
CF Macquaries Global Infrastructure Securities Fund		London38	OEIC, sub fund	77.08%
Quilter Investors Diversified Portfolio Fund		London39	OEIC, sub fund	93.01%
Quilter Investors UK Equity Large-Cap Value Fund		London39	OEIC, sub fund	97.59%
Amundi Index Solutions - Amundi MSCI Emerging Ex China ESG Leaders Select		Luxembourg40	SICAV, sub fund	61.30%
Associates:
UK Commercial Property Estates Limited (property investment company)	Guernsey41		Ordinary Shares	44.46%
UK Commercial Property GP Limited (dormant company)	London42		Ordinary Shares	44.46%
UK Commercial Property Holdings Limited (property investment company)	Guernsey41		Ordinary Shares	44.46%
UK Commercial Property Nominee Limited (dormant company)	London42		Ordinary Shares	44.46%
Moor House General Partner Limited		London43	Limited Partnership	33.30%
UK Commercial Property REIT Limited (property investment company)	Guernsey41		Ordinary Shares	44.46%
UK Commercial Property Estates Holdings Limited (property investment company)	Guernsey41		Ordinary Shares	44.46%
UKCPT Limited Partnership (dormant company)		London42	Limited Partnership	44.46%
UK Commercial Property Finance Holdings Limited (property investment company)	Guernsey41		Ordinary Shares	44.46%
UK Commercial Property Estates (Reading) Limited (dormant company)	London42		Ordinary Shares	44.46%
Brixton Radlett Property Limited (dormant company)	London42		Ordinary Shares	44.46%
Duke Distribution Centres S.à.r.l. (investment company)	Luxembourg44		Ordinary Shares	44.46%
Duke Offices & Developments S.à.r.l. (investment company)	Luxembourg44		Ordinary Shares	44.46%
Significant holdings:
Janus Henderson Institutional Global Responsible Managed Fund		London29	OEIC, sub fund	38.18%
Janus Henderson Institutional UK Index Opportunities Fund		London29	OEIC, sub fund	60.29%
Standard Life Capital Infrastructure I LP		Edinburgh7	Limited Partnership	26.30%
ASI (SLI) Corporate Bond Fund		Edinburgh7	OEIC, sub fund	30.28%
ASI Global Absolute Return Strategies Retail Acc		Edinburgh7	Unit Trust	60.78%
ASI Dynamic Distribution Fund		Edinburgh7	Unit Trust	62.43%
Standard Life Investments UK Real Estate Accumulation Feeder Fund		Edinburgh7	Unit Trust	47.85%
ASI Global Smaller Company Fund		Edinburgh7	Unit Trust	20.29%
Aberdeen Standard Global SICAV III Global Equity Impact Fund		Luxembourg30	SICAV, sub fund	46.90%
Aberdeen Standard SICAV II Total Return Credit Fund		Luxembourg30	SICAV, sub fund	24.22%
Aberdeen Standard Liquidity Fund (Lux) Sterling Fund		Luxembourg31	UCITS, sub fund	21.85%
ASI UK High Income Equity Fund		Edinburgh7	OEIC, sub fund	52.37%
ASI Global Unconstrained Equity Fund		Edinburgh7	OEIC, sub fund	44.98%
ASI High Yield Bond Fund		Edinburgh7	OEIC, sub fund	38.14%
ASI UK Opportunities Equity Fund		Edinburgh7	OEIC, sub fund	51.66%
ASI Investment Grade Corporate Bond Fund		Edinburgh7	OEIC, sub fund	31.98%
ASI UK Smaller Companies Fund		Edinburgh7	OEIC, sub fund	31.29%
ASI Europe ex UK Growth Equity Fund		Edinburgh7	OEIC, sub fund	31.58%
ASI Short Duration Global Inflation-Linked Bond Fund		Edinburgh7	OEIC, sub fund	27.06%
ASI UK Unconstrained Equity Fund		Edinburgh7	OEIC, sub fund	54.87%
ASI Ethical Corporate Bond Fund		Edinburgh7	OEIC, sub fund	52.72%
ASI Global Real Estate Share Fund		Edinburgh7	OEIC, sub fund	45.32%
ASI Global Real Estate Fund		Edinburgh7	Unit Trust	46.22%

 

ASI MyFolio Market I Fund		Edinburgh7	OEIC, sub fund	43.60%
ASI MyFolio Market II Fund		Edinburgh7	OEIC, sub fund	45.66%
ASI MyFolio Market III Fund		Edinburgh7	OEIC, sub fund	54.48%
ASI MyFolio Market IV Fund		Edinburgh7	OEIC, sub fund	52.83%
ASI MyFolio Market V Fund		Edinburgh7	OEIC, sub fund	60.55%
ASI MyFolio Multi-Manager I Fund		Edinburgh7	OEIC, sub fund	53.32%
ASI MyFolio Multi-Manager II Fund		Edinburgh7	OEIC, sub fund	53.40%
ASI MyFolio Multi-Manager III Fund		Edinburgh7	OEIC, sub fund	62.97%
ASI MyFolio Multi-Manager IV Fund		Edinburgh7	OEIC, sub fund	57.45%
ASI MyFolio Multi-Manager V Fund		Edinburgh7	OEIC, sub fund	60.48%
ASI MyFolio Managed IV Fund		Edinburgh7	OEIC, sub fund	67.17%
Aberdeen Standard SICAV II Euro Smaller Companies Fund		Luxembourg30	SICAV, sub fund	23.29%
Aberdeen Standard SICAV II European Corporate Bond Fund		Luxembourg30	SICAV, sub fund	35.97%
Aberdeen Standard SICAV II Global Absolute Return Strategies Fund		Luxembourg30	SICAV, sub fund	42.94%
Aberdeen Standard SICAV II Global Corporate Bond Fund		Luxembourg30	SICAV, sub fund	71.23%
ASI American Unconstained Equity Fund		Edinburgh7	OEIC, sub fund	21.55%
Aberdeen Standard Liquidity Fund (Lux) Euro Fund		Luxembourg31	UCITS, sub fund	28.60%
ASI Europe ex UK Income Equity Fund		Edinburgh7	OEIC, sub fund	37.71%
ASI UK Income Unconstrained Equity Fund		Edinburgh7	OEIC, sub fund	52.60%
Brent Cross Partnership		London43	Limited Partnership	23.83%
Castlepoint LP		Birmingham45	Limited Partnership	34.81%
Gallions Reach Shopping Park Unit Trust		Jersey32	Unit Trust	100.00%
Aberdeen Standard UK Retail Park Trust		Jersey46	Unit Trust	56.60%
Standard Life Investments UK Shopping Centre Trust		Jersey46	Unit Trust	40.13%
Gallions Reach Shopping Park Limited Partnership		London11	Unit Trust	100.00%
Standard Life Investments Brent Cross LP		Edinburgh7	Unit Trust	40.13%
AXA Fixed Interest Investment ICVC - Sterling Strategic Bond Fund		London47	UCITS, sub fund	48.50%
AXA Global High Income Fund		London48	OEIC, sub fund	23.67%
AQR Global Risk Premium UCITS Fund		USA49	UCITS, sub fund	100.00%
Threadneedle Investment Funds ICVC - American Select Fund		London50	OEIC, sub fund	21.43%
Vanguard Investment Series plc - Vanguard Global Short-Term Corporate Bond Index Fund		Dublin51	UCITS, sub fund	38.99%
Vanguard FTSE U.K. All Share Index Unit Trust		London52	Unit Trust	25.38%
Vanguard Investment Series plc - Vanguard U.K. Short-Term Investment Grade Bond Index Fund		Dublin51	UCITS, sub fund	61.57%
Vanguard Common Contractual Fund - Vanguard U.S. Equity Index Common Contractual Fund		Dublin51	UCITS, sub fund	99.47%
Vanguard Investment Series plc - Vanguard Global Corporate Bond Index Fund		Dublin51	UCITS, sub fund	31.10%
Vanguard Investments Common Contractual Fund - Vanguard FTST Developed World ex UK Common Contractual Fund		Dublin51	UCITS, sub fund	99.84%
MI Somerset Global Emerging Markets Fund		London53	OEIC, sub fund	53.84%
ASI Emerging Markets Equity Enhanced Index Fund		Edinburgh7	OEIC, sub fund	22.06%
Amundi UCITS Funds - Amundi Global Multi-Factor Equity Fund		Luxembourg40	UCITS, sub fund	65.07%
AB SICAV I - Emerging Markets Low Volatility Equity Portfolio		Luxembourg30	SICAV, sub fund	87.52%
Aberdeen Standard SICAV I - GDP Weighted Global Government Bond Fund		Luxembourg31	SICAV, sub fund	84.51%
Aberdeen Standard SICAV I - Global Bond Fund		Luxembourg31	SICAV, sub fund	91.69%
Aberdeen Standard SICAV I - Global Government Bond Fund		Luxembourg31	SICAV, sub fund	37.28%
Fidelity Multi Asset Open Adventurous Fund		Surrey54	OEIC, sub fund	55.92%
Goldman Sachs SICAV - Emerging Markets Total Return Bond Portfolio		Luxembourg55	SICAV, sub fund	96.48%
HSBC ETFs PLC - HSBC FTSE EPRA NAREIT Developed UCITS ETF		Dublin19	UCITS, sub fund	42.34%
Invesco US Equity Fund		Oxfordshire56	OEIC, sub fund	27.68%
Legal & General Real Capital Builder Fund		London37	Unit Trust	67.38%
L&G Absolute Return Bond Plus Fund		Luxembourg57	SICAV, sub fund	57.79%
L&G Emerging Markets Bond Fund		Luxembourg57	SICAV, sub fund	33.89%
L&G Multi-Asset Target Return Fund		Luxembourg57	SICAV, sub fund	32.93%
Legal & General Asian Income Trust		London37	Unit Trust	60.75%
Legal & General Dynamic Bond Fund		London37	Unit Trust	52.43%
Legal & General Emerging Markets Government Bond (Local Currency) Index Fund		London37	Unit Trust	22.03%
Legal & General Emerging Markets Government Bond USD Index Fund		London37	Unit Trust	28.93%
Legal & General European Index Trust		London37	Unit Trust	24.25%
Legal & General Global Real Estate Dividend Index Fund		London37	Unit Trust	22.36%
Legal & General High Income Trust		London37	Unit Trust	47.75%
L&G Euro High Alpha Corporate Bond Fund		Luxembourg57	SICAV, sub fund	45.92%
Legal & General UK Equity Income Fund		London37	Unit Trust	24.97%
Legal & General UK Smaller Companies Trust		London37	Unit Trust	31.88%
Legal & General UK Special Situations Trust		London37	Unit Trust	58.68%
LGIM Sterling Liquidity Plus Fund		Dublin51	UCITS, sub fund	35.72%
Blackrock ICS Sterling Government Liquidity Fund		Dublin58	UCITS, sub fund	30.87%
Marks and Spencer Worldwide Managed Fund		London34	Unit Trust	42.05%
Quilter Investors Bond 2 Fund		London39	OEIC, sub fund	45.71%
Quilter Investors China Equity Fund		London39	OEIC, sub fund	22.00%
Quilter Investors Cirilium Moderate Blend Portfolio Fund		London39	OEIC, sub fund	34.30%
Quilter Investors Ethical Equity Fund		London39	Unit Trust	50.55%
Quilter Investors Global Equity Growth Fund		London39	OEIC, sub fund	42.26%
Quilter Investors Global Dynamic Equity Fund		London39	OEIC, sub fund	22.86%
Quilter Investors UK Equity Index Fund		London39	OEIC, sub fund	31.83%
BlackRock Market Advantage X		London36	UCITS, sub fund	42.68%
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed Europe ex UK Common Contractual Fund		Dublin51	UCITS, sub fund	100.00%
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Common Contractual Fund		Dublin51	UCITS, sub fund	40.50%
Vanguard Investment Series plc - Vanguard U.K. Investment Grade Bond Index Fund		Dublin51	UCITS, sub fund	20.59%
Baillie Gifford UK & Balanced Funds ICVC - Baillie Gifford UK and Worldwide Equity Fund		Edinburgh59	OEIC, sub fund	27.14%

 

Baillie Gifford Investment Funds II ICVC - Baillie Gifford UK Equity Core Fund		Edinburgh59	OEIC, sub fund	33.61%
ASI Short Dated Sterling Corporate Bond Tracker Fund		Edinburgh7	OEIC, sub fund	41.08%
ASI Global Inflation-Linked Bond Tracker Fund		Edinburgh7	OEIC, sub fund	24.02%
ASI Multi-Asset Fund		Edinburgh7	OEIC, sub fund	28.22%
Aberdeen Standard SICAV I - Diversified Income Fund		Luxembourg31	SICAV, sub fund	32.69%
ASI Diversified Growth Fund		London11	Unit Trust	26.01%
Amundi Index Solutions - Amundi MSCI China ESG Leaders Select		Luxembourg40	SICAV, sub fund	47.71%
Amundi Index Solutions - Amundi Global Corp SRI 1-5Y		Luxembourg40	SICAV, sub fund	29.32%
BNY Mellon Multi-Asset Global Balanced Fund		London60	UCITS, sub fund	22.65%
Aberdeen Japan Equity Fund		Edinburgh7	OEIC, sub fund	21.56%
ASI European Equity Tracker Fund		Edinburgh7	OEIC, sub fund	20.68%
ASI UK Responsible Equity Fund		Edinburgh7	OEIC, sub fund	27.26%
Central Saint Giles Unit Trust		Jersey61	Unit Trust	25.66%
Performance Retail Unit Trust		Jersey62	Unit Trust	50.10%

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

4    90 St. Stephen's Green, Dublin, D2, Ireland

5    Windsor House, Telford Centre, Telford, Shropshire, TF3 4NB, United Kingdom

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

7    1 George Street, Edinburgh, EH2 2LL, United Kingdom

8    301 St Vincent Street, Glasgow, G2 5HN, United Kingdom

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

10                    Suite 202, 103 Foulk Road, Wilmington, Delaware, 19803, United States

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

12                    22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey

13                    8 Boulevard Royal, L-2449, Luxembourg, Luxembourg

14                    20 Old Bailey, London, England, EC4M 7AN, United Kingdom

15                    30 Finsbury Square, London, EC2A 1AG, United Kingdom

16                    33 Finsbury Square, London, EC2A 1AG, United Kingdom

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

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

19                    25/28 North Wall Quay, Dublin 1, Dublin, Ireland

20                    Avenue Louise 326, bte 33 1050 Brussels, Belgium

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

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

23  c/o Citco (Denmark) ApS, Holbergsgade 14, 2 .tv, 1057 København K Denmark

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

25                    5th Floor Beaux Lane House, Mercer Street Lower, Dublin 2, Dublin, Ireland

26                    32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey

27                    Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 - Madrid, Spain

28                    The Pearl Centre, Lynch Wood, Peterborough, PE2 6FY, United Kingdom

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

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

31                    35a Avenue J.F. Kennedy, L-1855, Luxembourg

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

33                    32 Molesworth Street, Dublin 2, Dublin, D02 Y512, Ireland

34                    8 Canada Square, London, E14 5HQ, United Kingdom

35                    Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP, United Kingdom

36  12 Throgmorton Avenue, London EC2N 2DL, United Kingdom

37                    One Coleman Street, London, EC2R 5AA, United Kingdom

38                    6th Floor, 65 Gresham Street, London, EC2V 7NQ, United Kingdom

39                    Senator House, 85 Queen Victoria Street, London, EC4V 4AB, United Kingdom

40                    5, Allée Scheffer, L-2520 Luxembourg, Luxembourg

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

42                    1 More London Place, London, SE1 2AF, United Kingdom

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

44                    1, Allée Scheffer, L-2520 Luxembourg, Luxembourg

45                    2 Snowhill, Birmingham, B4 6WR, United Kingdom

46                    Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey

47                    155 Bishopsgate, London, EX2M 3JX, United Kingdom

48                    22 Bishopsgate, London, EC2N 4BQ, United Kingdom

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

50                    Cannon Place, 78 Cannon Street, London, EC4N 6AG, United Kingdom

51                    70 Sir John Rogerson's Quay, Dublin 2, Ireland

52                    4th Floor, The Walbrook Building, 25 Walbrook, London, EC4N 8AF, United Kingdom

53                    Manning House, 22 Carlisle Place, London, SWIP 1JA, United Kingdom

54                    Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP, United Kingdom

55                    49, Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg

56                    Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom

57                    10, Château d'Eau, L-3364 Leudelange, Grand Duchy of Luxembourg

58                    1st Floor, 2 Ballsbridge Park, Ballsbridge, Dublin, D04 YW83, Ireland

59                    Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom

60                    160 Queen Victoria Street, London, EC4V 4LA, United Kingdom

61                    Grove House, Green Street, St Helier, JE1 2ST, Jersey

62                    44-47 Esplanade, St Helier, JE4 9WG, Jersey 

The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution:

•  PUTM European Unit Trust

•  PUTM Bothwell Europe Fund

•  ASI Financial Equity Fund A Inc

The following subsidiaries were either fully disposed of or holdings became insignificant to the Group. The subsidiaries were deconsolidated from either the date of disposal or from the date when the holdings became insignificant:

•  Ark Life Assurance Company DAC

•  ASI Japanese Growth Equity Fund

•  North American Strategic Partners 2006 L.P.

•  North American Strategic Partners (Feeder) 2006

•  Standard Life Investments Global SICAV II - MyFolio Multi-Manager II Fund

•  Standard Life Investments Global SICAV II - MyFolio Multi-Manager III Fund

•  Standard Life Investments Global SICAV II - MyFolio Multi-Manager IV Fund

•  Standard Life Investments Global SICAV II - MyFolio Multi-Manager V Fund

•  Beresford Funds ICAV - Indexed Emerging Market Equity Fund

•  Beresford Funds ICAV - Indexed Euro Large Cap Corporate Bond Fund

•  Quilter Investors High Yield Bond Fund

•  Legal & General Real Capital B L ACC

The Group no longer has significant holdings in the following undertakings:

•  Standard Life UK Investments Real Estate Income Feeder Fund.

•  BlackRock Market Advantage X

•  AXA Sterling Index Linked Bond Fund

•  AQR UCITS Funds - AQR Global Risk Parity C5 GBP (Acc)

•  Legal & General European Trust

•  Aviva Investors UK Property Feeder Inc Fund

•  Jupiter Asset Management Series PLC - Jupiter Merian Global Equity Income Fund (IRL)

•  Quilter Investors Monthly Income and Growth Portfolio Fund

•  Quilter Investors Sterling Corporate Bond Fund

•  Legal & General Ethical Trust

•  L&G Emerging Markets Short Duration Bond Fund

•  AXA Framlington FinTech Fund

•  Quilter Investors Global Equity Index Fund

•  Legal & General Authorised Contractual Scheme - L&G Real Income Builder Fund

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:

	2021 £m	2020 £m
Expense arising from equity-settled share-based payment transactions	14	13

I1.2 Share-based payment expense

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.

Assuming no good leavers or other events which would trigger early vesting rights, the 2019 LTIP awards are subject to performance conditions tied to the Group's performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and Total Shareholder Return ('TSR'). The 2020 and 2021 LTIP awards are subject to performance conditions tied to the Group's performance in respect of net operating cash receipts, return on shareholder value, persistency 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. All awards have a contractual life of ten years from the date of grant.

2021 LTIP awards were granted on 12 March 2021 and 17 August 2021, and are expected to vest on 12 March 2024 and 17 August 2024 respectively. The 2018 LTIP awards vested on 21 March 2021. The 2019 awards will vest on 11 March 2022 and the 2020 awards will vest on 13 March 2023. The number of shares for all outstanding LTIP awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.

The fair value of these awards is estimated at the average share price in the three days preceding the date of grant, taking into account the terms and conditions upon which the instruments were granted. The fair value of the LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a 'market condition'. The fair value of the 2019, 2020 and 2021 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below:

	2021 TSR performance condition	2020 TSR performance condition	2019  TSR performance condition
Share price (p)	738.6	586.3	694.0
Expected term (years)	3.0	3.0	3.0
Expected volatility (%)	30	20	20
Risk-free interest rate (%)	0.14	0.28	0.74
Expected dividend yield (%)	Dividends are received by holders of the awards therefore no adjustment to fair value is required

On 17 August 2021, LTIP awards were granted to certain senior management employees. The vesting periods and performance conditions for these awards are linked to the core 2020 LTIP awards.

LTIP Buy Out awards were granted to the Group Chief Executive Officer in 2019, and finalised in 2020, following forfeiture of a proportion of his long-term incentive awards held with Aviva plc that had been awarded in March 2017 and May 2018. The Aviva March 2017 LTIP vested on 27 March 2020 with a performance outturn of 50% and the Aviva May 2018 LTIP vested on 26 March 2021 with a performance outturn of 0%.

On 12 March 2021 and 17 August 2021 LTIP Buy-out awards were granted to certain senior management employees. There are discreet vesting periods for these awards and these grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.

On 14 August 2020, LTIP awards were granted to certain senior management employees. The vesting periods and performance conditions for these awards are linked to the Group's core 2018, 2019 and 2020 LTIP awards.

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 final tranche of awards vested on 28 March 2021. These grants of shares were 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. The awards are granted on the same dates as the core 2019, 2020 and 2021 LTIP awards. 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. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting.

Deferred Bonus Share Scheme ('DBSS')

Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. 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. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting. Dividends will accrue for DBSS awards over the three year deferral period. The number of shares for all outstanding DBSS awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.

The 2021 DBSS was granted on 12 March 2021 and is expected to vest on 12 March 2024. The 2018 DBSS awards vested on 15 March 2021. The 2019 awards are expected to vest on 11 March 2022 and the 2020 awards are expected to vest on 13 March 2023.

The fair value of these awards is estimated at the average share price in the three days preceding the date of the grant, taking into account the terms and conditions upon which the options were granted. All awards have a contractual life of three years and six months from the date of grant.

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 2021 sharesave options were granted on 9 April 2021.

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 prior to the end of their three or five year period. All awards are required to be exercised within six months of the vesting date.

In 2018, following the scheme of arrangement, participants in the sharesave plans at this time exchanged their options over shares in the previous parent company 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 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 2017 to 2021 UK sharesave options:

	2021 sharesave	2020 sharesave	2019 sharesave	2018 sharesave	2017 sharesave
Share price (£)	7.486	5.664	6.800	7.685	7.470
Exercise price (£) (Revised)	5.890	4.970	5.610	5.629	5.674
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	0.5 (for 3.25 year scheme) and 0.7 (for 5.25 year scheme)	0.5 (for 3.25 year scheme) and 0.5 (for 5.25 year scheme)	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)
Expected volatility (%) based on the Company's share price volatility to date	30.0	30.0	30.0	30.0	30.0
Dividend yield (%)	6.3	8.2	6.8	6.5	6.3

The information for determining the fair value of the 2021 Irish sharesave options differed from that included in the table above as follows:

•  Share price (€): 8.618 (2020: 6.462)

•  Exercise price (€): 6.880 (2020: 5.650)

•  Risk-free rate (%): (0.4) (for 3.25 year scheme) and (0.3) (for 5.25 year scheme) (2020: (0.3) (for 3.25 year scheme) and (0.2) (for 5.25 year scheme))

Share Incentive Plan

The Group operates two Share Incentive Plans ('SIP') 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. In 2019 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, which was launched in 2019, 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 2021, 471,543 Matching shares (including unrestricted shares) were conditionally awarded to employees (2020: 287,547).

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 2021
	LTIP	Sharesave	DBSS
Outstanding at the beginning of the year	5,488,995	3,569,159	1,267,852
Granted during the year	2,984,144	1,729,022	601,944
Forfeited/cancelled during the year	(290,064)	(240,130)	(5,236)
Exercised during the year	(882,043)	(307,229)	(314,267)
Outstanding at the end of the year	7,301,032	4,750,822	1,550,293

 

	Number of share options 2020
	LTIP	Sharesave	DBSS
Outstanding at the beginning of the year	4,637,555	2,542,764	905,867
Granted during the year	2,634,386	2,233,597	588,925
Forfeited/cancelled during the year	(1,030,017)	(767,140)	-
Exercised during the year	(752,929)	(440,062)	(226,940)
Outstanding at the end of the year	5,488,995	3,569,159	1,267,852

The weighted average fair value of options granted during the year was £4.98 (2020: £3.88).

The weighted average share price at the date of exercise for the rewards exercised is £7.06 (2020: £6.74).

The weighted average remaining contractual life for the rewards outstanding as at 31 December 2021 is 5.5 years (2020: 5.6 years).

I2. Cash flows from operating activities

Operating cash flows include purchases and sales of investment property and financial investments as the purchases are funded from cash flows associated with the origination of insurance and investment contracts, net of payments of related benefits and claims. The following analysis gives further detail behind the 'cash (utilised)/generated by operations' figure in the statement of consolidated cash flows.

 

	Notes	2021 £m	2020 £m
(Loss)/profit for the year before tax		(430)	1,270
Non-cash movements in (loss)/profit for the period before tax
Gain on completion of abrdn plc transaction	A6.1	(110)	-
Loss on disposal of Ark Life, excluding transaction costs	H3	17	-
Gain on acquisition		-	(372)
Gain on L&G Part VII portfolio transfer	H2.2	-	(85)
Fair value (gains)/losses on:
Investment property	G4	(1,195)	52
Financial assets and derivative liabilities		(9,436)	(10,806)
Change in fair value of borrowings		(9)	(39)
Amortisation and impairment of intangible assets	G2	644	487
Change in unallocated surplus	F2	(106)	113
Share-based payment charge	I1.1	14	13
Finance costs	C5	242	234
Net interest expense on Group defined benefit pension scheme liability/asset	G1	37	29
Pension past service costs		-	2
Other costs of pension schemes	G1	6	5
Decrease in investment assets		6,738	8,254
(Increase)/decrease in reinsurance assets		(227)	708
Decrease in assets classified as held for sale		286	-
Increase in insurance contract and investment contract liabilities		6,354	6,261
Decrease in deposits received from reinsurers		(521)	(236)
(Decrease)/increase in obligation for repayment of collateral received		(1,762)	1,146
Decrease in liabilities classified as held for sale		(264)	-
Net (increase)/decrease in working capital		(1,100)	211
Other items:
Contributions to defined benefit pension schemes	G1	(49)	(77)
Cash transferred under L&G Part VII portfolio transfer		-	146
Cash (utilised)/generated by operations		(871)	7,316

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 Group's risk management framework is described in the risk management commentary on pages 54 to 65 of the Annual Report and Accounts and the risk universe component of this framework summarises the comprehensive set of risks to which the Group is exposed. The major risks ('Level 1' risks) that the Group's businesses are exposed to and the Group's approach to managing those risks are outlined in the following notes:

•  note E6: Credit risk, market risk, financial soundness risk, strategic risk, customer risk and operational risk; and

•  note F4: Insurance risk.

The section on risk and capital management objectives is included below.

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 dividend policy to pay an ordinary dividend that is sustainable grows over time.

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 comprises 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 availability 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 accordance with the approvals received from the PRA, the Group currently operates a partial Internal Model to calculate Group SCR and following the approval of the harmonised internal model by the PRA during the year, all Group companies are within the scope of a single harmonised internal model, with the exception of the acquired ReAssure businesses and the Irish life entity, Standard Life International Designated Activity Company, which determines their 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	2021 £bn	2020 £bn
PGH plc Eligible Own Funds	14.8	16.8
Remove Own Funds pertaining to unsupported with-profit funds and pension schemes	(2.9)	(3.2)
Group capital resources	11.9	13.6

Solvency II surplus - unaudited

An analysis of the PGH plc Solvency II surplus as at 31 December 2021 is provided in the business review section on pages 34 and 35. 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 318 and 319.

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

On 23 February 2021, the Group entered into a new agreement with abrdn plc to simplify the arrangements of their Strategic Partnership (see note A6.1 for further details). As part of the acquisition of the brand, the relevant marketing, distribution and data team members transferred to the Group. Consequently, the Client Service and Proposition Agreement ('CSPA') entered into between the two groups following the acquisition of the Standard Life businesses in 2018, has been significantly amended prior to being dissolved. As a consequence of this transaction, it has been assessed that abrdn plc no longer has significant influence over the Group and as a result is no longer considered to be a related party of the Group from the date that the Group entered into the new agreement.

	Transactions 20211 £m	Balances outstanding 2021 £m	Transactions 2020 £m	Balances outstanding 2020 £m
Pearl Group Staff Pension Scheme
Payment of administrative expenses	(4)	-	(3)	-
UK Commercial Property Trust Limited
Dividend income	17	-	13	-
abrdn plc
Investment management fees	(20)		(125)	(54)
Fees under Transitional Services Arrangement and material outsource agreements	(4)		(6)	(2)
Receipts under Transitional Services Arrangement	-		64	19
Net receipts under Client Service Proposition Agreement	-		16	36
Net payments under deed of indemnity	-		6	(68)
Dividend paid	-		(67)	-

1    Transactions with abrdn plc only include those that took place prior to 23 February 2021. Balances outstanding as at the date abrdn plc ceased to be a related party of the Group have all been settled prior to 31 December 2021.

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:

	2021 £m	2020  £m
Salary and other short-term benefits	5	5
Equity compensation plans	3	5

Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 106 to 136.

During the year to 31 December 2021 key management personnel and their close family members contributed £291,546 (2020: £9,100) to Pensions and Savings products sold by the Group. At 31 December 2021, the total value of key management personnel's investments in Group Pensions and Savings products was £3,443,658 (2020: £2,842,300).

I5. Commitments

This note analyses the Group's other commitments.

 

	2021 £m	2020  £m
To subscribe to private equity funds and other unlisted assets	710	565
To purchase, construct or develop investment property and income strips	206	89
For repairs, maintenance or enhancements of investment property	12	26

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.

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.

I7. Events after the reporting period

The 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 financial statements are disclosed.

On 11 March 2022, the Board recommended a final dividend of 24.8p per share for the year ended 31 December 2021 (2020: 24.1p). 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 2021 and will be charged to the statement of consolidated changes in equity in 2022.

The Group is continuing to monitor developments regarding the conflict between Russia and Ukraine. As at 31 December 2021, the Group had £23 million of shareholder exposure to Russia and Ukraine, which represents less than 0.1% of total shareholder assets. The exposure relating to assets held to back policyholder liabilities at 31 December 2021 is not considered to be material and the associated indirect shareholder exposure is minimal.

Nicholas Lyons

Andy Briggs

Rakesh Thakrar

Alastair Barbour

Karen Green

Hiroyuki Iioka

Wendy Mayall

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Mike Tumilty

 

12 March 2022

Parent company financial statements

Statement of financial position

As at 31 December 2021

	Notes	2021 £m	2020 £m
Assets
Property, plant and equipment	10	21	-
Investments in Group entities	11	10,031	10,090
Financial assets
Loans and deposits	12	1,234	2,119
Derivatives	6	69	-
Debt securities	13	1	1
Collective investment schemes	13	690	194
Deferred tax	14	82	16
Prepayments and accrued income		58	-
Other amounts due from Group entities	20	616	295
Cash and cash equivalents	15	95	4
Total assets		12,897	12,719
Equity and liabilities
Equity attributable to ordinary shareholders
Share capital	3	100	100
Share premium	3	6	4
Merger relief reserve	3	1,819	1,819
Other reserve	3	(4)	(4)
Retained earnings		5,448	5,211
Total equity attributable to ordinary shareholders		7,369	7,130
Tier 1 Notes	4	411	411
Total equity		7,780	7,541
Liabilities
Financial liabilities
Borrowings	5	4,387	4,521
Derivatives	6	5	-
Obligations for repayment of collateral received	6	66	-
Other amounts due to Group entities	20	415	448
Provisions	7	92	122
Lease liabilities	8	21	-
Accruals and deferred income	9	131	87
Total liabilities		5,117	5,178
Total equity and liabilities		12,897	12,719

The notes identified numerically on pages 297 to 312 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 163 to 293.

Statement of changes in equity

For the year ended 31 December 2021

	Share capital (note 3) £m	Share premium (note 3) £m	Merger relief reserve (note 3) £m	Other reserve (note 3) £m	Retained earnings £m	Total £m	Tier 1 Notes  (note 4) £m	Total equity £m
At 1 January 2021	100	4	1,819	(4)	5,211	7,130	411	7,541
Total comprehensive income for the year attributable to owners	-	-	-	-	728	728	-	728
Issue of ordinary share capital, net of associated commissions and expenses	-	2	-	-	-	2	-	2
Dividends paid on ordinary shares (note B4)	-	-	-	-	(482)	(482)	-	(482)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	(23)	(23)	-	(23)
Credit to equity for equity-settled share-based payments (note I1)	-	-	-	-	14	14	-	14
At 31 December 2021	100	6	1,819	(4)	5,448	7,369	411	7,780

 

For the year ended 31 December 2020

	Share capital (note 3) £m	Share premium (note 3) £m	Merger relief reserve (note 3) £m	Other reserve (note 3) £m	Retained earnings £m	Total £m	Tier 1 Notes (note 4) £m	Total equity £m
At 1 January 2020	72	2	-	(4)	5,368	5,438	411	5,849
Total comprehensive income for the period attributable to owners	-	-	-	-	256	256	-	256
Issue of ordinary share capital, net of associated commissions and expenses	28	2	1,819	-	-	1,849	-	1,849
Dividends paid on ordinary shares (note B4)	-	-	-	-	(403)	(403)	-	(403)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	(23)	(23)	-	(23)
Credit to equity for equity-settled share-based payments (note I1)	-	-	-	-	13	13	-	13
At 31 December 2020	100	4	1,819	(4)	5,211	7,130	411	7,541

 

Statement of cash flows

For the year ended 31 December 2021

	Notes	2021 £m	2020 £m
Cash flows from operating activities
Cash generated/(utilised) by operations	16	897	(71)
Net cash flows from operating activities		897	(71)
Cash flows from investing activities
Acquisition of ReAssure subsidiaries		-	(1,265)
Investment income		-	5
Interest received from Group entities		111	74
Capital contribution to subsidiary		(63)	(50)
Repayment of amounts due from Group entities		-	400
Net cash flows from investing activities		48	(836)
Cash flows from financing activities
Proceeds from issuing ordinary shares	3	2	2
Proceeds from new shareholder borrowings, net of associated expenses	5	-	1,445
Repayment of shareholder borrowings	5	(122)	-
Ordinary share dividends paid		(482)	(403)
Interest paid on borrowings		(222)	(149)
Lease payments		(1)	-
Coupon paid on Tier 1 Notes		(29)	(29)
Net cash flows from financing activities		(854)	866
Net increase/(decrease) in cash and cash equivalents		91	(41)
Cash and cash equivalents at the beginning of the year		4	45
Cash and cash equivalents at the end of the year		95	4

 

Notes to the parent company financial statements

1. Accounting policies

(a) Basis of preparation

The financial statements have been prepared on a going concern basis and under the historical cost convention, 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 2021 was £728 million (2020: £256 million).

Statement of compliance

The Company's financial statements have been prepared in accordance with UK- adopted international accounting as applied in accordance with the 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 163 to 293, 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 12 and 15.

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 17 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 2023 as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, the Company did not meet the eligibility criteria to defer the application of IFRS 9 and the standard has therefore been adopted by the Company. The relevant disclosures are included in these financial statements.

3. Share capital, share premium, merger relief reserve and other reserve

During 2021, the Company issued 303,914 shares (2020: 440,062 shares) with a premium of £2 million (2020: £2 million) in order to satisfy its obligations to employees under the Group's sharesave schemes.

On 22 July 2020, the Company acquired ReAssure Group plc and as part consideration for the acquisition issued 277,277,138 new ordinary shares at par to Swiss Re Group, of which 144,877,304 shares were subsequently transferred to MS&AD Insurance Group Holdings ('MS&AD'). The equity stake in the Company held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.

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

On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of 'Old PGH' (the Group's ultimate parent company until December 2018) via a share for share exchange. The cost of investment in Old PGH 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.

	2021 £m	2020 £m
Issued and fully paid:
999.5 million ordinary shares of £0.10 each (2020: 999.2 million)	100	100

 

 

2021	Number	£
Shares in issue at 1 January 2021	999,232,144	99,923,214
Ordinary shares issued in the period	303,914	30,391
Ordinary shares in issue at 31 December 2021	999,536,058	99,953,605

 

2020	Number	£
Shares in issue at 1 January 2020	721,514,944	72,151,494
Ordinary shares issued to Swiss Re and MS&AD	277,277,138	27,727,714
Other ordinary shares issued in the period	440,062	44,006
Ordinary shares in issue at 31 December 2020	999,232,144	99,923,214

4. Tier 1 notes

The accounting policy and details of the terms for the Tier 1 Notes are included in note D4 to the consolidated financial statements.

	2021 £m	2020 £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 fair value of £411 million in the form of an intragroup loan which was received as consideration.

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

5. Borrowings

The accounting policy for borrowings is included in note E5 to the consolidated financial statements.

	Carrying value			Fair value
	2021 £m	2020 £m		2021 £m	2020 £m
£428 million subordinated loans (note a)	435	436		498	517
£450 million Tier 3 subordinated notes (note b)	449	449		457	470
US $500 million Tier 2 bonds (note c)	337	329		408	416
€500 million Tier 2 notes (note d)	389	410		490	516
£300 million senior unsecured bond (note e)	-	123		-	125
Loan due to Standard Life Assurance Limited (note f)	300	294		300	294
US $750 million Contingent Convertible Tier 1 notes (note g)	551	545		581	585
£500 million Tier 2 notes (note h)	485	484		593	622
US $500 million Fixed Rate Reset Tier 2 notes (note i)	368	364		389	395
£500 million 5.867% Tier 2 subordinated notes (note j)	550	556		598	620
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note k)	266	272		269	280
£250 million 4.016% Tier 3 subordinated notes (note l)	257	259		264	266
Total borrowings	4,387	4,521		4,847	5,106
Amount due for settlement after 12 months	4,387	4,398

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. On 7 July 2021, the senior unsecured bond matured and the outstanding balance of £122 million was repaid in full along with the final coupon of £7 million.

f.    On 22 February 2019, the Company recognised a loan due in 2024 to Standard Life Assurance Limited ('SLAL'), a subsidiary undertaking, for £162 million. This loan was the initial consideration for the acquisition from SLAL of its investment in Standard Life International Designated Activity Company ('SLIDAC'). On 28 March 2019 the purchase price was adjusted by £120 million, which resulted in an increase in the loan principal. Interest accrues at SONIA plus 1.9366% and during the year interest of £6 million (2020: £6 million) was capitalised.

g.   On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the 'contingent convertible Tier 1 Notes') which are unsecured and subordinated. The contingent convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The contingent convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury ('CMT') rate (based on the prevailing five year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the contingent convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter. Further details are contained in note E5 to the consolidated financial statements.

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

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

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

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

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

m.  The Company has in place a £1.25 billion unsecured revolving credit facility, maturing in June 2026. The facility accrues interest at a margin over SONIA that is based on credit rating and non-cumulative compounded risk-free rate. The facility remains undrawn as at 31 December 2021.

Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings.

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 movements		Non-cash movements
	At 1 January 2021 £m	Repayments £m		Movement in foreign exchange £m	Amortisation £m	Capitalised interest £m	Movement in fair value £m	At 31 December 2021  £m
£428 million subordinated notes	436	-		-	(1)	-	-	435
£450 million Tier 3 subordinated notes	449	-		-	-	-	-	449
US $500 million Tier 2 bonds	329	-		3	5	-	-	337
€500 million Tier 2 notes	410	-		(24)	3	-	-	389
£300 million senior unsecured bond	123	(122)		-	(1)	-	-	-
Loan due to Standard Life Assurance Limited	294	-		-	-	6	-	300
US $750 million Contingent Convertible Tier 1 notes	545	-		5	1	-	-	551
£500 million Tier 2 notes	484	-		-	1	-	-	485
US $500 million Fixed Rate Reset Tier 2 notes	364	-		4	-	-	-	368
£500 million 5.867% Tier 2 subordinated notes	556	-		-	(6)	-	-	550
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes	272	-		-	(6)	-	-	266
£250 million 4.016% Tier 3 subordinated notes	259	-		-	(2)	-	-	257
Derivative assets1	-	-		-	-	-	48	48
Derivative liabilities1	-	-		-	-	-	(5)	(5)
	4,521	(122)		(12)	(6)	6	43	4,430

1    Cross currency swaps to hedge against adverse currency movements in respect of Group's Euro and US Dollar denominated borrowings (see note 6 for further details).

		Cash movements		Non-cash movements
	At 1 January 2021 £m	Repayments £m		Movement in foreign exchange £m	Amortisation £m	Capitalised interest £m	Movement in fair value £m	At 31 December 2021 £m
£428 million subordinated notes	437	-		-	-	(1)	-	436
£450 million Tier 3 subordinated notes	448	-		-	-	1	-	449
US $500 million Tier 2 bonds	334	-		-	(10)	5	-	329
€500 million Tier 2 notes	385	-		-	22	3	-	410
£300 million senior unsecured bond	128	-		-	-	(5)	-	123
Loan due to Standard Life Assurance Limited	288	-		-	-	-	6	294
US $750 million Contingent Convertible Tier 1 notes	-	566		-	(23)	2	-	545
£500 million Tier 2 notes	-	483		-	-	1	-	484
US $500 million Fixed Rate Reset Tier 2 notes	-	396		-	(32)	-	-	364
£500 million 5.867% Tier 2 subordinated notes	-	-		559	-	(3)	-	556
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes	-	-		275	-	(3)	-	272
£250 million 4.016% Tier 3 subordinated notes	-	-		259	-	-	-	259
	2,020	1,445		1,093	(43)	-	6	4,521

1    Loans issued via substitution are a non-cash flow item as consideration was the transfer of loans and deposits (refer to note 12).

6. Derivatives

The accounting policy for derivatives is included in note E3 to the consolidated financial statements.

In June 2021, the Company entered into four cross currency swaps in order to hedge against adverse currency movements in respect of its Euro and US Dollar denominated borrowings.

From December 2021, the Company also hedged certain Euro and US Dollar exposures to adverse foreign currency movements in respect of underlying business within two of its subsidiaries, SLAL and SLIDAC.

The fair value of the derivative financial instruments are as follows:

	Asset			Liability
	2021	2020		2021	2020
	£m	£m		£m	£m
Cross currency swaps	48	-		5	-
Foreign currency swaps	21	-		-	-
	69	-		5	-

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 £69 million (2020: £nil) of which credit risk of £66 million (2020: £nil) 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 has not pledged any collateral in respect of its OTC derivative liabilities.

7. Provisions

In 2019, the Company recognised a Standard Life transition restructuring provision of £159 million, of which £31 million was subsequently released in 2020. During the year, £17 million (2020: £19 million) of the restructuring provision was utilised, resulting in a provision as at 31 December 2021 of £92 million (2020: £109 million). The remaining provision is expected to be utilised within the next two years.

A further provision of £13 million was recognised for amounts payable to abrdn plc, in respect of obligations arising under agreements entered into in relation to the acquisition of the Standard Life Assurance businesses in 2018. Following completion of the agreement with abrdn plc to simplify the arrangements of the Strategic Partnership, the balance of £13 million was released during the year.

Further details are included in note G7 to the consolidated financial statements.

8. Lease liabilities

The accounting policy for lease liabilities is included in note G10 to the consolidated financial statements.

Lease liabilities relate to office premises at 20 Old Bailey, London. The lease was assigned on 24 March 2021 for a term of 12 years and 9 months, with an option to break the contract on 25 December 2028. It is currently not expected that the break clause will be exercised.

	2021 £m
At 1 January	-
Inception of lease	22
Lease payments	(1)
At 31 December	21
Amount due within 12 months	2
Amount due after 12 months	19

9. Accruals and deferred income

The accounting policy for accruals and deferred income is included in note G11 to the consolidated financial statements.

	2021 £m	2020 £m
Accruals and deferred income	131	87
Amount due for settlement after 12 months	-	-

10. Property, plant and equipment

The accounting policy is included in note G3 to the consolidated financial statements.

The right-of-use asset relates to office premises leased at 20 Old Bailey, London. Depreciation is being charged on a straight-line basis over the term of the lease.

	Property Right-of-use asset 2021 £m	Total Property, Plant and Equipment 2021 £m
Cost or valuation
At 1 January 2021	-	-
Additions	22	22
At 31 December 2021	22	22
Depreciation
At 1 January 2021	-	-
Depreciation	(1)	(1)
At 31 December 2021	(1)	(1)
Carrying amount at 31 December 2021	21	21

11. Investments in Group entities

	2021 £m	2020 £m
Cost
At 1 January	14,236	11,074
Additions	63	3,162
Acquisition Price Adjustment	(79)	-
At 31 December	14,220	14,236
Impairment
At 1 January	(4,146)	(4,146)
Charge for the year	(43)	-
At 31 December	(4,189)	(4,146)
Carrying amount
At 31 December	10,031	10,090

On 23 February 2021, the Group entered into a new agreement with abrdn plc to simplify the arrangements of the Strategic Partnership, as described further in note A6.1 to the consolidated financial statements. As part of this transaction, settlement of amounts due under the deed of indemnity by Old PGH resulted in a reduction in the cost of investment in SLAL of £79 million and payment of a capital contribution of £55 million to Old PGH.

In March 2021, the Company subscribed for 850 million ordinary shares in SLAL at par for a consideration of £8 million.

On 22 July 2020, the Company acquired ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for a total consideration of £3,112 million. The consideration consisted of £1,265 million cash and the issue of 277,277,138 shares to Swiss Re Group on 23 July 2020, of which 144,877,304 shares were subsequently transferred to MS&AD Insurance Group Holdings. The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.

During the year ended 31 December 2020, a capital contribution of £50 million was paid into SLIDAC which was provided in order to strengthen its capital position following adverse market conditions experienced during that year. This increased the carrying value of the Company's investment in SLIDAC to £582 million.

Where indicators of impairment are identified, the carrying value of the Company's investments in its subsidiaries is tested for impairment at the period end. The value in use is the recoverable amount determined by 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 an impairment 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 are valued using discount rates which reflect the risks inherent to each cash flow. For other subsidiaries, the value in use is determined using net asset values.

As at 31 December 2021 and 31 December 2020, the market capitalisation of the Company was lower than the net asset value, and this was considered to be an indicator that the Company's investments in its subsidiaries may have been impaired. Where such indicators are identified, an impairment test is performed. During the year ended 31 December 2021, an impairment charge of £43 million (2020: £nil) was recognised to align the carrying amount of certain investments in subsidiaries to their recoverable amount.

For a list of principal Group entities, refer to note H6 of the consolidated financial statements in which the entities directly held by the Company are separately identified.

12. Loans and deposits

	Carrying value			Fair value
	2021 £m	2020 £m		2021 £m	2020 £m
Loans due from Phoenix Life Holdings Limited (note a)	1,221	1,214		1,370	1,403
Loan due from Phoenix Group Employee Benefit Trust (note b)	13	6		13	6
Loan due from ReAssure Group plc (note c)	-	704		-	710
Loans and deposits due from Group entities	1,234	1,924		1,383	2,119
Fixed term deposits (note d)	-	195		-	195
Total loans and deposits	1,234	2,119		1,383	2,314
Amounts due after 12 months	784	1,924

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. None of the loans are considered to be overdue.

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 2021, the carrying value of the loan was £435 million (2020: £437 million).

      On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.158% 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 2021, the carrying value of the loan was £450 million (2020: £449 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 £4 million (2020: £10 million). At 31 December 2021, the carrying value of the loan was £336 million (2020: £328 million).

b)   On 18 June 2019, the Company was assigned an interest free facility arrangement with Phoenix Group Employee Benefit Trust ('EBT'). As at 31 December 2021, the carrying value of the loan was £13 million (2020: £6 million). In 2021, an additional £17 million (2020: £7 million) was drawn down against this facility. The loan is fully recoverable until 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 2021, £10 million (2020: £8 million) of the loan was written off.

c)   On 22 July 2020, the Company entered into a £1,099 million loan agreement with ReAssure Group plc, a subsidiary undertaking, as consideration for the transfer of subordinated loan notes into the Company. The loan accrued interest at a rate of 6 month LIBOR plus 1.30% and was due to mature on 31 December 2025. During the year, the Company received full repayment of the outstanding loan balance of £699 million plus interest capitalised to date. As at 31 December 2021, the carrying value of the loan was £nil (2020: £704 million which also included £5 million of interest previously capitalised).

d)   Fixed term deposits include holdings in bank deposits with an initial maturity of more than 3 months at the date the deposit was made.

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.

13. Financial assets

	2021 £m	2020 £m
Financial assets at fair value through profit or loss
Derivatives	69	-
Debt securities	1	1
Collective investment schemes	690	194
	760	195
Amounts due after 12 months	1	1

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 2021	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets at fair value through profit or loss
Derivatives	-	69	-	69
Debt securities	-	-	1	1
Collective investment schemes	690	-	-	690
	690	69	1	760

 

Year ended 31 December 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets at fair value through profit or loss
Debt securities	-	-	1	1
Collective investment schemes	194	-	-	194
	194	-	1	195

There were no transfers between levels in either 2021 or 2020.

Level 3 financial instrument sensitivities

The investment in debt securities is in respect of debt holdings in a property investment structure which was originally transferred to the Company via an in-specie dividend received from Old PGH during 2019. The holding was disposed of during the year ended 31 December 2020, but a balance of £1 million remains in respect of a potential repayment of cash reserves that may be due to the Company. The amount recognised has taken account of both the uncertain nature of the value of the proceeds and when they will be received.

14. Deferred tax

The accounting policy for tax assets and liabilities is included in note G8 to the consolidated financial statements.

Movement in deferred tax balances

	1 January 2021 £m	Credit for the year £m	31 December 2021  £m
Provisions and other temporary differences	16	66	82
	1 January 2020 £m	Credit for the year £m	31 December 2020 £m
Provisions and other temporary differences	15	1	16

The standard rate of UK corporation tax for the accounting period is 19% (2020: 19%).

Following cancellation of the planned corporation tax rate reduction from 19% to 17% announced in the Chancellor's Budget of March 2020, an increase to 25% effective from 1 April 2023 was announced in the Budget of 3 March 2021. Deferred tax assets are provided at the rate of 19% for tax losses carried forward to the extent that realisation of the related tax benefit is probable before 1 April 2023; otherwise a rate of 25% has been applied.

15. Cash and cash equivalents

The accounting policy for cash and cash equivalents is included in note G6 to the consolidated financial statements.

	2021 £m	2020 £m
Bank and cash balances	95	4

16. Cash flows from operating activities

	2021 £m	2020 £m
Profit for the year before tax	661	222
Non-cash movements in profit for the year before tax:
Impairment of loan due from subsidiary	10	8
Impairment of investment in subsidiaries	43	-
Investment income	(111)	(78)
Finance costs	274	189
Fair value gains on financial assets	(62)	(45)
Foreign exchange movement on borrowings at amortised cost	(11)	(43)
Share-based payment charge	14	13
Depreciation	1	-
Decrease/(increase) in investment assets	385	(116)
Net increase in working capital	(307)	(221)
Cash generated/(utilised) by operations	897	(71)

17. Capital and risk management

The Company's capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with International Financial Reporting Standards (IFRS), 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 2021, total capital was £7,780 million (2020: £7,541 million). The movement in capital in the period comprises the total comprehensive income for the period attributable to owners of £728 million (2020: £256 million), dividends paid of £482 million (2020: £403 million), coupon paid on Tier 1 Notes, net of tax relief of £23 million (2020: £23 million), credit to equity for equity-settled share-based payments of £14 million (2020 £13 million) and issue of ordinary share capital of £2 million (2020: £1,849 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 hedges its currency risk exposure arising on foreign currency hybrid debt.

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 Company 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:

2021	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 12)	N/A	Performing	12 month ECL	1,234	-	1,234
Other amounts due from Group entities (note 20)	N/A	Performing	12 month ECL	616	-	616
Cash and cash equivalents (note 15)	A	N/A	12 month ECL	95	-	95

 

2020	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 12)	N/A	Performing	12 month ECL	2,119	-	2,119
Other amounts due from Group entities (note 20)	N/A	Performing	12 month ECL	295	-	295
Cash and cash equivalents (note 15)	A	N/A	12 month ECL	4	-	4

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 to be of 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 Employee Benefit Trust are discussed in note 12.

Amounts due from other Group entities - The credit risk from activities undertaken in the normal course of business is considered to be extremely low. 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, the impact to the net carrying amount stated in the table above is therefore considered not to be 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.

18. Share-based payments

Detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes is contained in note I1 in the consolidated financial statements.

19. Directors' remuneration

Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in the Directors' Remuneration Report on pages 106 to 136 of the Annual Report and Accounts.

20. 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 23 February 2021, the Group entered into a new agreement with abrdn plc to simplify the arrangements of the strategic partnership. As part of the acquisition of the brand, the relevant marketing, distribution and data team members were transferred to the Group. Consequently, the Client Service and Proposition Agreement entered into between the two groups following the acquisition of the Standard Life businesses in 2018 has been significantly amended prior to being dissolved. It has been assessed that abrdn plc no longer has significant influence over the Group and as a result is no longer considered to be a related party of the Group from the date that the Group entered into the new agreement.

During the year ended 31 December 2021, the Company entered into the following transactions with related parties, including transactions with abrdn plc to 23 February 2021.

	2021 £m	2020 £m
Dividend income from other Group entities	957	400
Interest income from other Group entities	111	73
	1,068	473
Impairment of loan due from subsidiary	-	8
Impairment of investment in subsidiaries	43	-
Expense to other Group entities	205	119
Interest expense to other Group entities	43	7
	248	134
Dividends paid to abrdn plc	-	67

Amounts due from related parties at the end of the year:

	2021 £m	2020 £m
Loans due from Group entities	1,234	1,924
Interest accrued on loans due from Group entities	35	-
Other amounts due from Group entities	616	295
	1,885	2,219
Amount due for settlement after 12 months	784	1,924

Amounts due to related parties at the end of the year:

	2021 £m	2020 £m
Loans due to Group entities	300	294
Interest accrued on loans due to Group entities	14	-
Other amounts due to Group entities	415	448
	729	742
Amount due for settlement after 12 months	300	294

21. 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.

22. Events after the reporting period

Details of events after the reporting date are included in note I7 to the consolidated financial statements.

Nicholas Lyons

Andy Briggs

Rakesh Thakrar

Alastair Barbour

Karen Green

Hiroyuki Iioka

Wendy Mayall

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Mike Tumilty

12 March 2022

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, the assets held by the non-controlling interests in consolidated collective investment schemes and assets in consolidated funds held within the disposal group.

The following table provides an overview of the exposure by asset category of the Group's life companies' shareholder and policyholder funds:

31 December 2021

Carrying value	Shareholder and non-profit funds1 £m	Participating supported1 £m	Participating non-supported2 £m	Unit-linked2  £m	Total3 £m
Cash and cash equivalents	5,437	1,644	7,103	9,691	23,875
Debt securities - gilts and foreign government bonds	8,687	311	20,623	14,170	43,791
Debt securities - other government and supranational	2,381	318	2,088	3,051	7,838
Debt securities - infrastructure loans4	1,491	-	-	-	1,491
Debt securities - UK local authority loans and US municipal bonds5	1,069	-	10	3	1,082
Debt securities - private placements6	3,978	1	179	33	4,191
Debt securities - loans guaranteed by export credit agencies7	208	-	-	-	208
Debt securities - equity release mortgages4	4,214	-	-	-	4,214
Debt securities - commercial real estate loans4	1,317	-	-	-	1,317
Debt securities - other debt securities	16,713	1,432	16,274	28,218	62,637
	40,058	2,062	39,174	45,475	126,769
Equity securities	122	61	20,386	113,779	134,348
Property investments	76	26	2,248	7,906	10,256
Income strips4	-	-	-	886	886
Other investments8	623	341	3,098	10,119	14,181
Total Life Company assets	46,316	4,134	72,009	187,856	310,315
Less assets held by disposal group9	-	-	-	(11,676)	(11,676)
At 31 December 2021	46,316	4,134	72,009	176,180	298,639
Cash and cash equivalents in Group holding companies					964
Cash and financial assets in other Group companies					793
Financial assets held by the non-controlling interest in consolidated collective investment schemes					4,155
Financial assets in consolidated funds held by disposal group9					1,788
Total Group consolidated assets excluding amounts classified as held for sale					306,339
Comprised of:
Investment property					5,283
Financial assets					293,192
Cash and cash equivalents					9,112
Derivative liabilities					(1,248)
					306,339

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    All infrastructure and commercial real estate loans, equity release mortgages and income strips are classified as Level 3 debt securities in the fair value hierarchy.

5    Total UK local authority loans and US municipal bonds of £1,082 million include £917 million classified as Level 3 debt securities in the fair value hierarchy.

6    Total private placements of £4,191 million include £3,120 million classified as Level 3 debt securities in the fair value hierarchy.

7    Total loans guaranteed by export credit agencies of £208 million include £159 million classified as Level 3 debt securities in the fair value hierarchy.

8    Includes policy loans of £11 million, other loans of £248 million, net derivative assets of £3,309 million, reinsurers' share of investment contracts of £10,009 million and other investments of £604 million.

9    See note A6.1 to the consolidated financial statements for further details.

31 December 2020

Carrying value	Shareholder and non-profit funds1 £m	Participating supported1 £m	Participating non-supported2 £m	Unit- linked2 £m	Total3 £m
Cash and cash equivalents	5,908	1,854	8,336	10,246	26,344
Debt securities - gilts and foreign government bonds	6,999	386	22,295	14,458	44,138
Debt securities - other government and supranational	2,257	294	2,220	7,815	12,586
Debt securities - infrastructure loans4	1,564	-	-	-	1,564
Debt securities - UK local authority loans and US municipal bonds5	696	-	-	-	696
Debt securities - private placements6	3,276	1	262	51	3,590
Debt securities - loans guaranteed by export credit agencies4	54	-	-	-	54
Debt securities - equity release mortgages4	3,484	-	-	-	3,484
Debt securities - commercial real estate loans4	1,075	-	-	-	1,075
Debt securities - other debt securities	20,371	1,587	18,322	24,412	64,692
	39,776	2,268	43,099	46,736	131,879
Equity securities	113	45	19,621	106,120	125,899
Property investments	81	30	2,054	6,409	8,574
Income strips4	-	-	-	692	692
Other investments7	923	711	4,916	10,009	16,559
At 31 December 2020	46,801	4,908	78,026	180,212	309,947
Cash and cash equivalents in Group holding companies					1,055
Cash and financial assets in other Group companies					776
Financial assets held by the non-controlling interest in consolidated collective investment schemes					4,170
Total Group consolidated assets					315,948
Comprised of:
Investment property					7,128
Financial assets					298,823
Cash and cash equivalents					10,998
Derivative liabilities					(1,001)
					315,948

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    All infrastructure loans, commercial real estate loans, equity release mortgages, income strips and loans guaranteed by export credit agencies are classified as Level 3 debt securities in the fair value hierarchy.

5    Total UK local authority loans of £696 million include £646 million classified as Level 3 debt securities in the fair value hierarchy.

6    Total private placements of £3,590 million include £2,297 million classified as Level 3 debt securities in the fair value hierarchy.

7    Includes policy loans of £10 million, other loans of £344 million, net derivative assets of £6,083 million, reinsurers' share of investment contracts of £9,559 million and other investments of £563 million.

The following table provides a reconciliation of the total life company assets to the Assets under Administration ('AUA') as at 31 December 2021 detailed in the Business Review on page 37:

	2021  £bn	2020  £bn
Total Life Company assets excluding amounts classified as held for sale	298.6	309.9
Off-balance sheet AUA1	11.8	37.5
Less: Standard Life Trustee Investment Plan assets2	-	(9.7)
Assets Under Administration	310.4	337.7

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. As at 31 December 2021, these assets form part of the disposal group classified as held for sale (see note A6.1 for further details).

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.

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 table below shows the Group's market exposure analysed by credit rating for the debt securities held in the shareholder and non-profit funds.

Sector analysis of shareholder and non-profit fund bond portfolio 2021	AAA £m	AA £m	A £m	BBB £m	BB & below1 £m	Total £m
Industrials	-	177	354	970	43	1,544
Basic materials	-	1	166	29	-	196
Consumer, cyclical	11	438	461	302	148	1,360
Technology and telecoms	165	268	592	735	3	1,763
Consumer, non-cyclical	258	315	986	352	-	1,911
Structured finance	-	-	52	-	-	52
Banks2	662	769	2,750	578	19	4,778
Financial services	51	281	382	147	5	866
Diversified	-	6	28	-	-	34
Utilities	25	121	1,345	1,562	2	3,055
Sovereign, sub-sovereign and supranational3	1,465	9,983	827	109	-	12,384
Real estate	27	211	3,386	727	254	4,605
Investment companies	30	200	2	-	-	232
Insurance	16	428	426	38	22	930
Oil and gas	-	147	381	81	-	609
Collateralised debt obligations	-	8	-	-	-	8
Private equity loans	-	-	-	26	-	26
Infrastructure	-	-	128	1,196	167	1,491
Equity release mortgages4	2,085	1,144	963	-	22	4,214
At 31 December 2021	4,795	14,497	13,229	6,852	685	40,058

1    Includes unrated holdings of £113 million.

2    The £4,778 million total shareholder exposure to bank debt comprised £3,732 million senior debt and £1,046 million subordinated debt.

3    Includes £1,082 million reported as UK local authority loans and US municipal bonds, £165 million reported as private placements and £82 million reported as loans guaranteed by export credit agencies in the summary table on page 313.

4    The credit ratings attributed to equity release mortgages are based on the ratings assigned to the internal securitised loan notes.

 

Sector analysis of shareholder and non-profit fund bond portfolio 2020	AAA £m	AA £m	A £m	BBB £m	BB & below1 £m	Total £m
Industrials	-	148	426	1,104	47	1,725
Basic materials	-	-	201	40	-	241
Consumer, cyclical	12	484	656	347	97	1,596
Technology and telecoms	175	288	719	782	-	1,964
Consumer, non-cyclical	270	309	1,239	549	-	2,367
Structured finance	-	-	56	-	-	56
Banks2	857	805	3,328	695	66	5,751
Financial services	92	279	350	246	2	969
Diversified	-	7	31	-	-	38
Utilities	28	130	2,153	1,660	-	3,971
Sovereign, sub-sovereign and supranational3	1,421	8,149	483	85	11	10,149
Real estate	37	171	3,016	509	126	3,859
Investment companies	33	193	-	4	-	230
Insurance	-	573	463	84	12	1,132
Oil and gas	-	212	350	83	-	645
Collateralised debt obligations	-	8	-	-	-	8
Private equity loans	-	-	22	5	-	27
Infrastructure	-	25	388	1,004	147	1,564
Equity release mortgages4	2,034	657	626	149	18	3,484
At 31 December 2020	4,959	12,438	14,507	7,346	526	39,776

1    Includes non-rated holdings of £117 million which have been assessed as having a low credit risk.

2    The £5,751 million total shareholder exposure to bank debt comprised £4,316 million senior debt and £1,435 million subordinated debt.

3    Includes £696 million reported as UK local authority loans, £171 million reported as private placements and £26 million reported as loans guaranteed by export credit agencies in the summary table on page 314.

4    The credit ratings attributed to equity release mortgages are based on the ratings assigned to the internal securitised loan notes.

The following table sets out the debt security exposure by country of the shareholder and non-profit funds of the life companies:

Analysis of shareholder debt security exposure by country	Sovereign, sub-sovereign and supranational 2021 £m	Corporate and other 2021 £m	Total 2021 £m		Sovereign, sub- sovereign and supranational 2020 £m	Corporate and other 2020 £m	Total 2020 £m
UK	10,216	17,076	27,292		8,077	17,577	25,654
Supranationals	800	-	800		660	-	660
USA	340	4,881	5,221		217	5,614	5,831
Germany	112	418	530		188	962	1,150
France	230	1,207	1,437		339	1,440	1,779
Netherlands	117	769	886		182	728	910
Italy	-	171	171		-	213	213
Ireland	-	57	57		-	155	155
Spain	26	105	131		-	183	183
Luxembourg	60	22	82		86	1	87
Belgium	39	111	150		31	152	183
Australia	1	503	504		-	577	577
Canada	99	303	402		65	275	340
Mexico	2	192	194		6	219	225
Other - non-Eurozone1	288	1,579	1,867		189	1,238	1,427
Other - Eurozone	54	280	334		109	293	402
Total shareholder debt securities	12,384	27,674	40,058		10,149	29,627	39,776

1    Includes £2 million sovereign debt and £21 million corporate and other debt with exposure to Russia. There was no exposure to either Ukraine or Belarus.

 

Additional capital disclosures

PGH PLC Solvency II Surplus

The PGH plc surplus at 31 December 2021 is £5.3 billion (2020: £5.3 billion).

	31 December  2021 Estimated £bn	31 December 2020 £bn
Own Funds	14.8	16.8
SCR	(9.5)	(11.5)
Surplus	5.3	5.3

Calculation of group solvency

In 2020, the Group used two methods for calculating Group solvency, 'Method 1' (being the default accounting based consolidation method) and 'Method 2' (the deduction and aggregation method). Method 2 was used for all entities within the Standard Life Assurance businesses acquired in 2018 and Method 1 was used for all other entities of the Group (including the ReAssure entities acquired in 2020). Following the approval of the harmonised internal model by the PRA during the year and as referred to in Article 230 of the Solvency II directive, the Group now wholly uses Method 1 to calculate Group solvency. The Group continues to determine its capital requirements on a partial internal model basis.

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 2021 Estimated £bn	31 December 2020 £bn
Tier 1 - Unrestricted	9.9	11.7
Tier 1 - Restricted	1.1	1.1
Tier 2	2.9	3.2
Tier 3	0.9	0.8
Total Own Funds	14.8	16.8

PGH plc's unrestricted Tier 1 capital accounts for 67% (2020: 70%) 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 contingent convertible Tier 1 Notes issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of which enable the instruments to qualify as restricted Tier 1 capital for regulatory reporting purposes.

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 £0.7 billion (2020: £0.7 billion) and the deferred tax asset of £0.2 billion (2020: £0.1 billion).

Breakdown of SCR

The Group operates one single harmonised PRA approved Internal Model covering all the Group entities, with the exception of the Irish entity, Standard Life International Designated Activity Company ('SLIDAC') and the acquired ReAssure businesses. SLIDAC and the ReAssure businesses calculate their capital requirements in accordance with the Standard Formula. An analysis of the pre-diversified SCR of PGH plc is presented below:

	31 December 2021 Estimated			31 December 2020
	Harmonised Internal Model %	ReAssure and SLIDAC Standard Formula %		Phoenix Internal Model  %	Standard Life Internal Model %	ReAssure and SLIDAC  Standard Formula %
Longevity	22	21		27	18	21
Credit	18	21		23	12	24
Persistency	20	22		12	25	20
Interest rates	9	8		7	6	10
Operational	6	3		4	8	4
Swap spreads	3	-		3	1	-
Property	4	1		10	1	-
Other market risks	12	14		3	16	10
Other non-market risks	6	10		11	13	11
Total pre-diversified SCR	100	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

Under the Solvency II regulations, the 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 of the Group. The Group wholly uses Method 1 (the default accounting based consolidation method) to calculate Group solvency following the approval of the harmonised internal model by the PRA during the year.

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 2021 is £2.9 billion (2019: Method 1 £1.9 billion and Method 2 £1.4 billion).

PGH plc's Eligible Own Funds to cover MGSCR is £11.5 billion (2020: Method 1 £8.3 billion and Method 2 £4.9 billion) leaving an excess of Eligible Own Funds over MGSCR of £8.6 billion (2020: Method 1 £6.4 billion and Method 2 £3.5 billion), which translates to an MGSCR coverage ratio of 393% (2020: Method 1: 431% and Method 2: 359%).

Alternative 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 28.

 

APM	Definition	Why this measure is 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 314.
Fitch leverage ratio	The Fitch leverage ratio 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, non-controlling interests, 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 158 and 159 and the analysis of borrowings note on page 206.
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. 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.
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 on page 35 for further analysis of the solvency positions of the Life Companies.
Long-term Free Cash ('LTFC')	Long-term Free Cash ('LTFC') is comprised of long-term cash to emerge from in-force business, plus holding company cash, less an allowance for costs associated with in-flight mergers and acquisitions and the related transition activities, and a deduction for shareholder debt outstanding.	LTFC provides a measure of the Group's total long-term cash available for operating costs, interest, growth and shareholder returns. Increases in LTFC will be driven by sources of long-term cash i.e. new business and over-delivery of management actions. Decreases in LTFC will reflect the uses of cash at holding company level, including expenses, interest, investment in BPA and dividends.	The metric is not directly reconcilable to the financial statements as it includes a significant component relating to cash that is expected to emerge in the future. Holding company cash included within LTFC is consistent with the holding company cash and cash equivalents as disclosed in the cash section of the business review. Shareholder debt outstanding reflects the face value of the shareholder borrowings disclosed on page 206.
New business contribution	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 one 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 36.
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 28 to 41, 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 313.
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 B2.1 to the 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 38.
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 34.