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Phoenix Gp Hldgs PLC   -  PHNX   

2018 Full Year Results

Released 07:00 05-Mar-2019

RNS Number : 8542R
Phoenix Group Holdings PLC
05 March 2019
 

Phoenix Group announces strong results after a transformational year. New cash generation targets set and synergy target increased by £500 million to £1.2 billion

Phoenix Group, Europe's largest life and pensions consolidator1, today announces a strong set of results for the year ended 31 December 2018.

2018 Highlights

·  £664 million of cash generation2 in 2018 (2017: £653 million). The Group has delivered £1.3 billion cash generation in 2017 and 2018, exceeding the upper end of its cash generation target range of £1.0 billion - £1.2 billion for this period.

·  Solvency II surplus of £3.2 billion3 as at 31 December 2018 (£2.5 billion pro-forma as at 31 December 2017).

·  Shareholder Capital Coverage Ratio of 167%4 as at 31 December 2018 (147% pro-forma as at 31 December 2017).

·  Proposed final dividend of 23.4p per share, a 3.5% increase on the 2017 final dividend.

·  Group operating profit of £708 million (2017: £368 million).

·  Assets under administration of £226 billion as at 31 December 2018 (31 December 2017 pro-forma: £240 billion). Net business inflows of £3.9 billion on UK Open and European businesses.

·  New business contribution5 of £154 million (2018 pro-forma) demonstrates value accretive nature of Open new business in the UK and Europe.

·  Fitch Ratings affirmed the Group's ratings at A+6; "stable" outlook. Leverage ratio 22%7.

New cash generation targets

·  2019 cash generation target of £600 - £700 million8.

·  Long-term cash generation target for 2019 - 2023 of £3.8 billion.

Acquisition of the Standard Life Assurance businesses

·  Acquisition of the Standard Life Assurance businesses completed on 31 August 2018.

·  Total synergy target (net of £150 million transition costs) increased by £500 million from £720 million to £1,220 million:

Capital synergies new target of £720 million (increased from £440 million); with £500 million delivered to date; and

Capitalised cost synergies new target of £650 million (increased from £415 million); reflecting an increase from £50 million to £75 million per annum.

Delivering on strategic priorities

·  Successfully entered bulk purchase annuity market contracting £0.8 billion of liabilities in 2018.

·  AXA and Abbey Life integrations completed ahead of plan and targets, delivering cost synergy benefits of £27 million per annum and cumulative cash generation of £968 million.

·  Diligenta selected as Phoenix's partner to deliver a single, digitally enhanced outsourcer platform to a further 2 million legacy-Phoenix policies.

·  Brexit preparations complete.

·  On-shoring project completed with UK plc in place.

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

"2018 was a very successful year for Phoenix in which we exceeded our cash generation targets, further improved our capital resilience and transformed the business through the acquisition of the Standard Life Assurance businesses.

These results show the strength of our Group and have enabled us to again increase our short and long term cash generation targets.

The transition of the Standard Life Assurance businesses continues to progress well and today we increase the total cost and capital synergy target by 70% from £720 million to £1.2 billion. Our end state operating model will incorporate the best of both legacy businesses and our management bench strength and strategic options as a combined Group have increased significantly.

Phoenix's substantial new business flows across both our Heritage and Open businesses through our Strategic Partnership with Standard Life Aberdeen bring increased sustainability to our long term cash generation. We are confident about our opportunities to grow in the future both organically and through BPA and acquisitions."

Presentation

There will be a presentation for analysts and investors today at 8.30am (GMT) at:

J.P. Morgan, 1 John Carpenter Street, London, EC4Y 0JP

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

Participants may also dial in as follows:

Dial-in number:

+44 20 3059 5868

Title of call:

Phoenix Full Year Results

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

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

Dividend

The recommended final dividend of 23.4p per share is expected to be paid on 7 May 2019, subject to shareholder approval at Phoenix Group Holdings plc's AGM on 2 May 2019.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 21 March 2019. The record date for eligibility for payment will be 22 March 2019.

Enquiries

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

Media:
Andy Donald and Vikki Kosmalska, Maitland + 44 (0) 20 7379 5151

Shellie Wells, Head of Corporate Communications, Phoenix Group

+44 (0) 203 735 0922/ +44 7872 414137

Notes

1.     Phoenix Group is the largest life and pensions consolidator in Europe with 10.0 million policies and £226 billion of assets under administration.

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

3.     The Solvency II capital position is an estimated position and includes the impact of a regulator approved recalculation of transitionals for Standard Life Assurance Limited only. Had a dynamic recalculation of transitionals been assumed for the Phoenix Life companies, the Solvency II Surplus and the Shareholder Capital Coverage ratio would increase by £0.1 billion and 3% respectively.

4.     The Shareholder Capital Coverage Ratio of 167% excludes Solvency II Own Funds and Solvency Capital Requirements of unsupported with-profit funds and the PGL Pension Scheme.

5.     New business contribution is the increase in Solvency II Own Funds arising from new business written in the period excluding risk margin and contract boundary restrictions.

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

7.     Current leverage ratio of 22% estimated by management.

8.     2019 cash generation target is net of the £250 million cost of capitalising Standard Life International Designated Activity Company for Brexit.

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

10.  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.

11.  Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: domestic and global economic and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union's "Solvency II" requirements on the Group's capital maintenance requirements; the impact of inflation and deflation; the political, legal and economic effects of the UK's vote to leave the European Union; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of future acquisitions 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.

12.  As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements and other financial and/or statistical data within this announcement. The Group undertakes no obligation to update any of the forward-looking statements or data contained within this announcement or any other forward-looking statements or data it may make or publish. Nothing in this announcement should be construed as a profit forecast or estimate.


Cash resilience growth

A sustainable phoenix

Annual report and accounts 2018

2018 was transformational for Phoenix as we delivered cash, resilience and growth.

With the restructuring of the life and pensions industry, we are in a position to take advantage of further opportunities.

The successful acquisition of the standard life assurance businesses has allowed us to evolve from being a heritage business to one that extends to open business and Europe.

This has enhanced the sustainability of the group and will propel us towards our new vision To become Europe's Leading Life Consolidator.

More information online at www.thephoenixgroup.com

PHOENIX GROUP AT A GLANCE

OUR VISION

Become Europe's Leading Life Consolidator.

OUR PURPOSE

Inspire confidence in the future.

OUR MISSION

Improve outcomes for customers and deliver value for shareholders.

WHAT WE DO

As the largest life and pensions consolidator in Europe, Phoenix specialises in the acquisition and management of closed life insurance and pension funds. We call this our Heritage business.

Transactions in the bulk purchase annuity market offer a complementary source of growth for the Group and the management actions we deliver help increase and accelerate cash flows.

Alongside this, we have an Open business which manufactures and underwrites new products and policies to support people saving for their future in areas such as workplace pensions and self-invested personal pensions. This Open business is supported by the Strategic Partnership with Standard Life Aberdeen plc following our acquisition of Standard Life Assurance Limited in 2018. We also have a market leading brand - SunLife - which sells a range of financial products specifically for the over 50's market

Read more on our operating structure and business model on P8 and 14

Read more on our marketplace on P12

OUR LOCATIONS

STRATEGIC REPORT

 

Phoenix Group at a glance

IFC

Chairman's Statement

2

Group Chief Executive Officer's Report

4

Our Operating Structure

8

Our Key Products

9

Our Business Segments

10

The Marketplace

12

Business Model

14

Our Strategy and KPIs

18

Business Review

28

Risk Management

39

Stakeholder Engagement

47

CORPORATE GOVERNANCE

 

Chairman's Introduction

60

Board Structure

61

Board of Directors

62

Executive Management Team

64

Corporate Governance Report

65

Directors' Remuneration Report

76

Directors' Report

106

Statement of Directors' Responsibilities

110

FINANCIALS

 

Independent Auditor's Report

112

IFRS Consolidated Financial Statements

122

Notes to the Consolidated Financial Statements

129

Parent Company Accounts

214

Notes to the Parent Financial Statements

216

Additional Life Company Asset Disclosures

222

Additional Capital Disclosures

228

Alternative Performance Measures

230

Additional information

 

Stakeholder Information

232

Forward-looking Statements

233

Glossary

234

Key performance indicators

£664m

OPERATING COMPANIES' CASH GENERATION

APM  REM

£3.2bn

PGH Solvency II SURPLUS (ESTIMATED)

167%

PGH Shareholder capital coverage ratio (estimated)

APM

23.4p

Final dividend per share

£708m

Operating profit

APM

93%

Customer satisfaction score1

OTHER PERFORMANCE INDICATORS

£410m

IFRS profit after tax

£226bn

ASSETS UNDER ADMINISTRATION
APM

£154m

NEW BUSINESS CONTRIBUTION2
APM

22%

Financial lEVERAGE RATIO3
APM

Read more on P28

All amounts throughout the report market with 'REM' are KPI's linked to Executive Remuneration.

See Directors' Remuneration Report P76

All amounts throughout the report marked with 'APM' are alternative performance measures.

1  Phoenix Life score only.

2  On a pro forma basis as if the Standard Life Assurance acquisition took place on 1 Jan 2018

3  As calculated by Phoenix on a Fitch Ratings basis.

OUR STRATEGIC PRIORITIES

01

IMPROVE CUSTOMER OUTCOMES

02

DRIVE VALUE

03

MANAGE CAPITAL

04

ENGAGE People

Read more on our strategic priorities P18

OUR THREE Main BUSINESS SEGMENTS

UK HERITAGE

With-profits

Unit linked

Annuities

Protection

UK OPEN

Unit linked:

Workplace

Retail pension

Wrap

Protection:

SunLife over 50s

EUROPE

Ireland:

Unit linked

With-profits

Annuities

Germany:

With-profit

Unit linked

OUR KEY PRODUCTS*

With-profits

£56bn

Unit linked

£145bn

Non-Profit (Annuities)

£19bn

Non-Profit (Protection)

£3bn

*  Based on assets under administration.

Our main business segments*

UK Heritage

£118bn

UK Open

£85bn

Europe

£23bn

*  Based on assets under administration.

OUR BRANDS

All amounts throughout the report marked with 'APM' are alternative performance measures.

Read more on P230

All amounts throughout the report market with 'REM' are KPIs linked to Executive Remuneration

See Directors' Remuneration Report P76

CHAIRMAN'S STATEMENT

"The acquisition of the Standard Life Assurance businesses in 2018 was transformational for Phoenix. We are now Europe's largest life and pensions consolidator."

Nicholas Lyons

CHAIRMAN

DEAR SHAREHOLDERS,

I joined Phoenix as Chairman at a pivotal moment in the Group's history. 2018 was a defining year for the Group marked by outstanding strategic delivery and strong financial performance.

On 31 August, Phoenix completed the £2.9 billion acquisition of the Standard Life Assurance businesses and entered into a Strategic Partnership with Standard Life Aberdeen. This transaction established the Group as the largest life and pensions consolidator in Europe with £226 billion of assets under administration and 10 million policies as at 31 December 2018. Not only did the acquisition bring additional scale to the Group's Heritage business, but Phoenix also acquired a significant Open business in the form of Standard Life branded insurance products which the Group is committed to growing.

Our Strategic Partnership is underpinned by a 19.98% equity stake taken by Standard Life Aberdeen in Phoenix and our Board has been strengthened by the appointment of two Standard Life Aberdeen nominated Non-Executive Directors. We have a close and positive working relationship with Standard Life Aberdeen which extends through its management of c. 60% of our assets under administration and the distribution agreement generating new business. Our objectives are aligned as we seek to leverage our respective skill sets to grow our businesses.

Phoenix marked a number of additional significant achievements this year including the completion of the integration of the AXA Wealth and Abbey Life businesses ahead of plan and targets and successfully entering into the Bulk Purchase Annuity market.

Finally, the Group extended its track record of meeting and exceeding all of its publicly stated financial targets by surpassing the upper end of its two-year cash generation target range of £1.0 - £1.2 billion, delivering £1.3 billion of cash generation over 2017 and 2018.

Capital Markets Day

In November Phoenix held a very well-attended Capital Markets Day to provide an update on the Standard Life Assurance acquisition. The presentation illustrated how Phoenix has evolved from being a 'closed' business to a consolidator of both Open and Heritage life businesses.

Organic growth through the capital-light new business written as part of the Strategic Partnership with Standard Life Aberdeen represents a fundamental strengthening of the Group's business model, stemming the natural run-off of our Heritage business and bringing sustainability to the Group's cash generation profile.

Dividend policy

The additional cash flows acquired as part of the acquisition of the Standard Life Assurance businesses enhance the sustainability of our dividend. Therefore, in line with previously stated expectations the Board recommends raising the dividend to an annualised amount of £338 million from the time of the 2018 final dividend. This corresponds to a final 2018 dividend per share of 23.4p and constitutes a c. 3.5% uplift in dividend per share (rebased to take into account the bonus element of the rights issue completed in July 2018), resulting in a new annualised dividend per share level of 46.8p going forward.

Given the long-term run-off nature of the Group's Heritage business, the Board continues to consider it prudent to maintain a stable and sustainable dividend policy.

Recent board changes

Against a backdrop of macroeconomic uncertainty in light of Brexit, the Board aims to maintain the breadth and depth of experience required to continue delivering shareholder value and improving customer outcomes. Therefore, we were delighted to welcome Campbell Fleming and Barry O'Dwyer from Standard Life Aberdeen to the Board. Both bring with them substantial experience and executive skills complementary to those of our existing Directors and very related to our evolving strategy.

Looking ahead

Despite our expectation that market conditions will remain turbulent leading up to and beyond Brexit, we look ahead with optimism as Phoenix's hedging programme brings resilience to the Group' solvency position and cash generation. Additionally, the Group's capital-light new business capability brings added sustainability to Phoenix's cash generation.

Simultaneously, the drivers for consolidation in the life insurance sector are increasing and we believe institutions will look to divest their capital intensive closed business to consolidators such as Phoenix. Phoenix has a proven track record of delivering value accretive acquisitions and I am confident that the Group is well placed to take advantage of these growth opportunities as and when they arise.

Phoenix will enter the FTSE100 Index on 18 March 2019. Entry into this index is recognition of the progress Phoenix has made as an organisation.

I would like to take this opportunity to thank all my colleagues for their hard work and commitment in what has been another hugely successful year for Phoenix and our investors for their continuing support. I look forward to working with you all in 2019.

NICHOLAS LYONS

CHAIRMAN

4 March 2019

£226bn

Assets under administration

10.0m

Policies

GROUP CHIEF EXECUTIVE OFFICER'S REPORT

"Phoenix's business continues to be resilient. Our open business brings improved sustainability to cash generation and we are confident about our growth opportunities."

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

The acquisition of the Standard Life Assurance businesses in 2018 was transformational for Phoenix. It allowed us to evolve from being a UK closed life consolidator into the largest life and pensions consolidator in Europe; with Heritage and Open businesses spanning the UK, Germany and Ireland.

Phoenix delivered strong financial performance during the year, generating £664 million of cash and increasing the resilience of the Group's capital position through the implementation of our hedging programme to the Standard Life Assurance businesses. Our leverage ratio remains below the target range and our credit ratings were affirmed by Fitch Ratings in September following completion of the acquisition.

Phoenix's substantial new business capabilities bring improved sustainability to our long-term cash generation. Our Open business is growing, driven by the success of the capital-light Standard Life branded products sold through the Strategic Partnership with Standard Life Aberdeen. This growth is augmented by our successful entry into the bulk purchase annuity market which, together with vesting annuities, keeps scale in our Heritage business.

Whilst the acquisition of the Standard Life Assurance businesses represents an important milestone in our consolidation journey, it is not our final destination and we remain confident in our ability to grow further through additional acquisitions.

ACQUISITION OF the STANDARD LIFE ASSURANCE businesses AND STRATEGIC PARTNERSHIP WITH STANDARD LIFE ABERDEEN

Phoenix completed the acquisition of the Standard Life Assurance businesses on 31 August 2018 with 99.98% of voting shareholders supporting the transaction. The acquisition was funded through a £950 million rights issue completed in July with a take-up rate of 96.25%, and the issuance of £500 million Tier 1 notes in April and a €500 million Tier 2 bond in September. I would like to thank our investors for their overwhelming support for this acquisition.

The acquisition has brought additional scale to Phoenix's pre-existing UK Heritage business which now has £118 billion of assets under administration. It has also brought a significant Open business to Phoenix in the form of Standard Life branded workplace pension, retail pension and Wrap products.

These products are predominantly capital-light unit linked products and will be delivered to the customer through the Strategic Partnership with Standard Life Aberdeen. Under this partnership, Standard Life Aberdeen will undertake sales, marketing and distribution for new business which Phoenix will underwrite and administer. In this way, both companies continue to provide the services that align to their key strengths and is built to work seamlessly for customers with the full proposition being delivered under the Standard Life Brand.

We also now have a European business which contains both Heritage and Open business. We are poised to complete our preparations to ready this business for Brexit with a Part VII transfer to an Irish domiciled subsidiary, Standard Life International Designated Activity Company ('SL Intl') due to complete in March. We have injected £250 million of capital into SL Intl prior to this Part VII and will report our 2019 cash generation figures net of this injection.

Cost and capital synergies

Upon announcement of the transaction in February 2018, we set a total cost and capital synergy target for the transition of the Standard Life Assurance business within Phoenix of £720 million.

Upon completion of the acquisition in August, we worked with our new colleagues from Standard Life Assurance to design the operating model of our combined organisation.

It is clear to me that Phoenix will be forever strengthened by the breadth of skills that our new colleagues bring. I am extremely grateful for the hard work across all locations in the Group that has ensured that our transition programme has 'the best of both'. As a result of this collaboration, I am pleased to announce an increase of 70% to a new total synergy target of £1,220 million.

Transition programme

Our transition programme is making good progress and will deliver an end state operating model over three phases. We are now targeting savings of £75 million per annum from our 2018 business as usual combined cost base of £600 million and have also set a £30 million target for one-off cost savings.

Actuarial harmonisation

In 2018 we delivered £500 million of capital synergies in respect of the Standard Life Assurance businesses. This principally consists of the benefits from capital synergies from implementing the Group's equity and currency hedging strategy but also includes capital synergies by internally restructuring indemnity benefits within the Group.

We have increased our capital synergy target to £720 million to reflect the estimated impact of moving towards Phoenix's strategic asset allocation for annuity backing assets and creating a single life company.

In addition, the programme will also bring together our two internal models. This has never been done before and the timeline we outline today targeting PRA approval by the end of 2020 remains indicative as we work through a number of key decisions and work with our regulators to assess achievability.

The end state operating model will be delivered in three phases over three years

Phase 1

 

Phase 2

 

Phase 3

Focuses on enabling Head Office functions such as HR, Legal and Risk to enhance process efficiency and remove duplication. This phase will also deliver a single Risk Management Framework and three lines of defence model.

 

Covers the Finance and Actuarial functions. This includes the harmonisation of the Group's capital framework and related internal model as well as improving the alignment of reporting processes as a combined business.

 

Will deliver the end state operating model for both the UK Heritage and UK Open segments. The end state operating model will be designed to respond to an evolving landscape from the Open business perspective while also providing a versatile platform for future consolidation.

Phase 1: Enabling Head Office Functions

Phase 2: Finance and Actuarial

Phase 3: Customer and Technology

2019

2020

2021

FINANCIAL PERFORMANCE

Cash generation is resilient and sustainable

Phoenix delivered £664 million cash generation in the year taking total cash generation in 2017 and 2018 to £1.3 billion and exceeding the upper end of the target range for this period of £1.0-£1.2 billion.

The Group has set new short and longer-term cash generation targets for the enlarged business. In 2019 we expect to generate £600 - £700 million of cash net of the cost of capitalising our Irish subsidiary for Brexit and our target for 2019 to 2023 is £3.8 billion. In addition we expect a further £8.2 billion of cash from 2024 on-wards.

The combined cash guidance of £12.0 billion reflects the cash for our in-force business only and does not include the additional cash flows that may be generated on new business. As our Open business grows, it will help to offset the run off of our Heritage business and bring improved sustainability to our cash generation which in turn supports our stable and sustainable dividend policy.

Phoenix Group capital position

During 2018, the Group strengthened the resilience of its capital position, increasing the Solvency II surplus from a pro forma of £2.5 billion as at 31 December 2017 to £3.2 billion as at 31 December 2018.

The Shareholder Capital coverage ratio also increased to 167% at 31 December 2018 from a 147% pro forma ratio at 31 December 2017, well within our target range of 140% to 180%.

Operating Profit

The Group delivered total operating profit of £708 million and reports for the first time operating profit across its three main business segments. The increase compared to the prior year is primarily driven by the inclusion of Standard Life Assurance for the four-month period post completion of the acquisition together with net positive impacts of management actions and experience and actuarial assumption changes during 2018.

Assets under administration

As at 31 December 2018, the Group had £226 billion of assets under administration, reduced from the £240 billion pro forma position at 31 December 2017. This fall is primarily driven by market movements experienced in the fourth quarter of 2018 when markets were particularly negative. During the year, strong net inflows on our UK Open and European businesses have partially offset net outflows on our UK Heritage business.

REGULATORY AND LEGISLATIVE CHANGES

In September we were informed by the Financial Conduct Authority ('FCA') that it had closed its investigation into Abbey Life Assurance Limited following the thematic review into the fair treatment of long standing customers in the life insurance sector. The FCA found that the conduct of Abbey Life Assurance Limited did not warrant enforcement action. Standard Life was referred to the FCA enforcement division to consider whether any of the issues identified in the thematic review on non-advised annuities sales warranted further intervention and we continue to work with the FCA on the ongoing investigation.

With regard to annuities sales, both Standard Life and Abbey Life agreed with the FCA to undertake a past business review and both programmes are well advanced. Both of these reviews were known issues at the time of acquisition and we expect the costs arising from these reviews to be covered by the indemnities agreed at the time of the acquisition.

CUSTOMERS

Phoenix places its customers at the heart of what it does and is committed to delivering a high level of customer service and to improving customer outcomes.

Phoenix invests in its online capabilities and we connect digitally with as many of our customers as possible.

For Phoenix Life, this digital journey is being shaped through our outsourcing arrangement with Diligenta. 80% of our Diligenta pension customers can now log on to our digital platform and during 2018 we saw over 40% of eligible customers taking advantage of our online encashment functionality. In absolute numbers this would be 80% of around 1 million customers.

In 2018, over 14,000 policies moved into drawdown with Standard Life and digital was the channel of choice for the majority of these customers. Furthermore, with more than three million logins last year, our mobile app is now the easiest way for Standard Life customers to interact with us when they want.

Since auto-enrolment we have supported 11,000 schemes into a qualifying workplace pension scheme with 1.7 million new joiners auto-enrolled into them by employers.

In August, I was delighted to announce that we would be introducing caps on ongoing charges across our Phoenix Life non-workplace unitised pensions business and removing exit charges on small unitised pensions policies. This change will benefit c. 250,000 policies and reduce the average Phoenix Life ongoing charge for unitised non-workplace pension policies to 1.1%.

We recognise the importance of customer service and monitor our performance through a number of metrics. We have exceeded all of our customer service targets in 2018.

Colleagues

Corporate responsibility plays a central role in the colleague experience at Phoenix. The three strands of physical, mental and financial wellbeing underpin our colleague and community initiatives, which now extend to the Standard Life Assurance businesses.

Volunteering is a priority across the Group with over 50% of Phoenix Group and Phoenix Life colleagues participating in volunteering activities over the year.

2018 saw Phoenix embark on a significant listening exercise to re-invigorate our commitment to our corporate values. 'The Big Conversation' brought these values to life and delivered an agreed set of behaviours - created by staff and championed by senior management sponsors.

2019 will see us engage colleagues in the creation of a combined set of values for the Group, building on previous work conducted at Standard Life Assurance and Phoenix.

This focus on engagement and colleague empowerment creates a rich and diverse working environment, reflected in our continued status as one of the UK's Top Employers.

CONCLUSION

In 2018, Phoenix delivered on its existing strategic priorities alongside a material acquisition. We completed the integration of both the AXA Wealth and Abbey Life during the year and to date have generated cash from both transactions of £968 million or over 70% of consideration. We also completed our on-shoring programme replacing the previous Cayman Islands registered holding company with a UK-incorporated one.

We look forward to 2019 with excitement. Whilst we will of course remain focused on the safe transition of our combined businesses, we have the management bandwidth to deliver on our growth strategy.

The drivers of consolidation in the life insurance industry are numerous: trapped capital, specialist skills shortages, stranded costs, and an increased regulatory burden. These drivers will generate future acquisition opportunities for Phoenix.

Phoenix has the skill set, scale and financial strength to be at the forefront of the UK and European life consolidation market. We remain optimistic about the opportunities that 2019 will bring and we are ready to move forward with transactions that add value to our investors.

I have been delighted to welcome former Standard Life colleagues to the Phoenix family and thank all of my colleagues throughout the Group for their hard work during a year that has seen Phoenix deliver its strategy for the benefit of both shareholders and policyholders.

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

4 March 2019

"The drivers of consolidation are increasing and Phoenix is well placed to be the Leading Life Consolidator in Europe during this process."

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

Illustrative cash generation profile over time

Cash generation

Management Actions
OPEN
Heritage

Management Actions

Management actions increase or accelerate cash generation across the Heritage and Open businesses.

Open

Growth of Open business at 2018 levels will offset Heritage run-off.

Heritage

Our Heritage business runs off at 5-7% per annum.

1  Pro forma assuming the acquisition of the Standard Life businesses took place on 31 December 2017.

2018 timeline

February

Announced proposed acquisition of the Standard Life Assurance businesses.

April

£500 million Tier 1 notes issued.

July

£950 million rights issue.

September

FCA closes Abbey Life enforcement investigation.

€500 million Tier 2 bond issued.

Fitch Ratings affirms ratings and places Phoenix on 'stable' outlook

March

Integration of AXA Wealth and Abbey Life complete.

May

First BPA transaction announced.

August

Acquisition of the Standard Life Assurance businesses completed.

December

New UK holding company in place. On-shoring complete. Abbey Life Part VII complete.

OUR OPERATING STRUCTURE

Phoenix Group's operating structure is evolving as we transition to a new end state operating model for the combined group.

Phoenix Group

Group functions

Manage corporate and strategic activity and include the following:

Group Finance including Tax, Treasury and Investor Relations

Corporate Communications

Group Risk

Group HR

Group Customer

Group Internal Audit

Group Legal

Strategy, Corporate Development and Group Actuarial

Company Secretariat

Phoenix Life

Standard Life

Manage the financial assets for policyholders across our UK Heritage; UK Open and European business segments

Life companies

Phoenix Life Limited

Phoenix Life Assurance Limited

Life companies

Standard Life Assurance Limited

Standard Life International Designated Activity Company

INVESTMENT MANAGEMENT AND DISTRIBUTION

Management services company

Provides life companies with management services

OUTSOURCE PARTNERS

GROUP FUNCTIONS

The Group operates centralised functions that provide Group-wide and corporate-level services and manage corporate and strategic activity. Based in Edinburgh, Wythall near Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.

PHOENIX LIFE and STANDARD LIFE

Phoenix Life and Standard Life are responsible for the management of the Group's life funds in the UK, Germany and Ireland across both Heritage and Open product lines. Phoenix Life is based in Wythall, Birmingham and is led by its Chief Executive Officer, Andy Moss. Susan McInnes is the Chief Executive of our Standard Life business which is primarily based in Edinburgh with significant operations in Frankfurt and Dublin.

Life companies

The life companies are regulated entities that hold the Group's policyholder assets. The Group simplifies its business model by bringing together separate life companies and funds, making more efficient use of the capital and liquidity in its life companies.

This results in administrative expense savings and increased consistency of management practices and principles across the Group.

Investment management

Investment management services are provided to the life companies by a number of external asset management companies, with the main partner being Aberdeen Standard Investments.

Distribution

Distribution of non-workplace Standard Life branded products is provided by Standard Life Aberdeen under the Client Service and Proposition Agreement. We have also retained the SunLife distribution business within the Open business segment of the Group with a management team based in Bristol focused on their key skills of marketing and sales.

Management services companies

The Group's management services companies are charged with the efficient provision of financial and risk management services, sourcing strategies and delivering all administrative services required by the Group's life companies. This benefits the life companies by providing price certainty and transferring some operational risks.

Outsource partners

The management services companies manage relationships with the outsource partners for our Phoenix Life business. Without further acquisitions, the number of policies in our Heritage business declines over time and the cost of our Heritage operations as a proportion of policies will increase. This risk is managed by paying a fixed price per policy to our outsource partners for policy administration services, which reduces this fixed cost element of our operations and converts it to a variable cost structure.

Outsource partners have scale and common processes to benefit the Group, including reducing investment requirements, improving technology and reducing our operational risk. Finance, actuarial, information technology, risk and compliance and oversight of the outsource partners are retained in-house, ensuring that Phoenix Life retains full control over the core capabilities necessary to manage and integrate closed life funds.

OUR KEY PRODUCTS

WE HAVE a wide range of products which are written across different funds.

The features of each policy influences whether it is the policyholders and/or the shareholders who are exposed to the risks and rewards of a policy.

Type of business

 

Typical characteristics

Policyholder benefits

Shareholder benefits

With-profit

£56bn

Assets under administration at 31 Dec 2018

25%

These are typically savings and investment products.

They comprise endowments, whole of life and pensions products and (some) guaranteed annuity options which guarantee the annuity that a pension pot will be able to buy.

The policyholders and shareholders share in the risks and rewards of the policy, depending on the structure of the fund.

Excess assets created over time ('estate') provide a buffer to absorb cost of guarantees and capital requirements.

In the 'supported' with-profit funds, the shareholders provide capital support to the fund.

Policyholders benefit from discretionary annual and/or final bonuses.

The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the fund, together with other elements of experience in the fund.

In the 'supported' with-profit funds, the shareholders' capital is exposed to all economic movements until the estate is rebuilt to cover the required capital, at which point the fund becomes 'unsupported'.

In the 'unsupported' with-profit funds, typically shareholders receive 10% of declared bonuses (90:10 structure) or nil (100:0 structure), including any estate distributed.

Unit linked

£145bn

Assets under administration at 31 Dec 2018

65%

These are insurance or investment contracts (savings and pensions) without guarantees.

The policyholders bear all of the investment risk.

Policyholders buy units with their premiums which are invested in funds.

Units are sold when a claim is made.

Policyholders' benefits are in the form of unit price growth (based on the investment income and gains, but subject to management charges and investment transaction costs).

Shareholders benefit from fees earned through management charges,

bid/offer spreads and/or policy fees.

Non-profit (annuities)

£19bn

Assets under administration at 31 Dec 2018

9%

Policyholders make fixed or variable payments in lieu of a future lump sum or a future income stream until death.

Policyholders receive regular payments which start immediately (immediate annuity) or at some time in the future (deferred annuity).

Shareholders earn a spread on the assets supporting the annuity payments.

The shareholders are directly exposed to all market and demographic risks.

Non-profit (protection)

£3bn

Assets under administration at 31 Dec 2018

1%

Term assurance policies which pay a lump sum on death if death occurs within a specified period.

Whole of life policies which cover the entire life and pay a lump sum on death, whenever it occurs.

Policyholders have certainty of the benefits they will receive.

Profits are generated from investment returns and underwriting margins.

Shareholders are exposed to the majority of the risks and benefit from 100% of the profits or losses arising.

Total Assets under administration of £223 billion analysed by product type excludes £3 billion held in shareholder funds.

OUR BUSINESS SEGMENTS

PHOENIX HAS THREE MAIN BUSINESS SEGMENTS FOR ITS LIFE AND PENSIONS BUSINESS: UK Heritage, UK Open and Europe.

The UK Heritage business segment comprises products that are no longer marketed to customers, for example with-profits, annuities and many legacy unit linked life and pension products. UK Open business comprises products that are actively marketed to new and existing customers and includes products sold under the Standard Life and SunLife brands. The European segment comprises both Heritage and Open business.

 

UK HERITAGE

UK OPEN

EUROPE

IN FORCE

 

With-profits

Unit linked

Annuities

Protection

Unit linked:

Workplace

Retail pension

Wrap

Ireland:

Unit linked

With-profits

Annuities

Germany:

With-profit

Unit linked

NEW BUSINESS

VESTING ANNUITIES BULK PURCHASE ANNUITIES

UNIT LINKED

UNIT LINKED

UK Heritage

Phoenix specialises in the safe and efficient management of UK Heritage business and has a strong track record of delivery.

Our UK Heritage business comprises products that are no longer actively marketed to customers and has £118 billion of assets under administration.

£118bn

UK Heritage*

With-profit (unsupported)

34%

With-profit (supported)

4%

Unit linked

42%

Non-profit (annuities)

15%

Non-profit (protection, shareholder funds and other non-profit)

5%

*Based on assets under administration at 31 December 2018

In Force

The UK Heritage business has been built from two decades of consolidation and comprises over 100 legacy brands including Britannic, Pearl,Scottish Mutual, AXA, Abbey Life and Standard Life. It has a broad range of life and pensions products which provide Phoenix with natural diversification and includes business from both Phoenix Life and Standard Life.

The Group's strategy for our UK Heritage Business is simple - to deliver value to shareholders and customers and to improve customer outcomes.

Heritage business cash generation runs off at 5-7% per annum depending on the particular features of each legacy book. Organic cash emerges naturally from our UK Heritage business as it runs off over time and we enhance this organic cash generation through the delivery of management actions which either increase the overall cash flows from the business or accelerate the timing of these cash flows.

Integral to our efficient management of the UK Heritage business is ensuring that our cost base reduces more quickly than our policy count runs off.

New business

The Group generates new business in the Heritage business segment through vesting annuities and bulk purchase annuities, or from incremental contributions from existing pensions.

Vesting annuities

We offer annuities to existing policyholders when their pension policies vest across both the Phoenix Life and Standard Life product ranges. The majority of our vesting annuities are from pension policies which included guaranteed annuity options on maturity.

Bulk purchase annuities

In 2018 we successfully entered into the bulk purchase annuity market completing three transactions during the year. The bulk purchase annuity market is a potential source of value accretive annuity liabilities and we will continue to participate in this market in a proportionate and selective manner.

UK Open

Phoenix is committed to growing its capital-light UK Open business.

Our UK Open business comprises products that are actively marketed to customers and has £85 billion of assets under administration.

£85bn

UK OPEN*

Workplace

44%

Retail pensions

29%

Wrap

27%

*Based on assets under administration at 31 December 2018

In Force

Open business mainly relates to those products being sold under the Standard Life brand but also includes those aimed at the over 50's market distributed by SunLife.

Assets under administration in our open business are held in three product lines: Workplace, Retail pensions and Wrap. These are predominantly unitised products which have no guarantees and where investment risk sits with the customer. Our Open business therefore comprises capital-light products.

The Group's strategy for our Open business is shared with our Heritage book as we aim to deliver value to shareholders and customers alike. Our Strategic Partnership is important in supporting that strategy.

New business

Our Open business is growing through new business generated through the Client Service and Proposition Agreement with Standard Life Aberdeen and through an increase in pensions auto-enrolment.

Under this agreement, Standard Life Aberdeen is responsible for the distribution, branding and marketing of products. They do this through their existing networks of Retail and Independent Advisors and for some products using their successful investment platform. The exception to this are Workplace pensions products where distribution is performed by the Phoenix Group.

Responsibility for the Wrap Platform, which hosts some of our investment products such as Wrap SIPP and offshore bond also sits with Standard Life Aberdeen.

Where a customer needs or wants advice it can be delivered by Standard Life Aberdeen's in house advice arm.

Phoenix are responsible for providing the insurance product and the administration once the product is sold - this plays very much to our strengths given our existing expertise in product administration for our existing c. 5.5 million Phoenix Life customers. The relationship is built to work seamlessly for customers with the full proposition from distribution through to administration being done under the Standard Life brand.

Under the agreement, Phoenix collects product charges from customers and remits investment management fees to Standard Life Aberdeen. Where relevant, Standard Life Aberdeen may also collect a platform charges directly from the customer.

The SunLife business also generates new business across it's range of over 50's products.

EUROPE

Our European business provides a platform for potential future consolidation.

It contains both open and heritage products split across Germany and Ireland and has £23 billion of assets under administration.

£23bn

EUROPE*

Germany

49%

Ireland

 24%

International Bond

 27%

*Based on assets under administration at 31 December 2018

In Force

Germany

Germany closed its with-profits business to new business in 2015 and now distributes only unit linked life assurance products which have no material guarantees. These products target the over 50's market and utilise the broker distribution channels through operations in Frankfurt and Graz, Austria.

International bond

This business is all open business managed from our Dublin office targeting customers in the UK. The international bonds are unit linked products distributed by retail advisers, banks and wealth managers.

Ireland

A unit linked investment proposition for both the pre and post retirement market, the Irish business is also capital-light in nature and is distributed through adviser channels.

New business

New business is written across all open product lines of our European business.

The international bond is sold by Standard Life Aberdeen through the retail market and the investment platform. All other open products are sold by the European units themselves.

THE MARKETPLACE

The UK Life and Pensions market remains competitive and a strong brand is the key to success in winning market share. THE PHOENIX BRAND IS DOMINANT IN the CONSOLIDATION OF THE LIFE AND PENSIONS INDUSTRY AND IS TAKING A FOOTHOLD IN THE BULK PURCHASE ANNUITY MARKET. Phoenix's open business is delivered under the brands of Standard Life and sunlife.

Phoenix has been a brand in the insurance industry since 1782. From its beginnings, more than 200 years ago, Phoenix has grown to become the largest life and pensions consolidator in Europe.

Closed life funds market

Phoenix estimates the size of the closed life funds market to be approximately £380 billion in the UK, increasing to £540 billion including Germany and Ireland.

Changes in customer behaviour, market dynamics and the regulatory environment resulted in insurers closing their old style capital-heavy insurance product lines to new business, replacing them with capital-light investment style products.

Opportunities and outlook

The Group expects to see continued consolidation in the closed life funds market in the future. This will be driven by the significant capital held within closed funds that owners may wish to redeploy, more intrusive regulation leading to pressure on owners and fixed cost pressures as closed funds decline in size over time.

Phoenix continues to seek opportunities to acquire and manage closed life funds. The Group's scale allows the generation of capital efficiencies through the diversification of risks and the wide range of product types that Phoenix currently manages provides a scalable platform for integrating further closed funds. In addition, Phoenix benefits from a variable cost model given the Group's outsourcing model and an approved Solvency II Internal Model which provides greater clarity over capital requirements.

Bulk purchase annuities market

Many Defined Benefit pension schemes are now closed to new members but have liabilities that will continue for many decades into the future. The BPA market offers employers the ability to mitigate the risk of their Defined Benefit pension liabilities whilst allowing the pension scheme trustees the ability to secure and protect their members' benefits.

The size of the BPA market is significant, with in excess of £20 billion of transactions completed in 2018 and a similar volume of transactions expected in 2019.

Opportunities and outlook

Having successfully completed three bulk purchase annuity transactions in 2018, Phoenix has the acquisition experience and proven skills set to compete in this market and is targeting winning BPA liabilities of £0.5 - 1.0 billion per annum.

Standard life

Phoenix will continue to write new business under the Standard Life Brand through the Strategic Partnership with Standard Life Aberdeen. Phoenix is committed to the development of the Standard Life proposition which holds a strong position across the following markets:

Workplace pensions

The introduction of auto-enrolment, which obliges employers to provide and contribute to a workplace scheme for all eligible members, has resulted in strong growth in the workplace pensions market with more than 9.5 million people automatically enrolled through the scheme since 2012. (Source ONS)

Recent trends have included scheme reviews and employers shifting from unbundled to bundled arrangements.

Opportunities and outlook

Continued growth is expected in the workplace pensions market. 280,000 policies joined existing employer schemes in 2018 and the increase in mandatory contribution rates from 5% to 8% from April 2019 will contribute to the growth of this business in the future.

Standard Life has built a strong proposition to compete in this market with 15,000 active schemes serving 1.9 million customers and harnessing the benefit of strong relationships with large employer benefit consultants and employers.

Retail pensions

The retail pensions book is in part built up by the Strategic Partnership with Standard Life Aberdeen selling retail pensions products via independent advisers and has 750,000 customers with 14,000 new drawdown customers in 2018.

Opportunities and outlook

The retail pensions products offering has a strong digital and service offering which is critically important in this marketplace.

By offering a solution for both accumulation and decumulation, customers can keep their assets in the decumulation phase of their life and consolidate pension pots with other providers into one vehicle.

This flexibility enables us to keep our customers in the longer term and retain assets under administration with the Group evidenced by the steady flow of customers moving from our workplace schemes to retail pensions when they change employer.

We support the introduction of the Pensions Dashboard and are engaging with the Department of Workplace Pensions with the rest of the industry. We believe our business will benefit from customers greater visibility of their retirement savings and increased engagement.

Wrap

The Wrap platform is owned and operated by Standard Life Aberdeen offering a range of Standard Life branded products provided by Phoenix to circa 100,000 customers. The Wrap platform offers a high level of functionality which differentiates it from other platforms and the strong and integrated relationship with advisers gives it a market-leading position.

Opportunities and outlook

Whilst the platform market is very crowded and highly competitive, the Wrap platform remains number one in the market based on both advised gross and net volumes and is well placed to grow in the future.

Europe

Our European businesses in Germany and Ireland sell unit linked investment style business and the International bond is sold by Standard Life Aberdeen through the retail market and investment platform.

Our European business is specifically targeted to the more affluent population via broker distribution channels.

Opportunities and outlook

The strong Standard Life brand recognition and a financially strong parent support new business growth.

Sunlife

Over 50s market

SunLife specialises in the distribution of insurance products to the over 50s. Phoenix underwrites and administers the life and pensions products within their range including life cover, equity release and funeral plans.

Opportunities and outlook

The SunLife brand holds a dominant position in the over 50s market with a 57.8% market share of all whole of life guaranteed acceptance plans bought directly. (Source: ABI statistics issued in November 2018 for 12 month period to 30 September 2018 based on new Phoenix Life policy sales trading as SunLife).

We will continue to invest in the SunLife brand and its service offering which was awarded the 2018 Feefo Gold Trusted Service Provider for the third year running.

UK MARKET OPPORTUNITIES BY OWNER

UK Life companies

58%

Foreign owned

30%

Bank owned

12%

UK MARKET

OPPORTUNITIES BY PRODUCT TYPE

With-profit

 37%

Unit linked

40%

Non-profit

23%

BUSINESS MODEL

HOW WE CREATE VALUE

OUR STRATEGIC PRIORITIES HELP ENHANCE THE VALUE WE CREATE THROUGH OUR BUSINESS MODEL.

01

IMPROVE CUSTOMER OUTCOMES

Improving customer outcomes is central to our vision of being Europe's Leading Life Consolidator, and to inspire confidence in the future.

Read more on P18

02

DRIVE VALUE

In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash flow.

Read more on P22

03

MANAGE CAPITAL

We continue to focus on the effective management of our risks and the efficient allocation of capital against those risks.

Read more on P24

04

ENGAGE PEOPLE

Our people are at the heart of our business and key to the successful growth of Phoenix Group.

Read more on P26

WE ARE SET APART BY OUR STRENGTHS WHICH UNDERPIN OUR BUSINESS MODEL

SCALE OF OUR PLATFORM

Largest Life and Pensions Consolidator in Europe

SECURITY

Strong balance sheet which generates long term cash flows and provides security for all stakeholders

SPECIALIST OPERATING MODEL

Specialist operating model enabling us to efficiently manage and integrate heritage books

Read more on P8

SERVICE

Quality service to our customers and their intermediaries is critical to our strategy

Read more from P18 to P21

Skills

Talented and experienced team. We will continue to invest in this expertise

Read more on P26

SIGNIFICANT GROWTH

A wealth of acquisitions opportunities across the UK and Europe and organic growth through new business is available to us

Read more on P12

OUR CASH GENERATION HELPS US REALISE OPPORTUNITIES FOR GROWTH

IN-FORCE BOOK CASH EMERGENCE

Capital requirements of operating life companies decline as policies mature, releasing capital in the form of cash

MANAGEMENT ACTIONS

Management track record of delivering incremental value

New BUSINESS

Capital-light new business under the Strategic Partnership with Standard Life Aberdeen

Vesting annuities

Mergers and acquisitions

Value accretive acquisitions generate increased cash flows and synergy opportunities through scale advantages

BULK PURCHASE ANNUITY TRANSACTIONS

The bulk purchase annuity market offers a complementary source of assets and growth

Resulting outcomes delivered are positive for all stakeholders

CUSTOMERS

Optimised customer outcomes

Read more on P48

93%

CUSTOMER SATISFACTION

REM

SHAREHOLDERS

Shareholder value created and stable and sustainable dividends delivered

Read more on P58

£664m

CASH GENERATION

APM

3.5%

INCREASE IN 2018 FINAL DIVIDEND

Colleagues

Challenged, motivated and rewarded colleagues

Read more on P51

COMMUNITY & ENVIRONMENT

Support for local communities and charity partners and reduced environmental impact

Read more on P54

£770k

DONATED TO MIDLANDS AND LONDON AIR AMBULANCE CHARITY PARTNERS

Read more about our cash generation on P16

OUR CASH GENERATION PROCESS

Any assets which the life companies hold in excess of overall capital buffers required is known as Free Surplus

Opening free surplus

Surplus generated in life companies

Reduction in capital requirements

Management actions

Cash remitted to holding companies

Closing free surplus

Opening cash at holding company level

Cash remitted from the life companies

Head office costs

Pensions

Debt interest and repayments

Dividends

Remaining cash at holding company level

Cash at the holding company level provides resources and resilience for the Group

Opening Free Surplus

What is the opening free surplus?

Life Company Own Funds

Life companies hold capital in accordance with Solvency II regulations, providing appropriate security for policyholders. This capital is known as Solvency II Own Funds.

Less Solvency Capital Requirement

The level of regulatory capital required is known as the Solvency Capital Requirement.

Less Capital Policy

The life companies hold additional internal capital buffers above the regulatory capital requirement for prudence.

sources of life company cash generation

How is Free Surplus generated?

Margins earned

Life companies earn margins on different types of life and pensions products increasing Own Funds.

Reduced capital requirements

As our heritage business runs off, the Solvency Capital Requirements reduce.

Management actions

These can either increase Own Funds or reduce capital requirements.

IMPACT OF NEW BUSINESS?

Capital light open business

New business written across our open product range is capital light.

uses of holding company cash generation

What is the cash remitted from the life companies used for?

Head office costs

Including salaries and other administration costs.

Pensions contributions

To Group's employee Defined Benefit schemes.

Debt interest and repayments

On outstanding Group shareholder debt.

Dividends

The Group maintains a stable and sustainable dividend.

Uses of remaining cash - GROWTH OPPORTUNITIES

What is the remaining cash used for?

Mergers and acquisitions

Transactions must be value accretive and cash flow generative and need to support the dividend level.

Bulk purchase annuity transactions

Generate increased cash flows over the longer term and are value accretive.

OUR STRATEGY AND KPIs

WE HAVE FOUR AREAS OF STRATEGIC FOCUS. OUR INITIATIVES AND KEY PERFORMANCE INDICATORS DEMONSTRATE HOW WE HAVE DELIVERED AGAINST THESE STRATEGIC AREAS.

01

Improve customer outcomes Phoenix Life

Improving customer outcomes is central to our vision of being Europe's Leading Life Consolidator.

We have seven key areas of focus related to our customer offering:

·  Product Offering - Offering products based on customer needs using best solutions and value for money, from in-house or through external sourcing.

·  Financial Security - Providing security to our customers including continuing to honour all policy guarantees.

·  Improving Value and Effective With Profit fund run-off - Delivering improved value to customers and effectively managing With-Profit fund run-off.

·  Effective Service Delivery - Delivering a fair, effective and value for money service to customers in a cost effective manner and having appropriate processes for identifying potential customer detriment.

·  Clear and Effective Communications - Providing customers with clear, accurate and unbiased information and access to advice and guidance to support them in making informed choices.

·  Product Outcomes - Ensuring that Phoenix product terms continue to deliver appropriate outcomes for customers and Phoenix.

·  Customer Journey - Delivery of fair outcomes, appropriate quality and improvements in the customer journey

KEY INITIATIVES AND PROGRESS IN 2018 - PHOENIX LIFE

·  Customers can now digitally access an annuity shopping around service which can shape and save their annuity quotes and options and provide marketplace comparisons. A full Customer Dashboard has been delivered and allows some customers to access their full policy details, view online documents and self-serve.

·  In August we announced a cap on ongoing charges of our non-workplace pension contracts at 1.5% for funds in excess of £5,000 and at 3% for smaller pension pots. All exit charges will be removed on pension pots of less than £5,000. This ensures that our pension contracts offer good value for money and there is no perceived barrier to exit for customers with small pension pots wishing to consolidate their savings.

·  We have refined the requirements under our death claims payment process for benefits valued at £10,000 or less, ensuring a more simplified customer journey.

·  Our service offering has been aligned across Phoenix Wealth and Abbey Life, ensuring that all customers receive the same fair service.

·  Good progress has been made to improve our key point and regular communications, ensuring letters are engaging, clear and provide all required information for customer.

·  Our performance on complaint handling, as measured by the independent complaints adjudicator, the Financial Ombudsman Service ('FOS'), once again shows our commitment and focus on our complaint handling. For FOS decisions during this reporting period, the overturn rate of 17% is significantly below the industry average rate of 30%.1

·  A positive customer satisfaction score based on the results of the satisfaction survey managed by Ipsos MORI (an external research firm) has been received. Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions asked (with a rating of 4 or 5 regarded as satisfied) and 93% of all questions scored a rating of 4 or above.

Read more about customer engagement activities undertaken during the year on P48

Note:

1  The most recent published industry average overturn rate across the industry in the Life and Pensions and Decumulation' category, in which the majority of our business sits was 22%.

 PRIORITIES FOR 2019

·  Progress work on our Digital Operating Model for Customer Services, which will give full digital self-serve capability and increase the ability of customers to interact with us digitally. This will deliver straight through customer journeys for Pension Transfers, Policy Enquiries, Life Surrenders (Quotes and Payments) and Maturities and further strengthens our commitment to a continued positive customer experience. We will also be extending our digital operating model to IFAs allowing them to engage and interact through our on-line channels.

·  Complete the implementation of our charge reductions on non-workplace pensions contracts.

HOW WE MEASURE DELIVERY - PHOENIX LIFE

CUSTOMER SATISFACTION SCORE1
(%)

2015

91.1

2016

91.2

2017

92.4

2018

93.0

Why is it important?

This is an externally calculated measure of how satisfied customers are with Phoenix's servicing proposition.

Analysis

The Group achieved a satisfaction score of 93% reflecting our commitment to ensuring customers are satisfied with our products and services.

Target

To maintain a customer satisfaction score of 90%%.

FINANCIAL OMBUDSMAN SERVICE ('FOS') OVERTURN RATE
(%)

2015

18

2016

18

2017

17

2018

17

Why is it important?

This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.

Analysis

The FOS overturn rate of 17% is significantly below the industry average of 34% and the 'Decumulation, Life and Pensions' category average of 27%.

Target

To maintain a FOS overturn target of less than the industry average of 30%.

SPEED OF PENSION TRANSFER PAYOUTS - ORIGO (DAYS)2

2015

10.97

2016

11.31

2017

11.03

2018

10.73

Why is it important?

This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against our peers.

Analysis

The Group's pension transfer times are better than the industry target.

Target

12 days in line with the industry stated target for Origo Pension Transfers.

93%

2017: 92%

REM

17.0%

2017: 17.0%

REM

11.00 days

2017: 11.03 days

REM

Notes:

1 The customer satisfaction score relates to Phoenix only.

2  Origo Timescales are Phoenix, Phoenix Wealth and Abbey - the overall timescale has been applied based on the way that timescales are calculated for each individual entity. These will be aligned from 2018.

01

IMPROVE CUSTOMER OUTCOMES STANDARD LIFE

KEY INITIATIVES AND PROGRESS IN 2018 - STANDARD LIFE

·  Significant changes have been made to our online, app and telephony services in 2018 including extending our opening hours, implementing a new voice recognition system and extending our secure messaging facility which enables contact with us out of hours. We have implemented a new online registration process, making it easier to get registered, fingerprint, pin and facial recognition access to our mobile app and improvements to the investment switching journey online for trust schemes.

·  Since Auto enrolment we have supported 11,000 schemes into a qualifying workplace pension scheme with 1.7 million new joiners auto enrolled into them by employers. We are continuing to enhance the administration experience we offer via our Workplace Hub platform.

·  In 2018, we had 14,000 policies moving into drawdown with the majority using our digital platform, followed by our Telephony Guidance service. Of all cases processed via our retirement application we anticipate that we were able to process 60% 'straight-through'.

·  Furthermore, with more than 3 million logins last year, our 24/7 mobile app is now the easiest way for our customers to interact with us when they want, time and time again.

·  For customers in our non-advised Active Money Personal Pension drawdown plan, we have developed an online retirement review to help them assess if they are still on track and in the right investment based on their objectives. The timing of our pre-retirement communications has also been changed as feedback has shown that people start to think about major decisions in the run-up to milestone birthdays. Our communications now trigger at ages 49, 54, 59 and 64.

·  Face-to-face retirement roadshows were run throughout 2018 to help our customers plan for their retirement. This year we have hosted 44 events in 19 locations, attended by around 2,000 customers and their guests. Following the success of the nationwide retirement roadshows we have introduced a digital option for retirement webinars.

·  Our vulnerable customer policy and programme remains a key focus. An extensive training programme has taken place over 2018. This has been done through face-to-face training and via E-learning modules and 100% of our colleagues who have contact with customers have completed their training by the end of 2018. This training programme won 'Excellence in skills in Learning and Development' at the 2018 Contact Centre Association ('CCA') Awards.

·  We continue to look for ways to improve the administration experience we offer financial advisers. In 2018 we enhanced our digital platform Adviser zone by delivering online portfolio analyser capabilities for an enhanced client experience and continued to provide live, online client valuations and contract enquiries through 15 of the top back office providers.

PRIORITIES FOR 2019

·  Focus on improving the propositions we offer, the servicing and administration capabilities available and the overall experience we deliver to our clients, members and customers.

·  Enhancing the proposition available for our workplace clients, listening and acting on the feedback they have given us on what is important to them. We will also be re-designing our Voice of Customer programme, to capture feedback more efficiently and demonstrate how we act on it.

·  Helping workplace clients through auto enrolment phasing increases that take effect in April 2019.

·  Investing in digital capability for financial advisers, as well as introducing save and replay functionality on our digital retirement journey. We will also be looking to make improvements to the investment switching journey online, for a majority of schemes.

HOW WE MEASURE DELIVERY - STANDARD LIFE Assurance

NET EASY CUSTOMER EFFORT SCORE (%)

72%

Why is it important?

This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.

Analysis

The FOS overturn rate of 17% is significantly below the industry average of 34% and the 'Decumulation, Life and Pensions' category average of 27%.

FINANCIAL OMBUDSMAN SERVICE ('FOS') OVERTURN RATE (%)

17%

Why is it important?

This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.

Analysis

The FOS overturn rate of 17% is significantly below the industry average of 34% and the 'Decumulation, Life and Pensions' category average of 27%.

SPEED OF PENSION TRANSFER PAYOUTS - ORIGO (DAYS)1

11 days

Why is it important?

This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against our peers.

Analysis

The pension transfer times are better than the industry target of 12 days.

Note:

1 The acquisition of the Standard Life businesses completed on 31 August 2018 but this measure has been calculated for the full year 2018

02

DRIVE VALUE

In order to drive value, the Group looks to identify organic and inorganic growth opportunities and deliver management actions which increase and accelerate cash flows.

The closed life funds within our Heritage business provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and repayment of outstanding debt.

Our Open business provides the opportunity to grow organically through the matching of products to new and existing customers as part of our Strategic Partnership with Standard Life Aberdeen and under the Group's SunLife brand. Such growth brings additional scale to our business and dampens the run-off of our Heritage books.

Additional value can be generated from acquisitions of life and pension books of business and further investment in the bulk purchase annuity market.

Furthermore, there are significant opportunities to increase and accelerate cash flows through the delivery of management actions across four key areas: operational management, risk management, restructuring and effective partnerships.

KEY INITIATIVES AND PROGRESS IN 2018

·  The Group delivered £664 million in cash generation in the year. With total cash generation in 2017 and 2018 of £1.3 billion, the Group exceeded the upper end of its £1.0 billion to £1.2 billion target range. 

·  The acquisition of Standard Life Assurance and Strategic Partnership with Standard Life Aberdeen completed in August adding significant scale and supporting future cash generation. The Group expects to deliver cost synergies of £75 million per annum, to be delivered from a combined cost base of £600 million.

·  The Open and European businesses delivered new business contribution of £154 million (net of tax on a pro forma basis assuming the acquisition of Standard Life Assurance took place on 1 January 2018). This measure provides a proxy for the expected future cash generation arising from the new business written in the year.

·  £409 million of management actions were delivered in the year that increased Solvency II Own Funds. This includes anticipated cost savings arising from the planned move to a single, digitally enhanced outsourcer platform, together with the impact of strategic asset allocation actions such as investment in illiquid assets which offer improved matching adjustment benefits in the annuity portfolios. A total of £1.4 billion was invested in illiquid assets during the year, including equity release mortgage portfolios, commercial real estate and private placements. 

·  The integration of the AXA Wealth and Abbey Life businesses completed ahead of plan delivering cost synergy benefits of £27 million per annum and cumulative cash generation of £986 million.

·  The Group successfully entered the bulk purchase annuity market with three transactions completed in 2018 and total contracted liabilities of £800 million. The Group has invested c. £100 million of capital to facilitate these transactions, reflecting the day 1 capital strain arising from the assets received. The bulk purchase annuity investments increase the Group's expected longer term cash generation by c. £300 million, to be delivered over the lifetime of the policies.

PRIORITIES FOR 2019

·  Deliver Phase 1 of the Standard Life acquisition transition programme and finalise the end state operating model for the HR, Legal and Risk functions.

·  Commence Phase 2 and 3 of the Standard Life acquisition transition programme related to the operating model for the Finance and Actuarial, Customer and IT functions.

·  Implement further management actions including progressing activity to begin applying the Group's strategic asset allocation to the Standard Life Assurance annuity book.

·  Seek further investment opportunities in the bulk purchase annuity market.

·  Seek further acquisition opportunities.

HOW WE MEASURE DELIVERY

OPERATING COMPANIES' CASH GENERATION
m)

2015

225

2016

486

2017

653

2018

664

Why it is important?

Operating companies cash generation represents cash remitted by the Group's operating companies to the holding companies. Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends.

Analysis

Cash remitted reflects the generation of Free Surplus within the life companies and the benefit of management actions implemented in the period. Cash generation in 2018 was £664 million.

Target

To generate cash flows of between £600 to £700 million in 2019 and £3.8 billion of cash between 2019 and 2023.

OPERATING PROFIT
m)

2015

324

2016

351

2017

368

2018

708

Why it is important?

Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic volatility.

A reconciliation of operating profit of £708 million to the IFRS profit after tax of £410 million (2017: £(27) million) is included in the Business Review section.

Analysis

Operating profit has increased by £340 million compared to prior year, principally reflecting the impact of including the four month contribution of Standard Life Assurance post completion of the acquisition together with the net positive impact of updates to actuarial assumptions.

FINAL DIVIDEND PER SHARE
(PENCE)1

 

2015

2016

2017

2018

Final dividend per share

20.4

21.5

22.6

23.4

Interim dividend

20.4

20.4

22.6

22.6

 

40.8

41.9

45.2

46.0

Why it is important?

The Group's dividend per share helps measure how the Group delivers value to shareholders in accordance with its stable and sustainable dividend policy.

Analysis

The final dividend per share of 23.4p is a 3.5% increase on the 2017 final dividend.

1  Historic dividends per share rebased to take into account the bonus element of the rights issue completed in November 2016 and the rights issue completed in July 2018.

£664m

2017: £653m

APM

REM

Read more about cash generation on P29
Read more about the link to our executive remuneration on P76

£708m

2017: £368m

APM

Read more about operating profit on P35

23.4p

FINAL DIVIDEND PER SHARE

03

MANAGE CAPITAL

We continue to focus on the effective management of our risks and the efficient allocation of capital against those risks.

The Group aims to optimise its capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators.

To ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed, we execute our hedging strategy.

In addition, regular re-balancing of asset and liability positions is required to ensure that only those assets which deliver appropriate risk-adjusted returns are held within life funds, taking into account any policyholder guarantees.

KEY INITIATIVES AND PROGRESS IN 2018

·  Receipt of regulatory approval to incorporate the Abbey Life business into the Group's Internal Model in March and the subsequent Part VII transfer of that business into Phoenix Life Limited in December.

·  The Group delivered £161 million of management actions that decreased SCR in the year, including the impacts of the Abbey Life actions detailed above and other activities such as interest rate hedging.

·  Capital synergies associated with the acquisition of the Standard Life Assurance businesses benefited the PGH Solvency II surplus by £0.5 billion primarily as a result of implementing Phoenix's equity and currency hedging strategy.

·  Issuance of the capital qualifying £500 million Tier 1 Notes in April and the €500 million Tier 2 bond in September 2018 facilitated the funding strategy for the acquisition of the Standard Life Assurance businesses and provided additional financial flexibility to the Group.

·  In September, following completion of the acquisition, Fitch assigned Standard Life Assurance Limited an Insurer Financial Strength rating of A+ with a 'stable' outlook. It also affirmed its A+ rating for the other principal insurance subsidiaries of the Group with 'stable' outlooks.

·  The on-shoring of the Group completed at the end of the year. PGH became UK resident for tax purposes in January 2018 and a new UK - registered holding company, Phoenix Group Holdings plc, was put in place for the Group in December 2018.

Read more about the Solvency II surplus and Shareholder Capital Coverage Ratio on P32

PRIORITIES FOR 2019

·  Implement further management actions to enhance the Group's capital position.

·  Progress activity to begin harmonisation of the Group's capital framework towards a single Group Internal Model.

HOW WE MEASURE DELIVERY

SOLVENCY II SURPLUS
bn)

2016 Pro forma1

1.1

2017

1.8

2017 Pro forma2

2.5

2018

3.2

Why it is important?

The Solvency II surplus is the regulatory assessment of capital adequacy at PGH plc level.

It is the excess of Eligible Own Funds over the Solvency Capital Requirement.

Analysis

The Group's Solvency II surplus of £3.2 billion has increased from a pro forma position of £2.5 billion2 driven by capital synergies from the acquisition of the Standard Life Assurance businesses together with management actions and the issuance of additional subordinated debt compared to that assumed in the pro forma. The increase was partly offset by financing costs and dividend payments, including accrual of the 2018 final dividend.

SHAREHOLDER CAPITAL
COVERAGE RATIO (%)

2016 Pro forma1

139

2017

164

2017 Pro forma2

147

2018

167

Why it is important?

The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders' Eligible Own Funds cover the Solvency Capital Requirements.

It is defined as the ratio of the Group Own Funds to Group SCR, after adjusting to exclude amounts relating to unsupported with - profit funds and PGL Pension Scheme.

Analysis

A coverage ratio of 167% reflects the increase in the Solvency II surplus in the period and represents a resilient capital position.

1 The position at 31 December 2016 included pro forma adjustments to illustrate the impacts of the issuance in January 2017 of the £300 million Solvency II qualifying Tier 3 bond and the receipt of the PRA's approval in March 2017 to include the acquired AXA Wealth businesses within the Group's Internal Model.

2 Pro forma assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.

£3.2bn

2017: £2.5bn
(PRO FORMA ENLARGED GROUP)2

167%

2017: 147%
(PROFORMA ENLARGED GROUP)2
APM

04

ENGAGE PEOPLE

Our focus on engagement and colleague empowerment creates a rich and diverse working environment, reflected in our continued status as one of the UK's Top Employers.

Phoenix Group's ability to attract, retain and motivate outstanding talent was, for the eighth year in succession, formally recognised in 2018 through our accreditation as one of the UK's Top Employers. We are proud to be recognised as a responsible, sustainable and inclusive employer, who values and rewards the contribution our colleagues make to our business.

KEY INITIATIVES AND PROGRESS IN 2018

Learning and Development

·  In partnership with Moving Ahead, we launched the Phoenix Group internal mentoring programme. We are fully committed to providing effective support for our colleagues personal and professional development and have 100 pairs currently working together across the Group.

·  A new online performance management system was launched increasing the efficiency of the performance management process at Phoenix.

Our Values

·  The Big Conversation was a significant listening exercise that was undertaken within Phoenix Group and Phoenix Life at the start of the year to raise the level of dialogue around the Group's values, and provided greater clarity around associated behaviours. The outcomes were shared with colleagues, and provided a clear framework for how individuals are recognised, developed and recruited.

Cultural Survey

·  In the absence of an all-staff employee engagement survey, Phoenix issued a cultural survey to colleagues across the Group in November. This insight will help the Group shape its values and understand more about what is required to create a high-performing organisation following our acquisition of the Standard Life Assurance businesses.

Volunteering and Charity

·  58% of colleagues participated in the 2018 volunteering programme contributing 3,547 hours.

·  Now into its fifth year of the six-year partnership with Midlands Air Ambulance Charity and London's Air Ambulance, the Group has donated in excess of £770,000 between the two charities since 2014.

Wellbeing

·  Corporate responsibility continues to play a central role in the colleague experience at Phoenix. The three strands of physical, mental and financial wellbeing continue to underpin our colleague and community initiatives, which now extend to the Standard Life Assurance businesses.

·  We continued to utilise our Corporate Responsibility agenda to provide opportunities for skills development and team building.

Diversity and Inclusion

·  The Group remains committed towards creating an inclusive and attractive environment for all potential employees.

·  The Group values the power of its employee voice and through the acquisition of Standard Life Assurance now has further networks in operation across the Enlarged Group. Alongside the combination of the Phoenix and Standard Life Assurance networks, we continue to adopt a 'best of both' approach to fusing colleague groups across the enlarged organisation.

·  Phoenix is a signatory to the Women in Finance ('WIF') Charter and continues to strive for an inclusive culture which enables all of our colleagues to reach their full potential.

·  In line with the WIF Charter Targets previously set, which were due for completion by the end of 2018, the group currently has women in 20% of the top 100 roles (target 30%), 26% of the Group's green/amber successors are female (target 40%) and the Group-wide mean gender pay gap is 23.3% (target 22%). Targets set for completion in 2018 were impacted by changes in senior management through acquisitions, structural changes, resignation and retirement; and these are now carried forward to 2021.

·  Phoenix statutory pay figures are published on the Group's website. The gender pay figure for the WIF Charter target is based on an internal calculation looking at base salary only; it is not based on the statutory gender pay gap calculations.

·  Gender Pay statistics are calculated based on data gathered on 'Full Pay Relevant Employees' in the payroll period covering 5 April 2018. Of the employing entities within the Group, only Pearl Group Management Services Limited ('PGMS') has the required 250+ employees and so it is PGMS employees who are included in the regulatory reporting for 2018.

Reward

·  The Group continues to attract and retain talented staff by offering a comprehensive range of benefits and development opportunities.

·  Participation figures for the Phoenix Group flexible benefits scheme have increased to 95%.

·  In 2018, private medical insurance was made available to all staff and their partner's regardless of status within the organisation.

Gender Pay and Bonus Gap (PGMS only)

Quartile

Female

Male

Lower Quartile

55%

45%

Lower Middle Quartile

44%

56%

Upper Middle Quartile

38%

62%

Upper Quartile

25%

75%

 

 

Mean

Medium

Pay Gap

26%

28%

Bonus Gap

53%

34%

 

 

Female

Male

Proportion of employees receiving a bonus

91%

92%

PRIORITIES FOR 2019

·  Remain an Employer of Choice, offering rewarding careers and opportunities across all sites within Phoenix.

·  Provide a common incentive plan for all colleagues within the Enlarged Group, ensuring consistency of corporate goals and individual performance management.

·  Enter into two further Corporate Charity Partnerships (Scotland's Charity Air Ambulance and Hampshire and Isle of Wight Air Ambulance), helping to unite the Enlarged Group by sharing common corporate charities.

·  Expand the Diversity and Inclusion programme across the Enlarged Group, providing a wide range of development opportunities and embedding changes to existing practices to deliver a diverse, engaged and inclusive workforce.

·  Engage colleagues in the creation of a combined set of values for the Group, building on previous work conducted at Standard Life Assurance and Phoenix.

·  Creating one single platform for Talent Acquisition for the combined Group.

·  Maintain support of our communities across the Enlarged Group through employee volunteering, fund raising and engagement.

HOW WE MEASURE DELIVERY

EMPLOYEE ENGAGEMENT INDEX (%)

2015

78

2016

81

2017

80

2018

n/a

Due to the Standard Life acquisition, no engagement survey was commissioned by the Group in 2018. There is an anticipated change to our engagement survey provider for 2019, to enable one engagement provision across the combined Group.

Why it is important?

We aim to ensure that employees understand the purpose of their role and feel that their contribution is valued. We need to understand how well we are performing against these aims.

2019 Target

To maintain an employee engagement index above 70%.

 

2018

2017

Total workforce1

4,088

1,249

Male

2,097

694

Female

1,991

555

Directors (includes Non-Executive Directors)

12

11

Male

8

7

Female

4

4

Executive Committee

9

8

Male

8

7

Female

1

1

Workforce that is of Black, Asian or Minority Ethnic background2

141

107

Notes:

1  The 2018 figure of 4,088 does not include workforce based in Germany/Austria.

2  The 2018 figure of 141 does not include workforce from the acquired Standard Life Assurance businesses or SunLife. Data relates to Phoenix Corporate and Phoenix Life companies only.

Read more about employee engagement activities undertaken during the year on P51

BUSINESS REVIEW

"2018 was another year of excellent progress WITH THE GROUP achieving ALL OF ITS FINANCIAL TARGETS SET FOR THE YEAR."

JAMES MCCONVILLE

GROUP FINANCE DIRECTOR and Group Director, Scotland

Cash generation in excess of target, enhanced scale and a resilient capital position

I am delighted to report that Phoenix has delivered a year of strong performance, achieving its financial targets and completing the transformational acquisition of the Standard Life Assurance businesses.

Cash generation remains our key reporting metric. The integration of the AXA Wealth and Abbey Life businesses were completed ahead of plan and this has supported the Group's cash generation of £664 million in the year. With total cash generation in 2017 and 2018 of £1.3 billion, the Group has exceeded the upper end of its £1.0 - £1.2 billion target range for that period.

The Group's Solvency II capital surplus position of £3.2 billion (2017: £2.5 billion pro forma1) has been positively impacted by the delivery of capital synergies following the acquisition of the Standard Life Assurance businesses, together with management actions delivered in the year and the issuance of capital qualifying subordinated debt. Implementation of the Group's hedging programme to the acquired business has ensured the surplus remains resilient to equity movements.

Our strong financial position has been recognised by Fitch Ratings who assigned Standard Life Assurance Limited an Insurer Financial Strength rating of A+ with a 'stable' outlook in September and reaffirmed its A+ rating for the other insurance subsidiaries of the Group.

The Group generated an IFRS profit after tax of £410 million for the year (2017: £27 million loss), reflecting the contribution of the Standard Life Assurance businesses for the four month period post completion of the acquisition and the positive impact of updates made to actuarial assumptions in the period, notably the continued slowdown of mortality improvements. As expected, the IFRS results continue to be impacted by investment variances arising from the Group's hedging programme, which is calibrated to protect the Group's Solvency II surplus. Declining equity markets in the second half of 2018 generated gains on these hedging instruments that have benefited the Group's IFRS results this year.

Following the acquisition of the Standard Life Assurance businesses, the Group now monitors additional performance metrics to reflect the Group's Open business capabilities. Assets under Administration ('AUA') provides a measure of the Group's future earnings capabilities and its success in attracting inflows from new business. AUA as at 31 December 2018 was £226 billion (2017: £240 billion pro forma1), with the reduction reflecting adverse equity movements in the year, together with net outflows on the Group's UK Heritage business. Net flows on the UK Open and European businesses were positive at £3.9 billion.

New business contribution reflects the increase in Solvency II shareholder Own Funds as a result of new business written by the Group's UK Open and European businesses. The measure excludes any risk margin and restrictions recognised under Solvency II for contract boundaries and is considered a prudent proxy for future cash generation from new business written. Assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017, the Group delivered a new business contribution of £154 million (net of tax).

Phoenix has set two new cash targets; a long-term cash generation target of £3.8 billion for the 5-year period 2019 to 2023 and a short term target of £600 to £700 million for 2019. The Group looks forward to the future from a position of financial strength.

Note: Presentation of financial information

Following the acquisition of the Standard Life Assurance businesses, the Group now has three main business segments: UK Heritage, UK Open and Europe. Within the Group's IFRS results, operating profit for each business segment is now reported.

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

1 Pro forma assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.

ALTERNATIVE PERFORMANCE MEASURES

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

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

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

As such, the key performance indicators for the Group mainly focus on cash generation and capital strength. Further information on the Group's APMs can be found on page 230, including definitions, why the measure is used and if applicable, how the APM can be reconciled to the nearest GAAP measure.

Cash Generation

Operating companies' cash generation represents cash remitted by the Group's operating companies to the holding companies.

Please see the (APM) section on page 230 for further details of this measure.

Maintaining strong cash flow delivery underpins debt servicing and repayments as well as shareholder dividends.

The cash flow analysis that follows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of those cash receipts.

Cash receipts

Cash remitted by the operating companies was £664 million (2017: £653 million).

Recurring cash outflows

The operating expenses of £32 million (2017: £36 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.

Pension scheme contributions of £49 million (2017: £92 million) are made on a monthly basis and include total contributions of £40 million into the Pearl Group Scheme and £9 million into the Abbey Life Scheme, including £4 million paid into Charged Accounts and held in escrow.

The decrease in total contributions compared to prior year reflects the lump sum payment of £25 million paid as part of the transfer of the Abbey Life Scheme to the Group in 2017 and £10 million paid into the Pearl Group Scheme in respect of the final quarter of 2016 as part of the move from annual to monthly funding. In addition, no further contributions are expected to be paid into the PGL Staff Pension Scheme under the existing funding agreement (2017: £10 million).

Debt interest of £88 million (2017: £60 million) principally comprise coupon payments on the Tier 1 Notes issued in April and the Group's subordinated and senior bond instruments. The Group's £900 million unsecured revolving credit facility and £600 million acquisition facility are undrawn as at 31 December 2018. The increase compared to the prior year reflects the debt issued in 2018 to finance the acquisition of the Standard Life Assurance businesses.

Non-recurring net cash outflows

Non-recurring net cash outflows of £216 million include £22 million of option premiums and £143 million of cash paid to close out derivative instruments entered into by the holding companies to hedge the Group's exposure to equity and currency risk arising from the Group's acquisition of the Standard Life Assurance businesses. Standard Life Assurance Limited has subsequently applied the Group's hedging strategy and the derivative instruments are now held within this entity.

Non recurring cashflows also include a favourable collateral movement of £27 million on the Group's other hedging positions relating to the Group's debt. The remainder of the balance includes £43 million of expenses associated with the acquisition of the Standard Life Assurance businesses and £35 million of net other corporate costs, including integration costs.

Debt repayments and shareholder dividend

External debt repayments of £1,053 million in 2017 include the full settlement of the £850 million revolving credit facility balance outstanding at 31 December 2016 and repayment of £178 million of the £300 million senior bonds which were redeemed at a premium of £25 million.

The shareholder dividend of £262 million represents the payment of £99 million in May for the 2017 final dividend and the payment of the 2018 interim dividend of £163 million in September. The final 2018 dividend per share proposed is 23.4p, which is a 3.5% increase on the 2017 final dividend.

Equity raise (net of fees)

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

Debt issuance (net of fees)

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

Cost of acquisitions

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

Support of BPA activity

£101 million of funding has been provided to the life companies to support the bulk purchase annuity new business (based on the assets received on day 1).

Target cash flows

The Group has previously announced a five-year cumulative target cash flow for 2016 to 2020 of £2.8 billion, of which £1.0 billion to £1.2 billion was expected to be achieved in 2017 and 2018. With £664 million of cash generation in 2018 taking total cash generation for 2017 to 2018 to £1.3 billion, the Group has exceeded its £1.0 to £1.2 billion target range for 2017 and 2018.

A new long-term £3.8 billion cash generation target has been set by the Group for the 5-year period 2019 to 2023. The resilience of the cash generation target is demonstrated by the illustrative stress testing in the table below. In addition the Group has set a new short-term target of £600 to £700 million for 2019 which is net of expected Brexit costs of £250 million.

Expected cash flows after 2024

There is an expected £8.2 billion of cash to emerge after 2024. This assumes no management actions after 2023 and no additional value from future new business from the Group's Open business.

 

Year ended
31 December 2018
£m

Year ended
31 December 2017
£m

Cash and cash equivalents at 1 January

535

570

Operating companies' cash generation:

 

 

Cash receipts from Phoenix Life

664

653

Total cash receipts1

664

653

Uses of cash:

 

 

Operating expenses

(32)

(36)

Pension scheme contributions

(49)

(92)

Debt interest

(88)

(60)

Total recurring cash outflows

(169)

(188)

Non-recurring cash outflows

(216)

(84)

Uses of cash before debt repayments and shareholder dividend

(385)

(272)

Debt repayments

-

(1,053)

Shareholder dividend

(262)

(193)

Total uses of cash

(647)

(1,518)

Equity raise (net of fees)

934

-

Debt issuance (net of fees)

932

830

Cost of acquisitions

(1,971)

-

Support of BPA activity

(101)

-

Cash and cash equivalents at 31 December

346

535

£664m

Operating companies' cash generation
APM
REM

Notes:

1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £39 million (2017: £20 million).

All amounts in the Business Review section marked with an 'APM' are alternative performance measures. See 'Alternative Performance Measures' section on page 230 for further details of these measures.

All amounts in the Business Review section marked with an 'REM' are KPIs linked to executive remuneration. See 'Directors Remuneration Report' on page 76 for further details of executive remuneration including the financial and non-financial performance measures on which is it based.

Illustrative stress testing1

1 Jan 2019 to

31 Dec 2023

£bn

Base case five-year target

3.8

Following a 20% fall in equity markets

3.8

Following a 15% fall in property values

3.7

Following a 60bps interest rates rise2

3.9

Following a 80bps interest rates fall2

3.7

Following credit spread widening3

3.6

Following 6% decrease in annuitant mortality rates4

3.3

Following a 10% increase in assurance mortality rates

3.7

Following a 10% change in lapse rates5

3.4

Notes:

1  Assumes stress occurs on 1 January 2019.

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

3  Credit stress equivalent to an average 120bps spread widening across ratings, 10% of which is due to defaults/downgrades.

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

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

ASSETS UNDER ADMINISTRATION AND NEW BUSINESS

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

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

A reconciliation from the Group's IFRS consolidated statement of financial position to the Group's AUA is provided on page 222.

Please see the Alternative Performance Measure ('APM') section on page 230 for further details of this measure.

Opening proforma AUA

The analysis that follows includes a Group AUA opening figure of £239.8 billion on a pro forma basis (assuming the acquisition of Standard Life Assurance completed on 31 December 2017). Movements in the year therefore include those of the acquired Standard Life Assurance businesses for the full year rather than the four month period post completion.

The decrease in Group AUA in the year from £239.8 billion to £226.3 billion was driven by adverse market movements, notably falls in global equity markets and the run-off of the Group's UK Heritage business; partly offset by net inflows from the Group's UK Open and European businesses.

UK Heritage net flows

UK Heritage net outflows of £(7.1) billion comprise total premiums received in the year from inforce contracts, net of policyholder outflows on claims such as maturities, surrenders and annuities in payment. In addition, UK Heritage net flows include £1.5 billion of new business inflows arising from vesting annuities and the three bulk purchase annuity transactions completed in the year.

UK Open flows

The UK Open segment experienced gross inflows of £10.7 billion during 2018, of which £7.4 billion was received in respect of new contracts transacted in the year.

Outflows for the UK Open business were £7.0 billion, resulting in net inflows of £3.7 billion, reflecting AUA growth in the Group's Wrap and Workplace products.

New inflows of £3.7 billion equates to 4% of the opening AUA for the UK Open business.

Europe net flows

The European business contributed a small positive net inflow of £0.2 billion to the Group's AUA.

Other movements including markets

AUA reduced by £10.3 billion as a result of other movements, largely driven by the impact of adverse equity market movements in the last quarter of the year.

New business contribution

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

New business contribution represents the increase in Solvency II shareholder Own Funds (net of tax) arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions recognised in respect of contract boundaries. It is stated net of 'Day 1' acquisition costs and is calculated as the value of expected cash flows from new business sold, discounted at the risk free rate. As such, it is considered a prudent proxy for the future cash generation that is expected to emerge over the life of the contract.

New business contribution for 2018 was £154 million (net of tax) and is stated on a pro forma basis, assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017. This includes £137 million from the Group's UK Open business and £17 million from the Europe business.

MOVEMENT IN AUA (£bn)

Pro forma AUA as at 1 Jan 2018

239.8

UK Heritage net flows

(7.1)

UK Open inflows

10.7

UK Open outflows

(7.0)

Europe net flows

0.2

Other movement including markets

(10.3)

AUA as 31 Dec 2018

226.3

£226bn

Assets under Administration
APM

£154m

NEW BUSINESS CONTRIBUTION
APM

CAPITAL MANAGEMENT

PGH plc SOLVENCY II SURPLUS OVERVIEW

Following completion of the on-shoring of the Group, a new UK-registered holding company, PGH plc was put in place in December 2018. The new company is the ultimate parent company and the highest EEA insurance Group holding company and the Group's Solvency II capital assessment and Group supervision is now being managed at the PGH plc level only.

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'). PGH plc'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 and intangible assets.

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

In December 2015, the Group was granted the PRA's approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA's approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group's Internal Model in March 2017 and March 2018 respectively.

The acquired Standard Life Assurance businesses determine their capital requirements in accordance with an approved partial Internal Model. As a result, the Enlarged Group currently uses a Partial Internal Model to calculate Group SCR, aggregating outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two. A harmonisation programme to combine the two models into a single Internal Model has commenced.

The Solvency II surplus excludes the surpluses arising in the Group's unsupported with-profit funds and the PGL Pension Scheme of £2.1 billion (2017: £2.2 billion pro forma4). In the calculation of the Solvency II surplus, the SCR of the with-profit funds and the PGL Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount. Surpluses that arise in with-profit funds and the PGL Pension Scheme, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.

CHANGE IN PGH plc SOLVENCY II SURPLUS (ESTIMATED)

The PGH plc Solvency II surplus has increased to £3.2 billion (2017 proforma: £2.5 billion). In this section, we focus on an explanation of the movements in the PGH plc Solvency II surplus on a pro forma basis as if the acquisition of the Standard Life Assurance businesses took place on 31 December 2017. Further details regarding the comparative actual position as at 31 December 2017 are set out in the additional capital disclosures section of this report on page 228.

The pro forma position as at 31 December 2017 for the Enlarged Group (i.e. including the acquired Standard Life Assurance businesses) was £2.5 billion, as set out in the acquisition prospectus disclosures.

Surplus generation and the impact of the reduction in capital requirements for the Enlarged Group added £0.3 billion to the surplus during the year.

Management actions undertaken, including further investment in illiquid assets within annuity portfolios, reductions in investment expenses and anticipated cost savings associated with a move to a single outsourcer and continued investment in digitalisation increased the surplus by £0.6 billion.

Delivery of capital synergies associated with the acquisition of the Standard Life Assurance businesses increased the surplus by £0.5 billion, primarily as a result of implementing Phoenix's equity and currency hedging strategy in order to protect the economic value of the acquired businesses.

The pro forma surplus for the Enlarged Group included an assumed £0.6 billion of capital qualifying debt issued in relation to the acquisition of the Standard Life Assurance businesses. Following the issuances of the £500 million Tier 1 Notes in April 2018 and €500 million of Tier 2 bonds in September 2018, actual debt raised in the year was £0.9 billion, resulting in a £0.3 billion increase to the surplus compared to the pro forma position.

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

Assumption, experience and modelling changes decreased the Solvency II surplus by £0.1 billion, reflecting the impact of strengthening lapse risk capital for the Standard Life businesses, together with expense impacts arising from separation of those businesses prior to the acquisition, customer proposition development and other project costs. These items have been offset by the positive impacts of changes to longevity assumptions.

The adverse impact of economic and other variances reduced the surplus by £0.2 billion. This includes a provision in respect of a commitment to reduce ongoing and exit charges for unitised non-workplace pensions. As detailed above, extending the Group's hedging strategy to Standard Life Assurance has ensured the Group remains resilient to equity market movements.

Financing costs, pension contributions and dividend payments (including accrual for the 2018 final dividend) amount to £0.5 billion and reduced the surplus in the period.

Standard Life Assurance Limited obtained regulatory approval to recalculate the benefits associated with Transitional Measures on Technical Provisions ('TMTP') as at 31 December 2018 and the impact of this recalculation is included within the PGH Solvency II surplus as at that date. The Phoenix Life entities will not undertake a mandatory recalculation of TMTP until 31 December 2019. Had a dynamic recalculation been assumed as at 31 December 2018 for Phoenix Life entities, the PGH Solvency II surplus would have been £0.1 billion higher.

SHAREHOLDER CAPITAL COVERAGE RATIO (ESTIMATED)

The Group 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. The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme.

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

Please see the Alternative Performance Measures section on page 230 or further details of this measure.

Unsupported with-profit funds and the PGL Pension Scheme consist of £4.4 billion of Own Funds and £2.3 billion of SCR. The related Own Funds are only recognised in the PGH plc Solvency II surplus up to the value of the SCR in respect of these funds. Of the £4.4 billion of Own Funds, £3.9 billion consists of estate within the unsupported with- profit funds and £0.5 billion of Own Funds within the PGL Pension Scheme.

Surpluses in these funds do not contribute to the PGH plc Solvency II surplus.

Excluding the SCR and Own Funds relating to the unsupported with-profit funds and the PGL Pension Scheme, the Solvency II Shareholder Capital Coverage ratio is 167% as at 31 December 2018 (2017: 147% on a pro forma basis for the Enlarged Group).

LIFE COMPANY FREE SURPLUS (ESTIMATED)

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

As at 31 December 2018, the Life Company Free Surplus is £1.0 billion (2017: £0.7 billion). The table opposite analyses the movement during the period.

SENSITIVITY AND SCENARIO ANALYSIS

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

The PGH plc Solvency II surplus position at 31 December 2018 is set out in the table below:

 

Estimated

position as at

31 December 2018

£bn

Proforma

position (Enlarged
Group) as at

31 December 2017

£bn4

Own Funds1

10.3

10.2

SCR2

(7.1)

(7.7)

Surplus3

3.2

2.5

£3.2bn

PGH SOLVENCY II SURPLUS (ESTIMATED)

167%

PGH SHAREHOLDER CAPITAL COVERAGE RATIO (ESTIMATED)
APM

Notes:

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

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

3  The surplus equates to a regulatory coverage ratio of 146% as at 31 December 2018 (2017: 132% pro forma for the Enlarged Group).

4  The pro forma position assumes the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.

CHANGE IN PGH SOLVENCY II SURPLUS1
bn)

Proforma Enlarged Group surplus as at FY17 (estimated)

2.5

Surplus emerging and release of capital requirements

0.3

Management actions

0.6

Delivery of Standard Life Assurance capital synergies

0.5

Impact of debt insurance

0.3

New Business including BPA

(0.2)

Assumption, experience and modelling changes

(0.1)

Economic and other variances

(0.2)

Financing costs, pension contributions and payment of 2018 interim dividend

(0.5)

Surplus as at FY18 (estimated)

3.2

SHAREHOLDER CAPITAL COVERAGE RATIO
bn)

 

Own funds

SCR

Surplus

FY18 (estimated) 167%

8.0

4.8

3.2

FY17 proforma *Enlarged Group) 147%

7.8

5.3

2.5

 

 

Estimated position as

at 31 December 2018

£bn

Opening Free Surplus (pro forma)1

0.8

Surplus generation and expected run-off of capital requirements

0.4

Management actions

0.6

Capital synergies associated with acquisition

0.1

New business

(0.1)

Economic, financing and other

(0.1)

Free Surplus before cash remittances

1.7

Cash remittances to holding companies

(0.7)

Closing Free Surplus

1.0

Illustrative stress testing2

 

Estimated PGH Solvency II surplus
£bn

Base: 1 January 2019

3.2

Following a 20% fall in equity markets

3.2

Following a 15% fall in property values

3.1

Following a 60bps interest rates rise3

3.2

Following a 80bps interest rates fall3

3.2

Following credit spread widening4

3.0

Following 6% decrease in annuitant mortality rates5

2.7

Following 10% increase in assurance mortality rates

3.1

Notes:

1  Assumes the acquisition of the Standard Life Assurance businesses and the implementation of the Group's equity and currency hedging strategy by those acquired businesses took place on 31 December 2017.

2  Assumes stress occurs on 1 January 2019.

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

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

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

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

IFRS RESULTS

OPERATING PROFIT

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

Please see the APM section on page 230 for further details of this measure.

The Group has generated an operating profit of £708 million (2017: £368 million). The increase compared to the prior year is primarily driven by the inclusion of the Standard Life Assurance businesses for the four month period post completion of the acquisition together with net positive impacts of management actions, experience and actuarial assumption changes during 2018.

IFRS Profit AFTER TAX

The IFRS profit after tax attributable to owners is £410 million (2017: £(27) million). The increase primarily reflects the improved operating profit together with net positive economic variances arising on hedging positions held by the life companies to protect the Group's Solvency II surplus position and a gain recognised on acquisition of the Standard Life Assurance businesses of £141 million.

The positive items have been partly offset by the recognition of certain one-off cost provisions including a commitment to reduce charges on non-workplace pension policies and expenses associated with the acquisition.

Operating profit for the life companies is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities).

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

Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Life company operating profit is net of policyholder finance charges and policyholder tax.

UK HERITAGE OPERATING PROFIT

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

The with-profit operating profit of £101 million (2017: £84 million) represents the shareholders' one-ninth share of the policyholder bonuses. The increase on prior year primarily reflects the contribution from the Standard Life Assurance businesses.

The with-profit funds where internal capital support has been provided generated an operating profit of £20 million (2017: £108 million loss). The profit is principally driven by the positive impact of updating actuarial assumptions related to longevity and expenses. The loss in the prior year was due to the adverse impact of updating actuarial assumptions related to persistency of products with valuable guarantees.

The non-profit and unit-linked funds operating profit increased to £524 million (2017: £386 million), which includes a contribution of £42 million from the Standard Life Assurance businesses, excluding actuarial assumption changes. Updating actuarial assumptions had a net positive impact of £205 million on the result for the year (2017: £166 million) and included the impact of updating longevity base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2017 core projection tables.

The long-term return on owners' funds of £(5) million (2017: £5 million) reflects the asset mix of owners' funds, primarily cash-based assets and fixed interest securities. The loss in the period reflects certain one-off project costs which have been borne by the shareholder.

UK OPEN OPERATING PROFIT

The Group's UK Open business segment delivered an operating profit of £41 million, including a £31 million contribution from the Standard Life Assurance businesses. This includes operating profits generated across the Workplace, Retail and SIPP product lines, including new business distributed through our Strategic Partnership with Standard Life Aberdeen plc.

The Group's SunLife business generated an operating profit of £10 million during the year.

EUROPE OPERATING PROFIT

The European business which comprises business written in Ireland, Germany and Austria and a mix of Heritage and Open products, generated an operating profit of £22 million during the year.

management services companies operating profit

The operating profit for management services of £25 million (2017: £21 million) comprises income from the life and holding companies in accordance with the respective management services companies agreements less fees related to the outsourcing of services and other operating costs.

GROUP COSTS

Group costs in the period were £20 million (2017: £20 million) in line with prior year. They mainly comprise project recharges from the service companies offset by returns on the scheme surplus of the Group staff pension schemes.

INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS

The net positive investment return variances and economic assumption changes on long-term business of £283 million (2017: £6 million negative) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets, together with the impact of gains on hedging positions held by the life funds as a result of declining equity markets in the year. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.

VARIANCE ON OWNERS' FUNDS

The adverse variance on owners' funds of £193 million (2017: £87 million negative) is principally driven by realised losses on derivative instruments entered into by the holding companies to hedge exposure to equity risk arising from the Group's acquisition of the Standard Life Assurance businesses. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.

AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES

The carrying amount of the Group's acquired in-force business and other intangibles was £4.3 billion at the end of the year (gross of deferred tax), of which £2.8 billion relates to the Standard Life Assurance businesses.

The acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates. Amortisation of acquired in-force business during the year totalled £189 million (2017: £102 million) with the increase from the prior year driven by the additional acquired-in-force business for the Standard Life Assurance businesses noted above. Amortisation of other intangible assets totalled £18 million in the year (2017: £17 million).

OTHER NON-OPERATING ITEMS

Other non-operating items of £38 million negative (2017: £80 million negative) includes a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses and a net benefit of £45 million reflecting anticipated costs savings associated with the move to a single, digitally enhanced outsourcer platform. These amounts have been more than offset by a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products, costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension benefits within the Group's pension schemes, costs of £43 million associated with the acquisition of the Standard Life Assurance businesses and £7 million incurred under the ongoing transition programme. It also includes net other one-off items totalling £47 million, including other corporate project costs.

The prior period result included a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond, costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses, costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth businesses prior to the completion of the implementation of the Phoenix operating model, a provision of £27 million in respect of a commitment to the reduction of ongoing charges for workplace pension products, a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA (GI) Limited, offset by the recognition of reimbursements of £39 million in respect of recoveries due or received from third parties under contractual arrangements; and net other one-off items totalling a cost of £5 million, including corporate project costs.

FINANCE COSTS

Finance costs have increased by £10 million, comprising a £5 million decrease in bank finance costs driven by the repayment of bank debt and a £15 million increase in other finance costs reflecting debt issuances during the year.

TAX CREDIT ATTRIBUTABLE TO OWNERS

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the corporate responsibility section of the Group's website. The Group's tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group's approach to its wider Corporate Social Responsibility. In the first half of 2018, the Tax Strategy was refreshed and published in accordance with the relevant statutory requirements.

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

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

The Group tax charge for the period attributable to owners is £60 million (2017: £1 million tax credit) based on a profit (after policyholder tax) of £470 million (2017: loss of £(28) million). The significant tax adjustments to the Owners' profit before tax are primarily due to the impact of non-taxable income which reduces the tax charge by £(31) million, the impact of non-tax deductible costs of £21 million, a prior year credit for shareholders £(5) million and profits taxed at a rate other than the statutory rate of £(14) million. See note C6 to the IFRS consolidated financial statements for further analysis.

Financial leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions. The financial leverage ratio as at 31 December 2018 (as calculated by the Group in accordance with Fitch Ratings' stated methodology) is 22% (2017: 27%). This is below the target range management considers to be associated with maintaining an investment grade rating of 25% to 30%.

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

Profit/(loss) after tax

Year ended

31 December

2018
£m

Year ended

31 December

2017
£m

UK Heritage

640

372

UK Open

41

(5)

Europe

22

-

Management Services companies

25

21

Group costs

(20)

(20)

Operating profit

708

368

Investment return variances and economic assumption changes on long term business

283

(6)

Variance on owners' funds

(193)

(87)

Amortisation of acquired in-force business, customer relationships and other intangibles

(207)

(119)

Other non-operating items

(38)

(80)

Profit before finance costs and tax attributable to owners

553

76

Finance costs attributable to owners

(114)

(104)

Profit/(loss) before the tax attributable to owners of the parent

439

(28)

Profit before tax attributable to non-controlling interests

31

-

Profit/(loss) before tax attributable to owners

470

(28)

Tax (charge)/credit attributable to owners

(60)

1

Profit/(loss) after tax attributable to owners

410

(27)

 

UK Heritage operating profit

Year ended
31 December 2018
£m

Year ended
31 December 2017
£m

With-profit

101

84

With-profit where internal capital support provided

20

(108)

Non-profit and unit linked

524

386

Long-term return on owners' funds

(5)

5

UK Heritage operating profit before tax

640

368

Finance costs attributable to owners

 

Year ended
31 December 2018
£m

Year ended
31 December 2017
£m

Bank finance costs

3

8

Other finance costs

111

96

Finance costs attributable to owners

114

104

£708m

OPERATING PROFIT
APM

£410m

IFRS PROFIT AFTER TAX

RISK MANAGEMENT

THE GROUP'S RISK MANAGEMENT FRAMEWORK

The Group's Risk Management Framework ('RMF') embeds proactive and effective risk management across the Group. It seeks to ensure that all risks are identified and managed effectively and that the Group is appropriately rewarded for the risks it takes.

Further detail on the ten components of our RMF and the principal risks facing the Group are provided below. This includes consideration of how the Enterprise Risk Management (ERM) Framework operated by the acquired Standard Life Assurance businesses aligns with the Phoenix RMF.

Work is well advanced to finalise implementation plans for the harmonised RMF for the Enlarged Group which combines the best of both from the respective frameworks.

BUSINESS AND RISK ENVIRONMENT

The acquisition of Standard Life was completed on 31 August and is transformational for the Group. Whilst significant progress has been made with the transition activity the Group must continue to ensure that it operates a robust risk and control environment in the delivery of all objectives across the Heritage, Open and European businesses.

After announcing its intention to enter the bulk annuity market, the Group successfully executed three deals over 2018 totalling £0.8 billion. The Group generates value through the use of reinsurance and its illiquid asset sourcing capabilities.

There remains great uncertainty about the timing and terms of the UK's withdrawal from the EU. The Group continues to closely monitor developments to understand any potential financial or operational implications. The Group identified contingency actions to ensure it could service EU-based customers in the event of a 'Hard Brexit' and has continued to progress these.

Announcement of Diligenta as the Group's preferred outsource partner will involve a major system and data migration to transfer c. 2 million of legacy Phoenix Life policies to a digitally enhanced customer platform.

The regulatory actions in respect of the acquired Abbey Life business were addressed through the implementation of Phoenix's robust control environment, product governance and oversight model to improve customer outcomes.

RISK CULTURE

The Group seeks to embed a culture that is forward-looking and competent in its assessment and management of risk, a culture where everyone in the Group is aligned in their goals to deliver better risk-based decisions.

To support this goal, the Group defined a Risk Culture Statement which sets out the Group's aspirations for Risk Management:

At its core are the Group's values and behaviours, clarity of accountability and a healthy tension between the first and second lines of defence.

Collectively this means our people understand the Group's approach to risk, take personal responsibility to manage risk in everything they do and encourage others to follow their example.

Risk culture has been one of the five elements of the ERM framework for Standard Life Assurance.

During 2018, Group Risk conducted its annual Risk Culture survey. The results of this survey enable us to assess and measure the Group's Risk Culture over time as well as being able to tailor training programmes to ensure the continued engagement and development of our employees.

OWN RISK AND SOLVENCY ASSESSMENT (ORSA)

The Group carries out an ORSA process to assess its risk profile on an ongoing basis. The ORSA considers risk, capital and return within the context of the business strategy on a forward-looking basis.

The ORSA is a fundamental part of the strategic risk and capital management processes of the business to prompt consideration of management actions and help shape strategic decision-making.

RISK MANAGEMENT FRAMEWORK

Risk strategy

Risk appetite

Risk universe

External communication and stakeholder management

Governance, organisation and policies

Business performance and capital management

Risk and capital assessment (including internal models)

People and reward

Management information

Technology and infrastructure

"The Group has a balanced risk culture, supportive of commercial risktaking coupled with strong execution in line with its risk appetite."

RISK STRATEGY

The Group's risk strategy provides an overarching view of how risk management is incorporated consistently across all levels of the business, from decision-making to strategy implementation.

It assists the business achieve its strategic objectives by supporting a more stable, well managed business with improved customer and shareholder outcomes.

This is achieved not by risk avoidance, but through the identification and management of an acceptable level of risk (its 'risk appetite') and by ensuring that the Group is appropriately rewarded for the risks it takes.

To ensure that all risks are managed effectively the Group is committed to:

·  embedding a risk aware culture;

·  maintaining a strong system of internal controls;

·  enhancing and protecting customer and shareholder value by continuous and proactive risk management;

·  maintaining an efficient capital structure; and

·  ensuring that risk management is embedded into day-to-day management and decision- making processes.

Strategic risk management is one of the five components of the ERM framework in Standard Life Assurance.

RISK APPETITE

The Group's risk appetite is the level of risk the Group is willing to accept in pursuit of its strategic objectives. The statements below encapsulate our risk appetite for policyholder security and conduct, earnings volatility, liquidity and our control environment:

Capital - The Group and each Life Company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios.

Cash flow - The Group will seek to ensure that it has sufficient cash flow to meet its financial obligations and will continue to do this in a volatile business environment.

Shareholder Value - The Group will take action to protect its shareholder value.

Regulation - The Group and each Life Company will, at all times, operate a strong control environment to ensure compliance with all internal policies and applicable laws and regulations, in a commercially effective manner.

Conduct - Phoenix has no appetite for deliberate acts of misconduct or omissions that result in poor customer outcomes, reputational damage and/or pose a risk to the Financial Conduct Authority ('FCA') statutory objectives.

The risk appetite and control framework supports the Group in operating within the boundaries of these statements by limiting the volatility of key parameters under adverse scenarios. Risk appetite limits are chosen which specify the maximum acceptable likelihood for breaching the agreed limits. Assessment against these limits is undertaken through extensive scenario and reverse stress testing.

Standard Life Assurance has operated its own framework of quantitative and qualitative risk appetite metrics supported by stress and scenario testing. Work is underway to align these to the Group statements.

RISK UNIVERSE

A key element of effective risk management is ensuring that the business has a complete understanding of the risks it faces. These risks are defined in the Group's risk universe.

The risk universe allows the Group to deploy a common risk language, allowing for meaningful comparisons to be made across the business. There are three levels of risk universe categories. The highest risk universe category is Level 1 and includes:

·  strategic risk;

·  customer risk;

·  financial soundness risk;

·  market risk;

·  credit risk;

·  insurance risk; and

·  operational risk.

Embedded within these categories, and Customer risk in particular, are the conduct risks faced by the Group and its customers. These risks are separately monitored and reported on across the organisation to ensure that conduct risk receives appropriate emphasis and oversight.

The risk universe operated within Standard Life Assurance is very closely aligned to this which enables an efficient adoption of the Group's risk universe.

EXTERNAL COMMUNICATION AND STAKEHOLDER MANAGEMENT

The Group has a number of internal and external stakeholders, each of whom has an active interest in the Group's performance, including how risks are managed. Significant effort is made to ensure that our stakeholders have appropriate, timely and accurate information to support them in forming views of the Group.

GOVERNANCE, ORGANISATION AND POLICIES

Governance

Overall responsibility for approving, establishing and embedding the RMF rests with the Board. The Board recognises the critical importance of having an efficient and effective RMF and appropriate oversight of its operation. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Group Board to the Life Company Boards and the Executive Committee.

The RMF is underpinned by the operation of a three lines of defence model with clearly defined roles and responsibilities for statutory boards and their committees, management oversight committees, Group Risk and Group Internal Audit.

First line: Management

Management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers. A series of business unit management oversight committees operate within the Group. They are responsible for implementation of the RMF, ensuring the risks associated with the business activities are identified, assessed, controlled, monitored and reported.

Second line: Risk Oversight

Risk oversight is provided by the Group Risk function and the Board Risk Committee. The Board Risk Committee comprises four independent Non-Executive Directors. It is supported by the Group Chief Risk Officer and met six times during 2018. During 2018, the Risk Committee of the Phoenix Life Board met five times and provided additional Board Committee focus on risk matters at Phoenix Life. The existing Standard Life Assurance Risk Committee has been brought alongside that of Phoenix Life to enable consideration of common matters.

Third line: Independent Assurance

Independent verification of the adequacy and effectiveness of the internal controls and risk management is provided by the Group Internal Audit function, which is supported by the Board Audit Committee.

The governance framework in operation throughout the Group can be found in the chart below.

Organisation

The Group Chief Risk Officer manages the Group Risk function and has responsibility for the implementation and oversight of the Group's RMF. The Group Risk function has responsibility for oversight over financial, operational and regulatory risk. The PRA/FCA relationship team manages the relationship and interactions with our primary regulators and reports to the Group Chief Risk Officer.

"THE GROUP'S RISK MANAGEMENT FRAMEWORK HAS SUPPORTED THE ACQUISITION OF STANDARD LIFE AND WILL EVOLVE TO MANAGE THE RISKS THAT THE ENLARGED GROUP WILL FACE."

JONATHAN PEARS

GROUP CHIEF RISK OFFICER

Governance framework

Board

PGH Board

PGH Board Nomaination Committee

PGH Board Remuneration Committee

PGH Board Risk Committee

PGH Board Audit Committee

FIRST LINE OF DEFENCE

SECOND LINE OF DEFENCE

THIRD LINE OF DEFENCE

Executives

Group Chief Executive Officer

PGH Board Nomination Committee

Chief Risk Officer

Management

Group Functions

Life Companies

Group Risk and Compliance

Group Internal Audit

Policies

The Group policy framework comprises a set of policies that supports the delivery of the Group's strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards to which each business unit must adhere to and against which they report compliance.

The policies define:

·  the individual risks the policy is intended to manage;

·  the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements;

·  the minimum controls required in order to manage the risk to an acceptable level; and

·  the frequency of the control's operation.

Each policy is the responsibility of a member of the Executive Committee who is charged with overseeing compliance throughout the Group.

Standard Life Assurance has operated a set of risk policies and the scope of these is very closely aligned to Phoenix's. Activity is underway to finalise and implement a harmonised set of policies across the combined Group.

BUSINESS PERFORMANCE AND CAPITAL MANAGEMENT

The Annual Operating Plan is assessed to ensure that the Group operates within our stated risk appetite. Business performance is routinely monitored with consolidated reporting against performance targets.

The Group operates a Capital Management Policy where capital is allocated across risks where capital is held as a mitigant and the amount of risk capital required is reviewed regularly.

RISK AND CAPITAL ASSESSMENT

The Group operates a standardised assessment framework for the identification and assessment of the risks to which it may be exposed and how much capital should be held in relation to those exposures. This framework is applicable across the Group and establishes a basis, not only for the approach to risk assessment, management and reporting but also for determining and embedding capital management at all levels of the Group in line with Solvency II requirements.

Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group's objectives.

Stress and scenario tests are used extensively to support the assessment of risk and provide analysis of their financial impact.

Independent reviews conducted by Group Risk provide further assurance to management and the Board that individual risk exposures and changes to our risk profile are being effectively managed.

MANAGEMENT INFORMATION

Overall monitoring and reporting against the risk universe takes place in business unit management committees and Boards. This is then reported to the Executive Committee and the Group Board via regular risk reporting.

The Board Risk Committee receives a consolidated risk report on a quarterly basis, detailing the risks facing the Group and the overall position against risk appetite limits. The Board Risk Committee is also provided with regular reports on the activities of the Group Risk function.

PEOPLE AND REWARD

Effective risk management is central to the Group's culture and its values. Processes are operated that seek to measure both individual and collective performance and discourage incentive mechanisms which could lead to undue risk taking. Training and development programmes are in place to support employees in their understanding of the RMF.

TECHNOLOGY AND INFRASTRUCTURE

The Group employs a number of risk systems to support the assessment and reporting of the risks it faces. This enables management to document key risks and controls and evidence the assessment of them at a frequency appropriate to the operation of the control.

RISK MANAGEMENT EFFECTIVENESS

The provisions of the UK Corporate Governance Code require an annual review of the effectiveness of Risk Management.

This assessment provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.

PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP

he Group's principal risks and uncertainties are detailed in the table below, together with their potential impact, mitigating actions which are in place, links to the Group's strategic objectives and changes in the risk profile from last year.

The number of principal risks has increased from six to ten as a result of the transformational Standard Life acquisition which introduces new strategic risks given our substantial new business capabilities. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor their potential impact. During the year we have reviewed our principal risks and consolidated the 'Concentration in the policy administration outsource industry' risk into a broader operational resilience risk. Further details of the Group's exposure to financial and insurance risks and how these are managed are provided in note E6 of the IFRS consolidated financial statements.

The current assessment of the residual risk in respect of each of the Group's principal risk categories is illustrated in the chart opposite.

The residual risk is the remaining risk after controls and mitigating actions have been taken into account.

Principal risks

Risk

A

Strategic

B

Customer

C

Operational

D

Market

E

Insurance

F

Credit

O+

Movement since HY 2018

Key

Strategic objectives icons

 

Change in risk from last year

1

Improve Customer outcomes

 

^

Risk Improving

2

Drive Value

 

-

No Change

3

Manage Capital

 

v

Risk Heightened

4

Engage People

 

N

New Principal Risk

 

Risk

Impact

Mitigation

Strategic priorities

Change from last year

Strategic risk

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

We are exposed to the risk of failing to deliver against our primary strategic focus of continuing to achieve inorganic growth through acquisitions.

Transition of acquired businesses into the Group could introduce structural or operational challenges that result in Phoenix failing to deliver the expected outcomes for policyholders or value for shareholders.

The Group applies a clear set of assessment criteria to assess opportunities.

Acquisition strategy supported by the Group's financial strength and flexibility, its strong regulatory relationships and its track record of managing conduct issues and generating value.

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

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

1
2
3

v Heightened

The heightened trend reflects the 
transformational nature of the acquisition of Standard Life Assurance.

Significant progress has been made with the transition and £500 million of capital synergies delivered.

The integration of Standard Life Assurance into Phoenix will include a consolidation of two Solvency II internal models which is amongst the first in the industry.

The Group's Strategic Partnership with Standard Life Aberdeen fails to deliver the expected benefits

The ongoing Strategic Partnership with Standard Life Assurance plc (SLA plc) will provide additional growth opportunities and is an enabler for delivery of the Group's strategy. There is a risk that the partnership does not deliver expected benefits.

Key areas include implementation and oversight of the Client Service and Proposition Agreement and Transitional Service Agreements.

The Joint Operating Forum between SLA plc and Phoenix will develop the partnership in existing areas, and identify areas for future growth and partnership, for the benefit of customers and shareholders of each Group.

Through the Client Service and Proposition Agreement Phoenix and SLA plc will actively collaborate across a number
of areas, including proposition development
and distribution.

1
2

N New Principal Risk

The Group fails to ensure that its propositions continue to meet the evolving needs of customers and clients

If our propositions fail to meet the needs of customers and clients it could adversely impact the Group's ability to deliver growth assumed in our business plans.

The risk could materialise through increased outflows or reduced new business levels.

Our propositions are designed with our customers and clients at the heart.

We regularly seek customer feedback on our propositions; this helps prioritise future developments.

We actively review and invest in our propositions to ensure they remain competitive and meet expectations.

1
2

N New Principal Risk

Customer risk

The Group fails to deliver fair outcomes for its customers

Phoenix is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and/or potential detriment.

This could also lead to reputational damage for the group and/or financial losses.

Our Customer policies help to ensure that the standards and outcomes we set are implemented consistently across the business.

We maintain a strong and open relationship with the FCA and other regulators.

1

N New Principal Risk

Operational risk

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

The conduct-focused regulator has a greater focus on customer outcomes. This may continue to challenge existing approaches and/or may result in remediation exercises where the life companies cannot demonstrate that it met the expected customer outcomes in the eyes of the regulator.

Changes in legislation such as the implications of Brexit can also impact the Group's operations or financial position.

Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate.

 

The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape.

The Group assesses the risks of regulatory and legislative change and the impact on our operations and lobbies where appropriate.

The Group has contingency plans in place to ensure we can continue to service our non-UK policyholders after the UK leaves the EU.

1
3

v Heightened

The FCA closed its enforcement investigation into the acquired Abbey Life business.

Investigations are ongoing in Standard Life following the thematic review of non-advised annuity sales.

Contingency plans continue to be progressed to enable EU policyholders to be serviced in the event of a 'Hard Brexit'.

PRA issued a consultation on potential changes to the valuation and capital treatment of equity release mortgages. Implementation was subsequently deferred until YE19 or later.

The Group or its outsourcers are not sufficiently operationally resilient

We are exposed to the risk of being unable to maintain provision of services in the event of major operational disruption, either within our own organisation or those of our outsourcers.

Our Enlarged Group now relies on a wide range of IT systems and also greater use of online functionality to meet customer preferences. This exposes us to the risk of failure of key systems and cyber-attacks.

The Group also now provides IT services to SLA plc through the terms of the sale of Standard Life Assurance.

Regulators expectations of the speed and effectiveness of firms' responses to business resilience incidents are increasing.

The Group has a set of risk policies that map to its risk universe and set out an appetite level for each risk and minimum controls standards.

We work with specialist external cyber risk experts to identify new risks and develop our responses.

The Group has a business continuity management framework that is subject to annual refresh and regular testing.

The Group operates an oversight framework to ensure that our outsource partners and critical suppliers adhere to the same business continuity principles.

1
2
3

N New Principal Risk

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

The Group places great reliance on its people to help deliver its strategy.

Delivery of our strategy could be impacted by the uncertainty caused by the integration of Phoenix and Standard Life, which could result in loss of critical corporate knowledge or unplanned departures of key individuals.

Timely communications to our people aim to provide clarity around any uncertainty brought by the purchase of Standard Life, along with key milestones required to deliver the transition.

We regularly benchmark terms and conditions against the market.

We maintain and review succession plans for key individuals.

1
2
3
4

N New Principal Risk

Market risk

In times of severe market volatility, the Group may not have sufficient capital or liquid assets to meet its cash flow targets or may suffer a loss in value

The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group's capital position, on fees earned on assets held and on customers and client sentiment.

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 response to this, the Group has implemented de-risking strategies to mitigate against unwanted customer and shareholder outcomes from certain market movements such as equities and interest rates. The Group also maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows.

The Group's excess capital position continues to be closely monitored and managed, particularly in the low interest environment and any potential impact on financial markets as a result of Brexit.

1
2
3

- No change

The majority of equity markets fell over 2018 after a volatile year. A further increase in the UK base rate was deferred in Q1 but happened in Q3 after economic data returned to expected levels.

The Group hedged the majority of market risk exposures associated with the Standard Life acquisition and benefited from capital synergies from these after completion.

The Group continues to monitor and review existing market risk exposures in light of political developments, particularly those that may arise from the terms and timing of the UK's exit from the EU.

Insurance risk

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

The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if our annuity policyholders live for longer than expected, then their benefits will be paid 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 continues to actively manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite.

The Group actively monitors persistency risk metrics and exposures across the open and heritage businesses.

2

- No change

The continuing trend of reductions in future mortality improvements again saw the Group amending assumptions accordingly in 2018. Policyholder mortality assumptions were strengthened slightly where indicated by recent experience.

The Group completed its first three bulk annuity transactions (totalling £0.8bn) in 2018 and reinsured the vast majority of the longevity risk.

Credit risk

The Group is exposed to the failure of a significant counterparty

The life companies are exposed to deterioration in the actual or perceived creditworthiness or default of counterparties we hold money, bonds or commercial real estate loans with. This can cause immediate financial loss or a reduction in future profits.

An increase in credit spreads (particularly if accompanied by a higher level of actual or expected issuer defaults) could adversely impact the value of the Group's assets.

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

The Group regularly monitors its counterparty exposure and has specific limits relating to individual exposures, counterparty credit rating, sector and geography.

Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised.

3

- No change

Counterparty exposures continue to be managed and monitored across the Group.

Phoenix continues to increase exposure to illiquid credit assets, such as equity release mortgages, commercial real estate and fund financing. This is accompanied by corresponding enhancements to our control framework and is in line with industry trends.

EMERGING RISKS

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

Some of the current emerging risks the Group considers are listed in the table opposite.

Risk Title

Description

Risk Universe Category

Market Disruptors

The impact of alternative providers in the market or those with more comprehensive digital propositions.

Strategic

Solvency II Changes

Changes to the solvency regime as a result of government review and the UK's exit from the EU

Financial Soundness

Climate Change Transition

Although the physical risks are not currently seen as a principal risk for the Group, there are a range of financial and operational risks associated with the transition to a low carbon economy, e.g. the impacts of climate risks on the prospects of current and future investment holdings. (This is considered further in 'Our Environment' on page 56).

All

VIABILITY STATEMENT

In accordance with the provision of section C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Board has completed an assessment of the prospects and viability of the Group over a five-year period to December 2023.

Assessment Process & Key Assumptions

The Group's prospects are assessed primarily through its strategic and financial planning process, which included a detailed annual review of the Group's strategy following the acquisition of the Standard Life Assurance businesses. This strategy is outlined within the Strategic Report of this Annual Report and Accounts. The Board fully participates in the annual strategic planning process by means of a Board meeting to review and approve the annual operating plan ('AOP').

The output of the AOP is a set of Group objectives, detailed financial forecasts, and risks and contingent actions to be considered when agreeing the plan. The latest AOP was approved by the Board in November 2018. This considered the Group's current position and its prospects over a medium-term horizon, reflecting the Group's stated strategy.

Progress against the financial plan is reviewed monthly by both the Group's executive committee and the Board.

The Board has determined that the five-year period to December 2023 is an appropriate period for the assessment, this being the period over which the Directors have reasonable confidence and set internal and external targets, and the period covered by the Group's Board-approved AOP.

The Board has also made certain assumptions when making the assessment and these include the following:

·  no change in stated dividend policy;

·  that corporate acquisitions are not relevant, as any acquisition would only be progressed on the basis it meets the Group's stated criteria;

·  that whilst the actual impacts of Brexit on the Group are still unknown, the Group has plans in place to ensure it is able to service all policyholders in the event of a hard Brexit. These management actions are reflected in the AOP; and

·  the stresses calculated occur on 1 January 2019 with no allowance for any recovery or contingent actions available, but do take into account the impact of any appropriate Solvency II transitionals recalculation.

Assessment of Viability

In making the viability assessment, the Board has undertaken the following process:

·  It considered Group prospects, taking into account current position and the principal risks and uncertainties that it is facing as outlined above;

·  It defined that viability is maintaining the capability to satisfy mandatory liabilities and meet external targets and confirmed this was still appropriate following the acquisition of the Standard Life Assurance businesses;

·  It reviewed the AOP which considers profits, liquidity, solvency and strategic objectives and the impacts of management actions on the Group. The AOP was finalised in November 2018 and reaffirmed the Group's strategy;

·  It completed stress testing to assess viability under severe but plausible scenarios, including two adverse stresses, with no recovery or contingent actions, which are deemed to be representative of the key financial risks to the Group as follows:

1. Market stress - a combined market stress broadly equivalent to a 1 in 10-year event, calibrated to the Phoenix internal model, incorporating a fall in equity, property values and yields, with a widening of credit spreads.

2. Longevity stress -longevity and yield stress broadly equivalent to a 1 in 10-year event, which implies a 1.2 year increase in life expectancy for a 65 year old male and 1.0 year increase for a 65 year old female, alongside a fall in yields.

·  It completed reverse stress testing for the pre-acquisition Group and the Standard Life Assurance businesses by reference to the Group's current and expected levels of solvency and liquidity;

·  It performed Brexit stress testing including additional analysis under a no deal Brexit and considered the implications of a range of Brexit outcomes as regularly monitored and presented to the Board and risk committees;

·  It considered the principal medium to long term risks facing the Group which have the potential to impact on viability as discussed in the Risk report above; and

·  It completed a qualitative assessment of all strategic risks to the Group and contingent actions available that could be implemented should any risk materialise that threatens the Group's resilience.

The results of the stress testing, including a combination of individual scenarios, as disclosed in the Business Review Section, demonstrated that due to the significant excess capital in the life companies, the Group's high cash generation and access to additional funding, the Group is able to withstand the impact in each case with regards to meeting all mandatory liabilities as they fall due, and continue to track towards meeting external targets assuming a partial recovery from the stress.

Statement of Viability

Based on the results of the procedures outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period of assessment.

STAKEHOLDER ENGAGEMENT

The Group's mission is to improve outcomes for customers, whilst delivering value for shareholders. The Group has responsibilities to a number of other stakeholders including its suppliers, colleagues, community partners and the environment. The management of stakeholder engagement is therefore considered key to long-term success.

OVERVIEW

The Group has four areas of strategic focus which support the fulfilment of our mission, including improving customer outcomes, driving value, managing capital and engaging our people. Further detail can be viewed within 'Our Strategy and Key Performance Indicators' from page 18.

By continuing to engage with our key stakeholders on a regular basis, the Group is able to balance the needs of all, taking into account different perspectives, whilst delivering against the Group's strategic priorities. Policies are in place to provide a clear risk and governance framework, as outlined in more detail for each stakeholder group. 

Positive stakeholder engagement remains of paramount importance to the Group's Corporate Responsibility agenda.

Our Customers

10 million policies with £226 billion of assets under administration. Key products and services include with-profit, unit-linked, non-profit (annuities), non-profit (protection) and workplace pensions.

Read more on

P48

Our Suppliers

Following the acquisition of Standard Life Assurance Limited, the Group now has c. 1,000 suppliers of which c. 70 are considered Material Service Providers.

Read more on

P50

Our COLLEAGUES

Over 4,000 colleagues based across Europe supporting Phoenix Group, Phoenix Life, Standard Life Assurance and SunLife, and within its operational sites: Wythall, London, Basingstoke, Bristol, Edinburgh, Glasgow, Dublin and Frankfurt.

Read more on

P51

Our Community Partners

A range of community partners including charities, schools, hospices and local community groups have benefited from the Group's support during the year.

Read more on

P54

Our Environment

The Group is committed to managing and reducing its environmental impact and considers the ongoing effects of climate change on its operations.

Read more on

P56

Our investors

The Group maintains an active dialogue with its investors throughout the year.

Read more on

P58

Go online for the full Corporate

and Social Responsibility Report

www.thephoenixgroup.com/CRreport2018

OUR CUSTOMERS

The Group recognises the responsibility it has to all of its customers, as both custodian of their financial assets and supplier of their pension needs or life cover. Treating Customers Fairly is at the heart of the business, and we aim to provide a responsible, fair and helpful service.

The Phoenix Life website can be accessed at

www.phoenixlife.co.uk

Read more about key customer engagement activities undertaken during the year on

P18 and 20

The Group's Customer Treatment Risk policy covers risks arising from the design or management of products, or from the failure to meet or exceed reasonable customer expectations, taking account of regulatory requirements. Customer treatment risks are aligned to the areas of focus in the Phoenix Group Customer Strategy. 

"Policyholders have diligently saved for many years in their policies, and it is unfortunate that the benefits may have been left unclaimed. We are delighted to have been able to repatriate so many of these lost policies with their rightful owners."

david woollett

Customer director, phoenix life

Listening to customers

Listening to the needs and wants of customers is helpful in delivering good customer outcomes. Feedback is gathered through automated telephone surveys, individual research projects and most recently through talking with the wider 'customer community' about their experiences and how they like to engage with the Group. These interactions help to shape communications and future propositions that may be of interest.

Within Phoenix Life improvements included an online facility for some customers within the retirement process, the launch of secure e-mail as an alternative communication channel, and improvements to the presentation of annual statements and communications.

Within Standard Life Assurance improvements for workplace members and clients included extended opening hours, implementation of a new voice recognition system, a new online registration process and amendments to the investment switching journey online for trust schemes. Face-to-face retirement roadshows were held nationwide, reaching c. 2,000 individuals in 19 locations. Following the roadshow success, retirement webinars were launched.

DIGITAL PROPOSITION

During the year the Group has continued to develop its digital offering for customers. The Phoenix Life website allows visitors 24/7 access to policy information, whilst reducing the volume of paperwork routinely issued. Selected customers can access a secure website where they can review and update their personal information, view policy details and contact Phoenix.

Operationally, Phoenix has selected Diligenta, the FCA regulated subsidiary of Tata Consultancy Services, as its preferred outsource partner to deliver a single, digitally enhanced outsourcer platform that will improve customer outcomes and deliver cost savings for legacy-Phoenix Life policies (c. 5.5 million customers).

Within Standard Life Assurance over 11,000 customers moved into drawdown in the year. Digital was the channel of choice for the majority of these customers, followed by telephony service. Over 3 million logins were recorded across 2018, with the 24/7 mobile app being the easiest way for customers to interact. For customers in non-advised Active Money Pension Plan drawdowns, the Group developed an online retirement review to help customers assess their investment choices based on objectives.

Customer complaints

The Group acknowledges that mistakes can happen, but where they do it aims to put things right as soon as it can. A robust oversight model is in place to continually monitor complaint activity including those complaints that are referred to the independent services of the Financial Ombudsman Service or the Pensions Ombudsman Service. Best practice is shared with colleagues across the industry to improve complaint-handling services. Work is carried out with internal teams to ensure that causes of complaints are addressed in a timely manner. A significant proportion of complaints are resolved across the Group, in less than three days, which is a key performance indicator for the complaints team and results in a better experience for customers.

Over 80% of cases referred to the Financial Ombudsman Service from Phoenix Life were found to be in agreement with the decision made, giving the Group useful insight and assurance into how well complaints are being handled. 

PROTECTING CUSTOMERS FROM PENSION SCAMS

The Group is dedicated to protecting its customers from financial crime, including pension scams. The Group continues to engage with Regulatory Authorities and Industry Working Groups on pension scams and looks at ways to better protect customers from becoming victims of pension scams. The Group continues to raise awareness of scams and warns its policyholders to remain vigilant of the evolving methods of fraudsters.

REUNITING CUSTOMERS WITH LOST POLICIES

Phoenix Life reunited 2,380 unclaimed policies with their rightful owner or next of kin following an extensive tracing exercise. The work commenced in September 2016 and to date has reunited policies amounting £12.7 million. 

The Group introduced a proactive campaign to ensure the customer or their estate benefited. They enlisted the help of external tracing companies and obtained copies of death certificates, probate and wills in the process. Phoenix Life has also recently implemented an enhanced 'gone-away' process across its outsource partners to allow the Group to re-engage and communicate with more Phoenix Life customers.

LONG-TERM SAVINGS COMMITTEE APPOINTMENT

The Association of British Insurers ('ABI') has appointed Susan McInnes, CEO of Standard Life Assurance Limited and Director of Open Business as chair to its Long-term Savings Committee. In addition she has taken a seat on the ABI Board and previously held the role of chair to the Long-Standing Customers Committee. The Long-term Savings Committee oversees the direction of all the ABI policy work in relation to pension savings and retirement. Current priorities include the delivery of the pension dashboard and supporting customers to make the most of their new choices at retirement.

2,380

UNCLAIMED POLICIES REUNITED WITH RIGHTFUL OWNERS FOLLOWING EXTENSIVE TRACING EXERCISES

£12.7m

REUNITED POLICIES VALUE

CUSTOMERS IN VULNERABLE CIRCUMSTANCES

Phoenix's vulnerable customer strategy aims to address vulnerability to the extent that the right outcomes for customers are achieved regardless of whether they are living in vulnerable circumstances. 

The Group's key objective is to be able to recognise vulnerability and then be equipped to take the appropriate action to address it. This is being achieved by having frameworks and practical guidance in place to support the strategy, whilst ensuring there is an appropriate awareness and positive culture instilled throughout the Group in respect of vulnerability.

Within Phoenix Group/Phoenix Life an online training module on customer vulnerability was designed and delivered by Money Advice Trust. Alongside this, colleagues have become dementia friends, with awareness sessions delivered by Phoenix's inhouse dementia champions, helping the Group work towards becoming a dementia-friendly business. The digital team is currently working on a proposal which will look to enhance online accessibility catering for varying customer needs. 

Within Standard Life Assurance the Customer Operations team has been working in partnership with Age Scotland and Alzheimer Scotland to deliver training to help colleagues better understand how to handle calls with vulnerable customers. An extensive training programme took place across 2018 which involved face-to-face and e-learning modules. This training programme won 'Excellence in Skills in Learning and Development' at the 2018 Contact Centre Association Awards.

OUR SUPPLIERS

The Group has c. 1,000 suppliers of which c. 70 are considered Material Service Providers1.

Following the acquisition of Standard Life Assurance Limited in August 2018, Aberdeen Standard Investments has become one of the Group's key strategic partners.

The Group's Modern Slavery and Human Trafficking Statement is available at

www.thephoenixgroup.com/mss

The Group's Anti-Bribery Statement is available on the Group's website at

www.thephoenixgroup.com/abs

SUPPLY CHAIN MANAGEMENT

Phoenix relies heavily on its service providers to support the delivery of its corporate objectives and management actions, whilst satisfying the outcomes required for all stakeholder groups. A key part of ensuring this takes place is managing the Group's supply chain in a sustainable and ethical manner. 

Sourcing and Procurement at Phoenix is far broader than the initial evaluation and selection process in that it ensures that a beneficial relationship for key stakeholders is implemented and managed. The Group works closely with its partners in order to closely monitor the operational and financial performance from Material Service Providers for any indications of instability and steps are taken where necessary and appropriate to mitigate risks to Phoenix or its stakeholders. 

For Material Service Providers, Phoenix has a dedicated professional relationship manager assigned. Their role is to govern the relationship, measure and monitor performance and work to continually improve outcomes for all stakeholders.

The Group's Sourcing and Procurement policy sets the minimum operating standards relating to the management of sourcing and procurement risk throughout the Group and forms part of the sourcing and procurement control framework. 

Phoenix is organised so that the Commercial Partnerships team manages a decentralised procurement model for low value/low volume spend, to enable the business to operate flexibly but within the controls of the Sourcing and Procurement policy. This has a robust oversight and governance model, administered and managed by the Commercial Partnerships team. 

PROMPT PAYMENT CODE

The Group's culture is to meet its obligations including paying suppliers promptly. The Group voluntarily signed the Government's Prompt Payment Code in 2012 and from January 2018 has been submitting relevant statements under the Small Business, Enterprise and Employment Act 2015 for the duty to report payment practices. The Group is committed to supply chain sustainability and supports the culture of prompt payment in the business community.

MODERN SLAVERY

Phoenix Group takes active steps to ensure its supply chain is not engaging in any form of modern slavery or human trafficking. In March 2018 a statement was published on the Group website pursuant to Section 54, Part 6 of the Modern Slavery and Human Trafficking Act 2015. The statement details the policies Phoenix has in place and the ongoing actions that will be taken to continue to support the combating of modern slavery and human trafficking in supply chains.

Financial crime prevention

In order to ensure that any financial crime matters or occurrences are effectively managed, the Group has a number of policies and practices in operation. The Group's Anti-Bribery policy addresses bribery and corruption risks alongside the Financial Crime policy which addresses risks such as anti-money laundering and fraud. Both policies detail the minimum control standards and risks that are to be managed to mitigate any potential issues. 

Adherence to the Anti-Bribery and Financial Crime policies is managed by the Financial Crime team via assessments of the minimum control standards that make up the policies, as well as themed Financial Crime Reviews and Assurance testing.

Colleagues are required to complete annual computer-based training around both financial crime prevention and adherence with the Code of Business Ethics and Ethical Conduct. Colleagues are also required to complete a Gifts and Hospitality Register which is overseen and managed by the Financial Crime team. 

The Group has a zero tolerance towards bribery and corruption in all its forms and adheres to the 2010 Bribery Act. Service providers are advised of and engaged in the zero tolerance approach to bribery and corruption and are expected to comply with Phoenix's minimum control standards. 

No instances or breaches were recorded during the year.

c. 1,000

SUPPLIERS

Note:

1  A Material Service Provider has been identified by the Group as a key supplier due to the nature of the services they provide.

OUR COLLEAGUES

We are an employer of choice offering rewarding careers and opportunities, promoting physical, financial and mental wellbeing in the workplace and empowering a wholly inclusive workforce.

Read more about key employee engagement activities undertaken during the year on

P26

Read more about diversity and inclusion on our website at

www.thephoenixgroup.com/diversity

The Group's Human Resources ('HR') policy defines people risk, which, if unmanaged, could result in a reduction in earnings or value, through financial or reputational loss. 

The minimum control standards in place enable effective management around the attraction, recruitment, development and engagement of colleagues, whilst ensuring compliance with any legislation and external regulatory requirements. 

Adherence to this policy is managed by the Group HR department via quarterly assessment of the minimum control standards. There were no material issues raised during the year.

This section details the actions taken and outcomes achieved across the year. 

EMPLOYEE CONSULTATION

The Big Conversation was a significant listening exercise that was undertaken within Phoenix Group and Phoenix Life at the start of the year to raise the level of dialogue around the Group's values, and provided greater clarity around associated behaviours. Through a series of facilitated workshops and online channels, colleagues were given the opportunity to voice their opinions on what they perceived as positive or negative behaviours, with a view to developing a common understanding across all levels of the business. 

The outcomes were shared with colleagues and provided a clear framework for how individuals are recognised, developed and recruited. The values were continually reinforced throughout the year and culminated in an employee-led recognition awards process, whereby colleagues were asked to nominate individuals who they believed displayed particular values across the year. 

The Group operates a Whistleblowing policy, prompting colleagues to disclose information where they believe wrongdoing, malpractice or risk exists across any of Phoenix's operations. Colleagues are encouraged to speak up about matters that concern them, with the understanding that confidentiality will be maintained.

Colleagues within Standard Life Assurance have access to Vivo, an employee consultation group based onsite. Championing the employee voice, it provides support and advice when employees need it most, and is actively engaged in any decisions affecting working life.

Learning and development

The Talent and Development team designs and delivers a varied programme of learning and development activities including leadership development, talent programmes, skills training, online learning, coaching and mentoring. 

As part of the Group's HR processes, there is an established succession plan which tracks internal succession across all material roles and enables appropriate assessment of skills gaps. 

The plan identifies talent across the broader organisation. Growing talent continues to deliver the Group's most senior appointments and talent programmes in Accounting, Actuarial and Change help to identify future leaders. 

The Group also selects key partners to provide a wide range of learning and continual professional development opportunities including the Chartered Management Institute, Corndell, Moving Ahead and the ACCA. Relationships continue with business schools and executive coaches to develop the Group's most senior talent pipeline.

The Professional Women's Network launched a mentoring scheme with Moving Ahead which is available to colleagues across the Group and at any level. Over 100 mentoring pairs are currently working together, breaking down silos and developing a culture of mentoring, learning and knowledge sharing. 

In addition, the Group participated for a second year in the Actuarial Mentoring Programme, providing support and guidance to newly qualified female actuaries.

As part of the Early Careers proposition, Standard Life Assurance currently has 24 graduates who form part of the Graduate Development Programme based in Edinburgh, in cohorts from 2017 and 2018. In addition 10 mentors are actively engaged in providing monthly mentoring sessions to young people across the Edinburgh area, through the Career Ready development programme.

The Group has fully utilised the Apprenticeship levy funding working in partnership with Corndell and has over 100 programmes underway including Project Management, Leadership, Data analytics and Accountancy enabling skill development across the Phoenix management population.

CULTURAL SURVEY

In the absence of an engagement survey for 2018, the Group issued a cultural survey to colleagues across the Enlarged Group. A series of questions were asked concerning what individuals would like to see in the future. This insight will help the Group shape its values and understand more about what is required to create a high-performing organisation.

DIVERSITY AND INCLUSION

Phoenix was one of the first companies to sign HM Treasury's Women in Finance Charter. The Charter is a commitment for signatory firms to work together to build a more balanced and fair industry. Targets for gender diversity are published annually on the Group's website. Targets set for completion by end of 2018 were not met, as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement. From 2019, the Group will report progress based on the combined entities, with a commitment to achieve targets by end of 2021. The Group remains committed to creating an inclusive and positive environment for all employees.

EMPLOYEE NETWORKS

The Group values the power of its employee voice. Various networks are in operation across the Enlarged Group, with a common goal of collaboration. Work has commenced to merge and replicate some of the networks, creating a common focus and support network across sites.

The 'Engagement Forum' is the longest standing network, which welcomes members from all functions and levels of seniority. 

This group is invited to meet with the management team on a quarterly basis to share views and shape future engagement activity. A similar network called Ignite operates within Standard Life Assurance, encouraging colleagues to be involved and positively influences everyday engagement activity.

Various other employee-driven networks exist which have a common aim of creating a more supportive and inclusive working environment.

Balance - which incorporates the former 'Professional Women's Network' aims to raise awareness of gender diversity, promoting an inclusive environment where everyone can thrive.

The 'Young Person's Development Network' aims to connect individuals across the organisation, providing a platform for individuals to learn, share and develop as they start out in their career journey.

The Group has a 'Lesbian, Gay, Bi-sexual and Transgender Network' - Affinity in operation, encouraging connections and a safe place to share common experiences, issues or challenges. 

A Black, Asian and Minority Ethnic ('BAME') Network - Mosaic exists to identify and address any barriers to development and career progression. The network enhances cultural awareness and creates a more inclusive and diverse workforce.

The 'Armed Forces Network' supports the recruitment of Armed Forces personnel into the business. In October 2018, the Armed Forces Covenant was signed by the Group. 

'Carers Network' and 'Working Parents' Network' are two groups providing education and support to colleagues with varying caring responsibilities outside of the workplace.

A new mental health network, Mind Matters was launched initially within Standard Life Assurance. Its purpose is to generate healthy conversation in the workplace around mental health issues. This network will be rolled out to other colleagues in 2019.

REWARD

The Group continues to attract, develop and retain talented individuals by offering a comprehensive range of benefits and development opportunities. All employees are paid at least the Living Wage as set by the Living Wage Foundation.

95% of colleagues within Phoenix Group and Phoenix Life participate in the flexible benefits scheme, which allows benefits to be selected that meet personal circumstances. Examples include cycle to work schemes, home technology and smart phones, critical illness cover through to health assessments and enhanced life cover. For 2018 buying and selling annual leave remained the most utilised, followed by childcare vouchers and insurance-related products. 

Private medical insurance cover is available to all colleagues across the Group regardless of their status within the organisation.

All Group employees participate in an Annual Incentive Plan and are able to become shareholders in the Company. Over half of the Phoenix Group and Phoenix Life population are voluntarily participating in one or more of the share-save or share incentive plans, benefiting in the Group's increased share performance. 

95%

OF PHOENIX GROUP/PHOENIX LIFE COLLEAGUES PARTICIPATE IN THE FLEXIBLE BENEFITS SCHEME

"Over half of the Phoenix Group and Phoenix Life population are voluntarily participating in one or more of the share-save or share incentive plans, benefiting in the Group's increased share performance."

STEPHEN JEFFORD

GROUP HR DIRECTOR

EMPLOYEE WELLBEING

The Group's wellbeing programme covers physical, mental and financial matters, offering colleagues and their dependants information, tools and resources covering a range of topics. A programme of wellbeing activity took place during the year which included onsite health-checks, flu vaccinations, self-care workshops and awareness of musculoskeletal issues. A programme of Mental Health First Aid training and bespoke mentally healthy workplace workshops were offered across the year. 

Four dementia champions have been trained by Alzheimer's Society to deliver awareness sessions to colleagues onsite. During 2018, 278 dementia friends were created. In addition colleagues can benefit from subsidised onsite massage, discounted gym membership and fitness classes at the larger sites.

Building on the success of the previous year's wellbeing partnership with Living Streets charity, the Group joined forces to offer additional cultural led-walks for colleagues in London and Basingstoke. The Group's efforts were featured in the City of London's Active Travel - Best Practice Guide for 2018. Launched in National Walking Month 2018, Wythall colleagues were trained to deliver weekly walks targeted at individuals aged over 65. 

'Wythall Walking Friends' was a six-month pilot which improved the physical and mental wellbeing of colleagues and members of the local community. This wellbeing initiative will be replicated in 2019 and expanded to reach additional beneficiaries.

Colleagues across the Group have access to an Employee Assistance Programme which provides free, independent and confidential advice on all matters affecting an individual's wellbeing. 

The Group was named as National and Regional Winner in the Chamber Business Awards 2018 for 'Workplace Wellbeing' and finalists in Herefordshire and Worcestershire Chamber of Commerce annual awards. 

HUMAN RIGHTS

The Group is committed to ensuring that human rights are respected and processes are in place to remove any human rights issues both internally and externally via outsourced relationships. 

In line with the Equality Act 2010 and in order to ensure that the Group is aligned to relevant Articles of the United Nations Universal Declaration of Human Rights, the Group has a Dignity at Work policy in place. The policy covers bullying and harassment of and by managers, employers, contractors, suppliers, agency staff and other individuals engaged with the Group. 

All colleagues are required to comply with the policy and take appropriate measures to ensure harassment and bullying does not occur. 

Adherence to the policy is managed by the Group HR department via assessments of the minimum control standards, which ensure effective resolution of employee disputes.

In addition all colleagues are required to complete annual computer-based training in Business Ethics and Ethical Conduct. 

During the year the Group effectively resolved all employee disputes and as a result was involved in no employment tribunals. 

HEALTH AND SAFETY

The Group operates a Health and Safety policy which helps the organisation to effectively manage risks and any adverse effects. Health and Safety risks that are not properly managed could lead to a reduction in earnings and/or value through financial or reputation loss associated with adverse impacts on the health and safety of employees, customers and third parties in the workplace. 

The Group had three reportable accidents during 2018 which were reported to the Health and Safety Executive under the Reporting of Incidents, Disease and Dangerous Occurrence Regulations ('RIDDOR'). 

All colleagues are required to complete annual computer-based Health and Safety training.

Arrangements are in place to manage onsite facilities across all sites, ensuring the working environment is kept clean and secure.

WELLBEING ACCOLADE

Phoenix Group WINs National workplace wellbeing award (image source: 2018 chamber business awards)

OUR COMMUNITY PARTNERS

We contribute to our local communities - providing donations, skills, time and resources to the cause. 

PHOENIX GROUP'S CHARITY PARTNERS OF THE YEAR

It is recognised that the true value of a corporate charity partnership allows the Company and employees to explore opportunities beyond just monetary value, often leaving a lasting legacy with those involved. Now into its fifth year of the six-year partnership with Midlands Air Ambulance Charity and London's Air Ambulance Charity, the Group is continuing to use this collaboration to engage colleagues in fundraising, skills-based volunteering and events.

The Group has donated in excess of £770,000 between these two air ambulance charities since 2014. A festive fundraising 'Reindeer Run' through the streets of London, raised over £21,000 (including matching) for the combined charities. 

For 2019, the Group will enter into two further corporate charity partnerships, helping to unite the Enlarged Group with fundraising for a common cause. Colleagues in Scotland will be supporting Scotland's Charity Air Ambulance and colleagues in Basingstoke will support Hampshire and Isle of Wight Air Ambulance. A donation of over £31,000 was presented to Scotland's Charity Air Ambulance in recognition for colleague participation in onsite lottery, Give as you Earn and a raffle for the period September to December 2018.

SunLife commenced a two-year partnership at the start of the year with Alive Activities Limited, enriching the lives of older people in care and providing training resources for carers. Colleagues at the Bristol office exceeded their fundraising target for the year by raising over £6,000 for the charity.

Further afield the German charity partner for 2018 was Hilfe für krebskranke Kinder Frankfurt e.V who received a donation of €13,486.30 to aid children with cancer and the Austrian charity partner was Oesterreichische Krebshilfe Wien who received €6,000, to support individuals living with cancer.

Colleagues in Ireland have reviewed partnership opportunities and from February 2019 will be partnering with Irish charity, ALONE, which helps older individuals in the community.

OTHER CHARITABLE DONATIONS

Colleagues based in the UK can fundraise for any UK-registered charity through the 'Our Community, Your Choice' programme and apply for matching. All applications must meet the Group's charity criteria, and not be deemed political or religious.

Over £17,000 was donated across the year through onsite fundraising, primarily benefiting causes in the local area. Beneficiaries included: Macmillan Cancer Support, Alzheimer's Society, Street Support Network Limited, St Michael's Hospice in Basingstoke and the City's Lord Mayor's Appeal. 

To welcome Standard Life Assurance colleagues to the Phoenix family, a charity vote was held onsite in September 2018. St Columba's Hospice in Edinburgh received the most votes and was awarded a community donation of £10,000, and runner-up donations of £6,000 and £4,000 was awarded to Scotland's Charity Air Ambulance and Streetwork in Edinburgh. In addition, for Dublin colleagues €4,000 were donated to The Peter McVerry Trust, to help reduce homelessness and the harm caused by substance misuse and social disadvantage. 

Through the staff-matched fundraising scheme, individuals are able to participate in charitable activity in their own time, and request matching of the amount raised. This also includes an element of 'payment in lieu of volunteering' whereby colleagues may regularly support UK-registered charities outside of business hours. Over £52,000 was donated across the year.

COMMUNITY WELLBEING

The Group extended its focus on wellbeing to members of the Wythall community, where Phoenix is considered one of the largest employers in the area. A unique initiative named 'Wythall Walking Friends' was launched in conjunction with
Living Streets charity to help tackle social isolation in individuals aged over 65, through the delivery of regular community led-walks. Volunteers were trained to lead the walks, helping to reduce loneliness, encourage new friendship groups and increase the exercise potential within the group, thus helping to reduce the risk of depression and dementia.

The Group has been assisting Alzheimer's Society with raising awareness of dementia onsite and in the community. Four colleagues are trained as dementia champions and have run awareness sessions to over 160 members of the community, reaching NHS dieticians at Moseley Hall Hospital and pupils within Ark Kings Academy. In addition colleagues attended the Bromsgrove Pensioners Advice and Information Fair, showcasing Phoenix engagement activity that directly improves community wellbeing, for example Age UK's Men in Sheds project.

COMMUNITY INVESTMENT

The Group has worked closely with various community partners over the year, offering support in both financial and non-financial ways.

Phoenix was premier sponsor of the 'Wythall and Hollywood Fun Run' which included a 10km, 5km and 1.5km run through the heart of Wythall's community and entered the site's grounds as part of the official distance. 

Standard Life Assurance sponsored a team for the annual Social Bite sleep in the park, which 22 colleagues participated, helping to raise awareness of homelessness in Scotland.

Meeting room facilities at the Wythall site were freely available to Acorns Children's Charity and Coppice School who provided times-table training to 39 school representatives, benefiting the education of over 11,000 pupils within the Midlands area. In addition the grounds have been loaned to Wythall Transport Museum and Kings Norton Marching Band.

The Group signed the Literacy Pledge for 2018, helping to raise literacy levels and increase social mobility within the UK. Volunteers currently support Ark Kings Academy in Birmingham and St Joseph's Primary School in London with reading programmes. In Dublin, a volunteering in schools programme, arranged in conjunction with Junior Achievement Ireland, works to keep children in education, therefore improving employment and life outcomes. Whilst this programme commenced before the Standard Life Assurance acquisition, the year's achievements included motivating 412 students across 15 schools. Four Career Ready interns were offered a paid placement, enabling valuable work experience and the Nigel Monaghan Apprenticeship for school leavers was launched, providing a six-month paid work experience placement.

Within the Edinburgh office, 10 young people are engaged with the Career Ready programme, receiving regular mentoring sessions with colleagues, helping to expand their educational opportunities.

The Group has supported Citizens Advice Solihull Borough with the creation of a new charity shop in Chelmsley Wood, Birmingham. The premises were equipped with furniture donations and wares from the Group.

VOLUNTEERING

Employees regularly volunteer on either an individual basis or with their team to make a difference in their local community.

Employees within Phoenix Group and Phoenix Life are permitted 14 hours per year during working hours to support a variety of causes. 58% of colleagues participated in this year's volunteering programme contributing 3,547 hours. There has been a shift in more colleagues wishing to participate in skills-based volunteering, offering their time to be mentors, reading buddies and number partners at local schools. 

At the SunLife operations in Bristol, volunteering is also a key part of their culture, with 87% of colleagues contributing 700 hours across the year to causes within their local community.

Within Standard Life Assurance colleagues are permitted up to three days community volunteering lieu time for activities they are engaged with inside and outside of working hours. In the period since September 2018, 1,533 hours were donated to community causes. The Armed Forces Network organised a day for volunteers to help collect donations for Poppy Scotland in Edinburgh.

Phoenix Group was a finalist in the Chartered Institute of Personnel and Development ('CIPD') annual awards, for Best Skills-based Volunteering Initiative. This accolade recognised the contribution that volunteers made in supporting Midlands Air Ambulance Charity with its Practical Quality Assurance System for Small Organisations ('PQASSO') Level 2 accreditation. 

SCHOOL PARTNERSHIPS

The Group continues its partnership with Ark Kings Academy in Kings Norton, working on a variety of mutually- beneficial initiatives across the year. The Group part-funded the 2018 - 2019 academic year Place2Be mental health service onsite, assisting pupils, their families and teaching staff with wellbeing and enrichment support.

Volunteers provide weekly financial literacy and reading skills support to pupils. The music department was the focus for this year, inspiring the youth in creative arts. Donations from the Group included staging and lighting towers, branded t-shirts and end-of-year concert support. The school was awarded a Gold Standard by the Incorporated Society of Musicians, recognising the high level of uptake and attainment in GCSE music, and commitment to the subject. The school's choir 'Phoenix Singers' performed to colleagues onsite at Wythall during their festive lunch celebrations.

In London our colleagues have supported St Joseph's Primary School, where pupils are visited on a weekly basis, helping to develop reading skills. In addition, the Group's CEO and management team visited Draper's Academy in Harold Hill, to share their experiences of working life and routes into the profession. They also took time to read with pupils with Special Educational Needs. 

"The support of Phoenix Group has very much helped with the development of music onsite."

ROGER PUNTON

PRINCIPAL AT ARK KINGS ACADEMY

OUR ENVIRONMENT

Our Corporate Responsibility programme supports our commitment to monitoring and reducing our environmental footprint. Having awareness of the potential impacts of climate change is of global importance, however is not considered a material risk to the working practices of the Group.

The Group's environmental aim is to 'put back' what it takes out. As a financial services organisation, the Group's impact on the environment is minimal when compared with other industries.

Various employee-led initiatives continue to take place each year, focusing largely on internal resource-use, and the 3 R's - reduce, re-use and recycle. From an energy contract point, the Group now uses only 100% renewable resources in its owned properties.

The Corporate Responsibility Steering Committee reviews environmental progress and agrees activity for future implementation such as the installation of electric vehicle charging facilities, scheduled for April 2019 at the Wythall site.

INTERNAL PRINT RESOURCE

Reducing print and paper consumption onsite remained one of the Group's primary environmental focuses across 2018. Phoenix Group and Phoenix Life colleagues now receive quarterly personalised dashboards detailing print usage and ratio of colour print, so they can directly manage what impact their print habits have on the wider environment.

With technological advances in Information Technology and greater availability to online content the Group's print and paper consumption is moving in the right direction. 

WASTE MANAGEMENT

All core sites continue to divert 100% of their waste from landfill with a detailed monthly report outlining the volume of waste and method of disposal or recycle. The London office, which is shared tenancy, achieved an accolade for its achievements in waste management, waste minimisation and re-use in the form of the Clean City Awards Scheme. Donations of old furniture, carpet tiles and electrical equipment were distributed to various community partners in the Wythall area, reducing the requirement for waste removal, but adding value by creating a new lease of life for the items being donated. In addition, LED lighting has been installed in three core staircases and other common areas within the Wythall site. The aim was to make the building more energy-efficient, whilst reducing ongoing energy usage.

Colleagues across the Enlarged Group were given a re-usable cup to mark the start of a new chapter in Phoenix Group's journey with Standard Life Assurance. At the Wythall site, colleagues have reduced one-use paper-cup consumption by an estimated 30% since go live. Plans are underway to move to a more sustainable biodegradable cup in 2019, with a view to eliminating other forms of one-use plastic onsite.

RESPONSIBLE INVESTMENT

The Group has completed several green investment deals across the year, signifying the importance it places on the wider environment. This signified a new area of investment for the Group, helping to diversify the overall investment portfolio.

The first was a £27 million investment in renewable energy at the Walney Extension Project, assisting with the construction and operation of the enlarged offshore wind farm, situated 45 miles north of Liverpool. This project now provides clean energy to a large number of UK homes. Phoenix participated in providing debt-financing for the acquisition of a 50% share in the project.

A further investment was £50 million in Anglian Water's green projects. The proceeds are to be used to help finance projects that will mitigate climate change impacts and the conservation of water resources.

CLIMATE CHANGE

Phoenix's vision is to be Europe's leading life consolidator and although it continues to be a predominantly Heritage business, it now also has a substantial Open business element. As the Group is a consolidator of life insurance funds, rather than general insurance, it does not currently consider climate risk as a principal risk. Climate change is one of the risks considered in the Group's horizon scanning activity and the Group continues to focus on the potential impacts of this risk, for example:

·  The Group uses external managers for the vast majority of its assets who consider a broad range of environmental, social and governance ('ESG') factors in their selection and management of our investments. With the view that ESG and social impact investing can deliver better risk adjusted returns, Phoenix is developing its own ESG policy in support of this. Over 2018, Phoenix has invested in a number of ESG-related opportunities, including renewable energy and green initiatives.

·  Expanding the Group's programme of qualitative and quantitative scenario analysis to take account of the potential impact of climate change scenarios; and to ensure this is appropriately reflected in the Group's risk management framework.

·  Continuing to engage with our regulators on the impact on the Group of near term physical and transition risks associated with climate change.

·  Continue to consider the requirements of consultations associated with the risks of climate change and engage with industry bodies on the Group's response where appropriate.

CONSERVATION

Working with Bromsgrove District and Redditch Borough Councils, colleagues have donated 750 volunteering hours to improving the various parklands within the Midlands area. Their efforts have assisted with creating a bark path, building dead hedging and a wildlife hibernaculum, thinning woodland, painting benches, planting floral displays and removing the invasive Himalayan balsam from the waterways. 

The Group continues to partner with the Heart of England Forest, planting in excess of 6,000 broadleaf trees since 2013. Pupils from partner school Ark Kings Academy were invited to the education centre at the Forest, to spend a day exploring the greater outdoors. The SunLife operation in Bristol is also a member of the Woodland Trust.

There has been a shift in 2018, with colleagues wishing to support more outdoor environmental-based volunteering projects. The Group has also supported the Canal and River Trust, Warwickshire Wildlife Trust and National Trust across the year.

This volunteering encouraged healthy exercise whilst taking part in environmentally-focused activities which will benefit future generations. At one of the Edinburgh sites the roof space is home to a colony of bees. Colleagues are able to meet the beekeeper and attend awareness sessions.

ENVIRONMENTAL REPORTING

This section includes an update on the Group's annual greenhouse gas emissions. Emissions disclosed relate to facilities and activities where the Group has operational control within the UK. 

As of September 2018, the vast majority of Standard Life business (part of Standard Life Aberdeen Plc) was sold to Phoenix Group. As a result, two operational properties were acquired - Standard Life House and Standard Life Data Centre. These two properties have therefore been included in the Group's carbon footprint (absolute GHG emissions) for the 2018 calendar year. However, as these two properties were not owned for the whole two-year period that is used for intensity measurement calculations, they have been excluded from these metrics to avoid skewed intensity results. 

The emissions reported are based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition). Data was gathered at meter level to compile the carbon footprint. The Government's 2018 Conversion Factors for GHG Company Reporting have been used to convert energy data into carbon dioxide equivalent (CO2e) emissions.

The Group reports Scope 2 emissions using the GHG Protocol dual-reporting methodology, stating two figures to reflect the GHG emissions from purchased electricity, using both:

·  A location-based method that reflects the average emissions intensity of the UK electricity grids from which consumption is drawn; and

·  A market-based method that reflects emissions from electricity specific to each supply/contract. Currently, the Group has used residual mix factors in the absence of contractual instruments.

In 2018 absolute emissions have increased by 11% due to the inclusion of the two ex-Standard Life acquired properties. This increase has outweighed the reduction in the emission factor for consumption of purchased electricity (Scope 2) and the reduced consumption of energy at a number of properties throughout 2018. 

Approximately 14% of 2018 emissions are estimated as full-year data is not available for all facilities. A sample of emissions from fuel use for company-owned transport, backup generation and fugitive emissions from refrigerants were calculated in previous years and were determined to be non-material to the overall footprint, so have not been included.

The Group's chosen intensity metrics detail carbon emissions per floor area and per full-time equivalent employees (FTE). The intensity by floor area has decreased slightly as a larger number of properties have been included within the analysis this year and these properties have largely reduced their energy use in 2018 compared to 2017. The intensity by FTE shows a slight increase from 2017 to 2018 as the number of people employed has reduced.

GREENHOUSE GAS EMISSIONS

Absolute GHG emissions data in tonnes of CO2e

Emissions, tonnes of CO2e from:

 

2018

2017

(location-based)

(market-based)

(location-based)

Combustion of fuel and operation of facilities (Scope 1)

1,402

1,402

1,203

Electricity, heat, steam and cooling purchased for own use (Scope 2)

2,990

3,042

2,754

Total Carbon Footprint (Scopes 1+2)

4,392

4,444

3,957

Phoenix Group's chosen intensity measurement1

 

2018

2017

(location-based)

(location-based)

Emissions reported above on a per floor area intensity

63 kg CO2e/m2

64 kg CO2e/m2

Emissions reported above on a per full-time equivalent employee (FTE) intensity

3.8 tonnes
CO2e/FTE

3.5 tonnes CO2e/FTE

1  Our intensity measurement calculations exclude former Standard Life Assurance Limited properties to avoid skewed intensity results over the two-year period.

The Group's full Corporate and Social Responsibility Report is available at

www.thephoenixgroup.com/CRreport2018

The Group's complete Economic, Social and Governance measures are available to download at

www.thephoenixgroup.com/esg

£27m

INVESTMENT IN RENEWABLE ENERGY AT THE WALNEY EXTENSION PROJECT

£50m

INVESTMENT IN ANGLIAN WATER'S GREEN PROJECTS

"These investments mark an important first step for the Group in renewable energy and is particularly suited to our ambitions. We hope to see further projects of this nature in the future."

SCOTT ROBERTSON

HEAD OF FINANCIAL management group, PHOENIX GROUP

OUR Investors

We value an active dialogue with the Group's financial audiences including institutional investors, private investors, buy and sell-side analysts and prospective investors. Phoenix therefore conducts a comprehensive investor relations programme.

MEETINGS WITH INSTITUTIONAL EQUITY INVESTORS

Throughout the year members of the Executive Committee and the Investor Relations department held meetings with investors to provide updates on the Group's strategy and operations. This involved 20 shareholder roadshow days and a total of 246 meetings with existing and prospective equity investors.

The Chairman and Non-Executive Directors are available for investor meetings to discuss subjects such as strategy, corporate governance and Director's remuneration as required. 

RESULTS PRESENTATIONS AND Capital markets DAYS

Full year and interim results were presented to analysts and investors by the Group. The presentations were webcast live on Phoenix's website and presentation materials were also made available. 

Phoenix held a Capital Markets Day on 29 November 2018 in London which was attended by 120 investors and analysts and provided an update on the Standard Life Assurance acquisition. The event also provided attendees with the opportunity to meet with management. 

Investor presentations are generally filmed and the videos as well as the presentation materials and transcript are made available on the Group's website.

CONFERENCES

Conferences enable the Group to meet with a significant number of investors and at the same time are important platforms for presenting on Phoenix's investment proposition. This year, Phoenix attended nine conferences in the UK, including conferences organised by ABN AMRO, Bank of America Merrill Lynch, Deutsche Bank, J.P. Morgan Cazenove, Investec, Lloyds, Morgan Stanley and Natixis. 

ANALYSTS AND EQUITY SALES FORCES

Phoenix maintains an active dialogue with its equity and debt research analysts who, in addition to results presentations, are invited to attend investor events such as the Capital Markets Day. The Executive Directors also held nine presentations to the sales teams at major investment banks to promote the Phoenix investment case.

DEBT INVESTORS

The Debt Investor Relations programme is managed by the Group Treasury department and supported by the Investor Relations department.

Senior management conducted 13 deal and non-deal related debt investor roadshow days in the UK, Continental Europe and Asia, meeting 168 debt investors overall. 

CREDIT RATINGS AGENCIES AND BANKS

Phoenix's life companies and outstanding bonds have credit ratings by Fitch Ratings. The Group meets with the rating agency at least once per year for the annual ratings review. The Group Treasury Team and management last provided Fitch with an update in June 2018. The Group Treasury department and senior management also keep a constant dialogue with the Group's relationship banks. 

PRIVATE SHAREHOLDERS

Private shareholders are encouraged to engage with the Group through the Investor Relations department and Company Secretariat.

ANNUAL GENERAL MEETING ('AGM')

The Group uses its AGM as an opportunity to communicate with shareholders. Business to be discussed at the meeting is notified to shareholders in advance through the Notice of Meeting and comprises topics such as the annual election of Directors, the appointment of the Auditor and the dividend declaration. 

414

TOTAL NUMBER OF debt and equity investors met in 2018

33

Total NUMBER OF debt and equity investor roadshows 

CORPORATE GOVERNANCE

IN THIS SECTION

Chairman's Introduction

60

Board Structure

61

Board of Directors

62

Executive Management Team

64

Corporate Governance Report

65

Directors' Remuneration Report

76

Directors' Report

106

Statement of Directors' Responsibilities

110

CHAIRMAN'S INTRODUCTION

Shareholders

I would like to start my introduction to this Governance section by expressing my pleasure and gratitude for the tremendous support from our shareholders in 2018, both through the 96% take-up in July 2018 of our £1bn rights issue to finance the acquisition of Standard Life Assurance and through their strong support of all proposals at the three shareholder meetings we held in 2018 as follows:

·  May 2018 Annual General Meeting - All 21 resolutions passed with a majority of at least 93% of votes cast.

·  June 2018 General Meeting to approve the acquisition of Standard Life Assurance businesses, the associated £1bn rights issue and the issue of shares to Standard Life Aberdeen plc ('SLA') as part consideration for the acquisition - All 7 resolutions passed with a majority of at least 91% of votes cast (including 99% for the resolution approving the acquisition).

·  November 2018 General Meeting to approve the Scheme of Arrangement and associated capital reduction in connection with the establishment of the Group's new UK-registered and listed holding company, Phoenix Group Holdings plc - All 8 resolutions passed with a majority of at least 99% of votes cast.

Our three general meetings in 2018 were held in London. Following the acquisition of Standard Life Assurance, our 2019 Annual General Meeting will be held on 2 May 2019 in Edinburgh, which is now our largest operational centre.

The UK listing of Phoenix Group Holdings plc as a UK-registered company in place of our former Cayman Islands registration was the final stage of regularising our legacy residency and incorporation status and followed the movement of central management and control for Phoenix Group Holdings from Jersey to the UK in January 2018.

BOARD OF DIRECTORS

Our Board has been through a period of renewal over the past three years and our Board Evaluation Review, undertaken in November 2018, concluded that we should now aim for a period of Board stability, following the appointment of eight new non-executive directors out of a total of ten since September 2016.

The relatively high amount of recent Board recruitment has enabled us to focus on the skills required for a growing business and the Group's M&A agenda, which in 2018 delivered the successful acquisition of Standard Life Assurance. Apart from my own appointment in 2018, the new appointees to the Board in 2018 were nominees from SLA, our strategic partner, exercising their rights in line with their c20% shareholding to appoint two directors to our Board. The November 2018 Board evaluation concluded that the Board had a strong and appropriate skillset which had been enhanced by our two new appointees from SLA, Campbell Fleming, who brings asset management skills and expertise, and Barry O'Dwyer, who brings experience as a CEO of a large open life assurance business and the associated customer-focused skills. 

I am pleased that several members of our Board have current or recent FTSE 100 financial services Board experience - Alastair Barbour (our Senior Independent Director and Audit Committee Chair), John Pollock (our Risk Committee Chair), Barry O'Dwyer, Karen Green and Belinda Richards as well as myself. 

I am also pleased that our Board complies with the target of the Hampton-Alexander Review for the Board to be at least 33% female. 

UK Corporate Governance Code

As detailed in the Corporate Governance Report on pages 65 to 75, we complied in 2018 with all the principles and provisions of the UK Corporate Governance Code ('the Code'), such that in the last six years we have had only one matter of non-compliance with the Code.

We have been considering the new requirements of the Code effective from 2019. We have been taking steps to comply with the new provisions and will, as required, report on our compliance with those provisions in our 2019 Annual Report.

However, I am very pleased to report now that, in respect of the provision to enhance the Board's engagement with the workforce, the Board has appointed Karen Green as our nominated non-executive director who will liaise with the workforce through a Workers' Advisory Council. 

The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices as follows:

·  Board and Committee Structure

·  Board of Directors

·  Executive Management Team

·  Corporate Governance Report

·  Directors' Remuneration Report

·  Directors' Report.

 "Since joining the Phoenix Board as Chairman, I have been impressed by the attention from the Board and management on robust governance, with the aims of both protecting our shareholders and customers and enhancing our performance."

Nicholas Lyons

CHAIRMAN

BOARD STRUCTURE

Phoenix Group Holdings Board and Committees

The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from Board committees. The chart below sets out the composition and main activities of the Phoenix Group Holdings Board and its committees. More detailed operational and customer-focused matters are addressed at the subsidiary board and committee level.

Phoenix Group Holdings Board

Audit Committee

Alastair Barbour (Chair)

Karen Green

John Pollock

Belinda Richards

Financial Reporting

Internal Controls

External Audit

Internal Audit

Risk Committee

John Pollock (Chair)

Alastair Barbour

Wendy Mayall

Belinda Richards

Risk Appetite and high-level Risk Matters

The Group's Risk Management Framework

Nicholas Lyons (Chair)

Alastair Barbour - SID

Clive Bannister

James McConville

Campbell Fleming

Karen Green

Wendy Mayall

Barry O'Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Group Strategy

Major Transactions 

Group Budget

Group Risk Appetite

Performance Monitoring

External/Shareholder Reporting

External Debt

Nomination Committee

Nicholas Lyons (Chair)

Alastair Barbour

Nicholas Shott

Kory Sorenson

Board Appointments

Senior Executive Appointments

Diversity and Inclusion

Board and Senior Executive Succession Planning 

Remuneration Committee

Kory Sorenson (Chair)

Karen Green

Nicholas Shott

Group Remuneration Framework

Executive Director Remuneration

Employee Share Schemes

Further details regarding the Board are contained on

P62-63

BOARD OF DIRECTORS

THE GROUP IS GOVERNED BY OUR BOARD OF DIRECTORS. BIOGRAPHICAL DETAILS ARE SHOWN BELOW.

NICHOLAS LYONS

Chairman

Committee membership

Nomination Committee (Chairman)

Appointed to the Board

31 October 2018

Experience

Nicholas Lyons was appointed Chairman of the board of directors of Phoenix Group Holdings and Chairman of the Nomination Committee of Phoenix Group Holdings with effect from 31 October 2018. Nicholas Lyons joined JP Morgan in 1982, where he worked for 12 years in debt and equity capital markets and mergers and acquisitions. He spent eight years at Lehman Brothers, as a Managing Director in their European financial institutions group, ending his executive career in 2003 as Global Co-Head of Recruitment. Mr Lyons has held a number of positions on the boards of other financial institutions including the Pension Insurance Corporation, where he was the Senior Independent Director from 2016 until July 2018. He also held positions on the boards of the Temple Bar Investment Trust, Catlin Group Limited, Friends Life Group Limited and Friends Life Holdings plc. Mr Lyons has recently joined the Board of the British United Provident Association Limited (BUPA) and is also Chairman of Clipstone Industrial REIT plc. He is an Alderman in the City of London Corporation.

CLIVE BANNISTER

Group Chief Executive Officer

Appointed to the Board

28 March 2011

Experience

Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, Mr Bannister was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc. He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Mr Bannister is also Chairman of the Museum of London.

JAMES MCCONVILLE

Group Finance Director and group director, scotland

Appointed to the Board

28 June 2012

Experience

Between April 2010 and December 2011, Mr McConville was Chief Finance Officer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles, latterly as Finance Director of Scottish Widows Group and Director of Finance for the Insurance and Investments Division. During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK. In 2014, Mr McConville joined the board of Tesco Personal Finance plc as a Non-Executive Director. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.

WENDY MAYALL

Independent Non-Executive Director

Committee membership

Risk Committee

Appointed to the Board

1 September 2016

Experience

Wendy Mayall has over 30 years of asset management experience, including as Group Chief Investment Officer and later consultant at Liverpool Victoria from 2012 to 2015, having previously been Chief Investment Officer for Unilever's UK pension fund from 1996 to 2011 and holding management responsibility for Unilever's pension funds globally. From 2006 to 2009, Ms Mayall was the Chair of the Investment Committee of the Mineworkers Pension Scheme, a British government appointment to one of the largest government backed pension schemes in the UK. Ms Mayall is a Non-Executive Director of Old Mutual Wealth Oversight Council. She is also the Senior Independent Director and Audit Committee Chair of Fidelity Investments Life Insurance Company and Chair of the Funding Committee for TPT Retirement Solutions.

BARRY O'DWYER

NON-EXECUTIVE DIRECTOR

Appointed to the Board

31 August 2018 

Experience

Barry O'Dwyer is the Head of UK for Standard Life Aberdeen. Prior to the sale of Standard Life Assurance to Phoenix, he was the CEO of Standard Life Aberdeen's Pensions & Savings businesses. Mr O'Dwyer initially worked at Standard Life between 1988 and 2008 and held several senior roles at Standard Life after re-joining the company in 2013. A Fellow of the Institute of Actuaries, Mr O'Dwyer has 30 years of experience in the insurance industry, in a career which has also included senior roles at Prudential and HBOS. 

JOHN POLLOCK

Independent Non-Executive Director

Committee membership

Risk Committee (Chairman), Audit Committee

Appointed to the Board

1 September 2016

Experience

John Pollock had a career in life assurance at the Legal & General Group from 1980 to 2015, including as an Executive Director of Legal & General Group plc from 2003 to 2015. Mr Pollock held numerous senior roles, gaining wide strategic and technical experience, finally as Chief Executive Officer of LGAS (L&G Assurance Society), one of Legal and Generals' three primary business units. Prior to Mr Pollock's retirement from Legal and General in 2015, he held positions as Deputy Chair of the FCA Practitioner Panel, Chairman of investment platform Cofunds, and as a Non-Executive Director of the Cala Homes Group. 

ALASTAIR BARBOUR

SENIOR INDEPENDENT DIRECTOR

Committee membership

Audit Committee (Chairman), Nomination Committee, Risk Committee

Appointed to the Board

1 October 2013

Experience

Alastair Barbour has over 30 years audit experience with KPMG where he worked across the full spectrum of financial services clients from large general insurers and reinsurers to the life insurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a Non-Executive career. He is a Director and Audit Committee Chairman of RSA Insurance Group plc and Liontrust Asset Management plc (both London Stock Exchange listed companies). He is also a Director and Audit Committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the Specialist Funds Segment of the London Stock Exchange and of The Bank of N. T. Butterfield & Son Limited, a group listed on the New York Stock Exchange and in Bermuda. Mr Barbour was appointed Senior Non-Executive Independent Director on 2 May 2018. 

CAMPBELL FLEMING

NON-EXECUTIVE DIRECTOR

Appointed to the Board

31 August 2018 

Experience

Campbell Fleming is the Global Head of Distribution at Aberdeen Standard Investments, the asset management business of Standard Life Aberdeen. He joined Aberdeen Asset Management in August 2016 from Columbia Threadneedle Investments where he was the Chief Executive - EMEA and Global COO for four years. Mr Fleming is the Chair of the Investment Association Trade Committee and previously held senior positions at JP Morgan Asset Management. 

KAREN GREEN

Independent Non-Executive Director

Committee membership

Audit Committee, Remuneration Committee

Appointed to the Board

1 July 2017

Experience

Karen Green is the former Chief Executive of Aspen UK, which comprised the UK insurance companies of the global US-listed insurer and reinsurer, Aspen Insurance Holdings and was a member of the Aspen Group Executive Committee for 12 years. She also held a number of other senior positions including as Group Head of Corporate Development, Strategy, and Office of the Group CEO. Prior to that, she held various senior private equity and corporate finance roles from 1997 to 2005 at GE Capital and then MMC Capital, gaining substantial M&A experience, having worked previously at Baring Brothers and Schroders. Ms Green is Non-Executive Director of Admiral Group plc and is a Council Member of Lloyd's of London. She is Deputy Chair and Acting Chair of Aspen Managing Agency Limited and is also a Vice President of the Insurance Institute of London. 

BELINDA RICHARDS

Independent Non-Executive Director

Committee membership

Risk Committee, Audit Committee

Appointed to the Board

1 October 2017

Experience

Belinda Richards has held senior executive positions at KPMG, EY, and latterly Deloitte from 2000 to 2010 where she was a senior corporate finance Partner and the Global Head of Merger Integration and Separation Advisory Services. She is an experienced Non-Executive Director, currently on the Boards of WM Morrison Supermarkets plc, Avast plc, The Monks Investment Trust plc and Schroder Japan Growth Fund plc. Previously, she has also been on the Boards of Aviva UK Life & Pensions, Grainger plc and Balfour Beatty plc. 

NICHOLAS SHOTT

Independent Non-Executive Director

Committee membership

Nomination Committee, Remuneration Committee

Appointed to the Board

1 September 2016

Experience

Nicholas Shott is an investment banker, who has been European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009. Mr Shott joined Lazard in 1991 and became a partner in 1997. He is also a Non-Executive Director on the Board of the Home Office.

KORY SORENSON

Independent Non-Executive Director

Committee membership

Remuneration Committee (Chair), Nomination Committee

Appointed to the Board

1 July 2014

Experience

Kory Sorenson is currently a Non-Executive Director and Chairman of the Audit Committee of SCOR SE, a Non-Executive Director of Pernod Ricard SA, a Non-Executive Director of Prometic Life Sciences Inc, a member of the Supervisory Board of Uniqa Insurance Group AG, and a member of the Supervisory Board of the privately-owned Bank Gutmann AG. Ms Sorenson is currently on the Supervisory Board of Uniqa Insurance Group AG, although will not be seeking renewal of her mandate in May 2019. She has been nominated to join the Board of SGS SA in March 2019. Ms Sorenson has over 25 years of experience in the financial services sector, most of which has been focused on insurance and banking. She was a Non-Executive Director of Aviva Insurance Limited, Managing Director, Head of Insurance Capital Markets of Barclays Capital and also held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley. She began her career in the finance department of Total SA. 

EXECUTIVE MANAGEMENT TEAM

Executive management of the Group is led by the Group Chief Executive Officer, Clive Bannister, who is supported by the Executive Committee ('ExCo').

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

ROLES AND RESPONSIBILITIES

·  Leads the development of the Group's strategy for agreement by the Board;

·  Leads and directs the Group's businesses in delivery of the Group's strategy and business plan;

·  Leads the Group to safeguard returns for policyholders and grow shareholder value;

·  Embeds a risk-conscious Group culture which recognises policyholder obligations in terms of service and security; and 

·  Manages the Group's key external stakeholders.

STEPHEN JEFFORD

GROUP HUMAN RESOURCES DIRECTOR

ROLES AND RESPONSIBILITIES

·  Leads the implementation of the Group's employee strategy in order to recruit, retain, motivate and develop high quality employees;

·  Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and the Group Board and Remuneration Committee; and 

·  Delivers HR services to the Group. 

TONY KASSIMIOTIS 

GROUP CHIEF OPERATING OFFICER

ROLES AND RESPONSIBILITIES

·  Leads development and delivery of the Group's operating platforms in line with regulatory requirements, the Risk Universe and strategy;

·  Ensures the delivery of the Group's information technology strategy;

·  Leads the management of the Group's long-term outsourcing arrangements; and

·  Ensures that the Group's procurement activities and shared services are efficient and effective.

JAMES MCCONVILLE

GROUP FINANCE DIRECTOR And Group Director, Scotland

ROLES AND RESPONSIBILITIES

·  Develops and delivers the Group's financial business plan in line with strategy;

·  Ensures the Group's finances and capital are managed and controlled;

·  Develops and delivers the Group's debt capital strategy and other treasury matters;

·  Ensures the Group has effective processes in place to enable all reporting obligations to be met;

·  Supports the Group Chief Executive Officer in managing the Group's key external stakeholders; and

·  Enhances shareholder value through clear, rigorous assessment of business opportunities.

SUSAN MCINNES

Chief Executive, Standard Life assurance Limited, AND GROUP DIRECTOR, OPEN BUSINESS

ROLES AND RESPONSIBILITIES

·  Leads development and delivery of the Standard Life business strategy including ensuring;

·  Customer proposition is evolved to ensure it continues to meet the market need;

·  Focusses on a business model which ensures good outcomes for customers, shareholders and all other stakeholders; and

·  Ensures that Standard Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the Risk Universe and strategy.

JOHN MCGUIGAN

GROUP HEAD OF CUSTOMER

ROLES AND RESPONSIBILITIES

·  Leads the Group's Customer Function to drive operational and experience delivery for the Group's customer base;

·  Sets standards and policies for customer management and interaction; and

·  Provides customer oversight, complaint handling and remediation activity.

ANDY MOSS

CHIEF EXECUTIVE, PHOENIX LIFE AND GROUP DIRECTOR, HERITAGE BUSINESS

ROLES AND RESPONSIBILITIES

·  Leads the development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses;

·  Leads the Phoenix Life business to optimise outcomes for customers in terms of both value and security; and 

·  Ensures Phoenix Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the Risk Universe and strategy.

JONATHAN PEARS

CHIEF RISK OFFICER

ROLES AND RESPONSIBILITIES

·  Leads the Group's risk management function, embracing changes in best practice and regulation including Solvency II; 

·  Oversees and manages the Group's relationship with the FCA and PRA; and

·  Supports the Group Board Risk Committee in the oversight of the Group's risk framework, in line with risk strategy and appetite.

RAKESH THAKRAR

DEPUTY GROUP FINANCE DIRECTOR

ROLES AND RESPONSIBILITIES

·  Leads on the Group's Annual Report and Accounts, ORSA and Pillar 3 reporting;

·  Manages the Group's financial plans and management information in line with strategy;

·  Contributes to the effective management of the Group's balance sheet and financial plan (including M&A); and

·  Leads on all financial aspects of any M&A.

SIMON TRUE 

GROUP CORPORATE DEVELOPMENT DIRECTOR AND GROUP CHIEF ACTUARY

ROLES AND RESPONSIBILITIES

·  Supports the Group Chief Executive Officer in the formulation of the strategy for the Group;

·  Leads implementation of the Group's strategy as regards any potential acquisition or disposal;

·  Ensures capital is managed efficiently across the Group;

·  Manages the Group's solvency position;

·  Leads the development of the Group's investment strategy; and 

·  Identifies and delivers opportunities to enhance shareholder value across the Group.

QUENTIN ZENTNER 

GENERAL COUNSEL

ROLES AND RESPONSIBILITIES

·  Leads provision of legal advice to the Group Board, other Group company Boards, ExCo and senior management;

·  Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group; 

·  Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations; and 

·  Designs and implements a whistleblowing framework within the Group.

Corporate governance report

The Board is committed to high standards of corporate governance and the Group's Corporate Governance policy is aligned to compliance with the UK Corporate Governance Code ('the Code') which sets standards of good practice for UK listed companies. It is the Board's view that the Company has been fully compliant during 2018 with the Principles and provisions set down in the Code. 

THE BOARD

The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director, two SLA nominated Directors and seven independent Non-Executive Directors. Biographical details of all Directors are provided on pages 62 to 63.

The Board considers that the following Directors are independent: Alastair Barbour, Karen Green, Wendy Mayall, John Pollock, Belinda Richards, Nicholas Shott and Kory Sorenson. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors. 

THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR

Nicholas Lyons is Chairman of the Board of Directors of the Company, having joined the Board as Chairman on 31 October 2018. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. 

The Chairman's other commitments are set out in his biographical details on page 62. The Chairman was appointed on the basis of committing two days per week to Phoenix. 

The Senior Independent Director, appointed by the Board, is Alastair Barbour. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman's performance by the Non-Executive Directors.

BOARD SUCCESSION PLANNING

The Board undertakes regular reviews of executive and non-executive succession planning, as it did in 2018, to ensure that robust plans are in place. Succession planning for executive directors and other senior management takes consideration of both external and internal markets. The Board concluded in its November 2018 Board Evaluation Review that a period of Board stability would now be desirable, following the successful succession planning programme resulting in regular changes in the Board's composition over the last three years, during which eight non-executive directors were appointed. 

BOARD EFFECTIVENESS

In accordance with the Code, an evaluation of the performance of the Board and that of its Committees and individual Directors was undertaken in the latter part of 2018. The process was led by the Chairman and internally facilitated by the Company Secretary. The process involved completion by Directors of a questionnaire covering various aspects of Board, Committee and Director effectiveness followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed by the Board in November 2018. 

A strong theme from the review was the desire to continue to focus on strategy and the Group's future as a heritage and open business. Various process-focused recommendations to support the Board in successfully driving forward the Group's strategy are being actioned. 

BOARD COMPOSITION

GROUP BOARD (%)

DECEMBER 2018

 

Chairman

8%

Executive Directors

17%

Independent Non-Executive Directors

58%

SLA nominated Directors

17%

BOARD GENDER DIVERSITY (%)

Female

33%

Male

67%

Key statistics

 

December
2018

December
2017

Market Cap

£4.45bn

£3.18bn

FTSE position

97

137

AGM votes in favour of all resolutions

May
2018
93%

May
2017
95%

UK Corporate Governance Code

Fully
compliant
in 2018

Fully
compliant
in 2017

To ensure that the Directors maintain up-to-date skills and knowledge of the Group, all Directors receive regular presentations on different aspects of the Group's business and on financial, legal and regulatory issues. All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. In 2018 the new Chairman, Nicholas Lyons and SLA nominated Directors, Campbell Fleming and Barry O'Dwyer, undertook a comprehensive induction, including detailed strategic and operational briefings and information, before and following their appointments. Comments on their induction process are shown below.

OPERATION OF THE BOARD

The Board is responsible to the shareholders for the overall performance of the Group. The Board's role is to provide entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles. 

These matters include:

·  Group strategy and business plans;

·  Major acquisitions, investments and capital expenditure;

·  Financial reporting and controls;

·  Dividend policy;

·  Capital structure;

·  The constitution of Board committees;

·  Appointments to the Board and Board committees;

·  Senior executive appointments; and

·  Key Group policies.

The schedule of matters reserved for the Board is available from the Company Secretary. Matters which are not reserved for the Board and also its committees under their terms of reference (which are available on the Group website), or for shareholders in general meetings, are delegated to the executive management under a schedule of delegated authorities approved by the Board.

The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings and to devote appropriate preparation time ahead of each meeting. In February 2019, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison with other FTSE 250 companies.

The Nomination Committee has confirmed its absolute satisfaction with the time and overall commitment given to Phoenix by all Directors. During 2018, several unscheduled meetings called at short notice impacted directors' attendance. 

INDUCTION INSIGHTS

Two new Directors, who joined the Board in 2018, share their insights on their induction.


CAMPBELL FLEMING

NON-EXECUTIVE DIRECTOR

BARRY O'DWYER

NON-EXECUTIVE DIRECTOR

What did your induction involve?

I spent several days with senior executives in London and Edinburgh on a full and very detailed programme covering all aspects of the businesses from Solvency models to client service. The sessions all involved excellent presentations and full, as well as open, discussions with the team. I also spent some time with the client service teams and learned about the strategy to better serve clients in future. I am yet to visit the life company operations in Wythall but hope to do so as soon as possible.

Prior to the acquisition of Standard Life Assurance, I was the CEO of that company and so I am very familiar with the newest part of the Phoenix Group. My induction hence focused on helping me to understand the wider Group and the Phoenix Life company in Wythall. My meetings involved discussing the Group's strategy andits risk management framework, as well as seeing how the business operates day-to-day.

WHAT WERE YOUR OVERALL IMPRESSIONS?

The induction process was very well structured and thorough. I experienced an open culture and a general willingness to arrange follow up sessions where I wanted to explore aspects of the business further. This is reflective of the culture of the Group as a whole.

I was very impressed by the way in which the Group approached the induction process - it was extremely well organised and everyone I met was very open and helpful in answering questions. As a Director, it felt very well-designed to get me up to speed quickly with ongoing events, allowing me to contribute immediately to Board discussions.

This included Alastair Barbour and Belinda Richards, who each missed three of twelve Board meetings in 2018. All three meetings missed by Mr Barbour were ad-hoc meetings called at short notice. His Board attendance record in the prior year (2017) was 100%. Two of the three meetings missed by Belinda Richards in 2018 were ad-hoc meetings called at short notice.

Since her appointment in 2017, she has attended all other Board meetings, so has attended twelve out of fifteen to date.

The remuneration of the Directors is shown in the Directors' Remuneration Report on pages 88 to 105. The terms and conditions of appointment of Non-Executive Directors are on the Group's website. In accordance with the provisions of the Articles and the Code, all Directors will submit themselves for election at the Company's AGM on 2 May 2019. 

The Board met twelve times during 2018 and is scheduled to meet seven times in 2019 including for a two-day strategy setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman, without the Executive Directors being present, as they did on several occasions in 2018.

BOARD and COMMITTEE ATTENDANCE 2018

 

Board meetings

Audit

Risk

Nomination

Remuneration

Max

Actual

Max

Actual

Max

Actual

Max

Actual

Max

Actual

Chairman

 

 

 

 

 

 

 

 

 

 

Henry Staunton1

9

9

 

 

 

 

4

4

 

 

Nicholas Lyons2

3

3

 

 

 

 

1

1

 

 

Executive Directors

 

 

 

 

 

 

 

 

 

 

Clive Bannister (Group CEO)

12

12

 

 

 

 

 

 

 

 

James McConville (Group FD)

12

12

 

 

 

 

 

 

 

 

Non-Executive Directors

 

 

 

 

 

 

 

 

 

 

Alastair Barbour6

12

9

7

7

7

7

5

5

 

 

Ian Cormack3

5

5

 

 

 

 

3

2

 

 

Campbell Fleming4

3

3

 

 

 

 

 

 

 

 

Karen Green5

12

12

7

7

 

 

-

-

6

6

Wendy Mayall5

12

12

 

 

7

7

-

-

 

 

Barry O'Dwyer4

3

3

 

 

 

 

 

 

 

 

John Pollock5

12

11

7

7

7

7

-

-

 

 

Belinda Richards5,6

12

9

3

2

7

5

-

-

 

 

Nicholas Shott

12

12

 

 

 

 

5

5

6

6

Kory Sorenson5

12

11

4

4

 

 

2

2

6

6

Notes:

1  Henry Staunton resigned from the Board on 31 October 2018.

2  Nicholas Lyons was appointed to the Board on 31 October 2018.

3  Ian Cormack resigned from the Board on 2 May 2018.

4  Campbell Fleming and Barry O'Dwyer were appointed to the Board on 31 August 2018.

5  In addition, the following attended meetings of the specially constituted Chair Selection Committee: Kory Sorenson (Chair) - 3 meetings; Karen Green - 3 meetings; Wendy Mayall - 3 meetings; John Pollock - 2 meetings; Belinda Richards - 2 meetings.

6  All three Board meetings missed by Alastair Barbour were ad-hoc meetings called at short notice. His Board attendance record in the prior year (2017) was 100%.
Two of the three Board meetings missed by Belinda Richards were ad-hoc meetings called at short notice. Since her appointment in 2017, she has attended all
other Board meetings, so has attended twelve out of fifteen to date.

BOARD ALLOCATION OF AGENDA TIME (%)

CEO report

30%

Strategy, performance, governance and regulatory review

 

Strategy and planning

30%

Strategic and operational planning, consideration of corporate transactions

 

CFO/MI report

15%

Monitoring performance against objectives

 

Financial reporting

10%

External reporting

 

Reports from Chairs of Committees

5%

Audit, Nomination, Remuneration and Risk Committee activity

 

Board changes and performance

5%

Appointments, succession and performance

 

Other matters

5%

BOARD COMMITTEES

The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees can be found on the Company's website.

AUDIT COMMITTEE

The composition of the Audit Committee is in accordance with the requirements of the Code and also with DTR 7.1.1AR in that all four members are independent Non-Executive Directors, that at least one member of the Committee has recent and relevant financial experience and the members of the Committee as a whole have competence relevant to the sector in which the Company is operating. 

The Audit Committee met seven times during 2018. Its meetings are attended by the Chair of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Board Chair and the Group Chief Executive Officer. The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors, without management present.

AUDIT COMMITTEE'S ROLE

·  Receiving and reviewing the Annual Report and Accounts and other financial results, statements and disclosures, although the ultimate responsibility for these matters remains with the Board.

·  Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group's internal controls.

·  Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

·  Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement including approval of external auditor fees and non-audit services and for reviewing the performance, objectivity and independence of the external auditors.

·  Considering and approving the remit of the Internal Audit function and reviewing its effectiveness.

·  Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairs of the Audit Committee and subsidiary audit committees, and the Audit Committee Chair's attendance at the Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit Committee (and from 1 September 2018, the Standard Life Audit Committee papers). This oversight has been enhanced further through the attendance at the Audit Committee, on at least an annual basis, by the Chair of the Phoenix Life and Standard Life Audit Committee. 

Members:

Chair: Alastair Barbour

Karen Green

John Pollock

Kory Sorenson (until 2 May 2018)

Belinda Richards (from 2 May 2018)

AUDIT COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

External reporting and controls

·  Reviewed the Company's 2017 Annual Report and Accounts and 2018 Interim Financial Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors.

·  Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements for 2017 (annual), 2018 (interim) and 2018 (annual) as summarised in the table on page 71. These matters were considered by the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with regard to the significant risks assessed by the Group's external auditors as set out in their audit opinion on pages 112 to 120.

·  Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern, the Group's ongoing viability and in support of dividend payments.

·  Reviewed the Line 1 risk and controls report from management, the Line 2 internal control assessment from Group Risk, and the annual Line 3 internal control environment opinion report (and the half year update) prior to its consideration by the Board and received reports regarding consequential actions; and received a dedicated briefing on acquisition accounting and continued consideration of the future impact of IFRS17. 

·  Considered various financial disclosures included within the transaction documents pertaining to the acquisition of Standard Life Assurance.

·  Reviewed reports from Internal Audit on the control environment in the Group's outsource service providers and on the effectiveness of the internal audit work undertaken within the outsource service providers, noting that this was addressed in more detail at the Phoenix Life Audit Committee.

External audit

·  Undertook a review of the effectiveness, engagement and remuneration of the current external auditors. This culminated in the re-appointment of Erns & Young ('EY'), which was approved by the Board and subsequently approved by shareholders at the May 2018 AGM - see 'Assessment of the effectiveness of the external audit process' and 'Auditor's Appointment' on page 70.

·  Reviewed and monitored the independence of the external auditors including their provision of non-audit services and fees and their appointment as external auditors to the Standard Life Assurance entities - see Auditor's Independence and External Auditor Policy on page 70.

Internal audit

·  Assessed the effectiveness of Internal Audit, noting the positive responses received from Management.

·  Approved the annual update of the Group Internal Audit Charter and the Group Internal Audit Plan (including its link to the Risk Management Framework), receiving regular reports to monitor progress against the plan. 

·  Reviewed the internal audit control environment opinion which included Internal Audit's view of the risk management framework across the Group.

Audit committee's performance

·  The Committee's performance was reviewed by the Board in November 2018 as part of its overall Board Evaluation Review. 

General

·  Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in confidence, about any possible improprieties; and approved an updated whistleblowing policy which complied with the FCA and PRA's whistleblowing rules and the appointment of the Phoenix Life Audit Committee Chair as Whistleblowing Champion under the Senior Insurance Managers Regime. 

·  Reviewed and approved updates to the Group Tax Policy, Group External Auditor Policy and the Group Liquidity & Funding Policy.

"THE ACQUISITION OF STANDARD LIFE IN 2018 WAS SIGNIFICANT FOR THE GROUP, AND FOR THE AUDIT COMMITTEE THERE WILL BE ADDITIONAL FOCUS ON ENSURING THAT ROBUST CONTROLS ARE IN PLACE AND ARE APPLIED ACROSS THE WHOLE ENLARGED GROUP."

ALASTAIR BARBOUR

CHAIR OF AUDIT COMMITTEE

AUDITOR'S APPOINTMENT 

In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to be in the best interests of its shareholders in light of the length of association with the current auditors. 

The tender process in 2016 was overseen by the Audit Committee. The Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the external auditor of the Group from 2017 and supported the recommendation for the re-appointment of the external auditor for the 2018 statutory audit. 

The Committee also reviewed the appointment of EY as auditor to Standard Life Assurance Limited and its subsidiaries in 2018 following the acquisition of those entities by the Group.

Following completion of the onshoring of the Group, a new UK-registered holding company, PGH plc was put in place in December 2018. Effective from December 2018, EY has been appointed as auditor of the Group by the Directors of PGH plc. 

EY has been appointed as auditor of the Group by the Directors of PGH plc. EY has indicated its willingness to continue in office and shareholders' approval will be sought at the AGM on 2 May 2019.

The current audit partner is Ed Jervis, who has held that role from the 2014 statutory audit and will rotate off after completion of the 2018 statutory audit responsibilities.

ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS

The effectiveness of the external audit process was assessed through the completion of a questionnaire by the key divisions and Group functions within Phoenix Group covering EY's performance during the 2017 financial reporting cycle. 

AUDITOR'S INDEPENDENCE AND EXTERNAL AUDITOR POLICY

The Company has an external auditor policy which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement partner. 

The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. Furthermore, the Group's external auditor policy prescribes a limit for fees associated with non-audit services of 70% of the average statutory audit fee for the three preceding years. This aligns with requirements introduced by the EU Audit Directive and Regulations in 2016. 

In 2018, total fees of £12.2 million were paid to EY. Of this amount £7.2 million related to statutory audit fees of the parent and its subsidiaries, with a further £0.9 million incurred in relation to services provided pursuant to legal or regulatory requirements. 

The remaining fees of £4.1 million are classified as non-audit services under the EU Directive and Regulations, and give rise to a non-audit to audit fee ratio of 66% in 2018 within the limits prescribed in the Group's policy. 

The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. £1.6 million of the non-audit fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition of Standard Life Assurance. The Audit Committee considers that the engagement of the external auditors in the performance of such diligence procedures provides synergies with audit work post-completion of the transaction and enhanced insight as to the quality of the control environment operated in the target company by comparison to Group standards. Of the remaining balance, a further £2.0 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents relating to the acquisition and debt issuances undertaken in the year. The engagement of the Group's independent external auditor for the provision of such services is consistent with market practice in transactions of this nature.

In relation to their appointment as auditors of the Standard Life Assurance entities, the Committee reviewed the independence of EY in accordance with the requirements of the Financial Reporting Committee's Ethical Standards on independence ("the Ethical Standards"). This included ensuring that any material business relationships between EY and the acquired entities and any prohibited professional services provided by EY to those entities, were terminated within a period of three months from completion of the acquisition as permitted under the Ethical Standards.

The Audit Committee is satisfied that the non-audit services performed during 2018 have not impaired the independence of EY in its role as external auditor. Further information on non-audit fees is provided in Auditor's Remuneration in Notes to the IFRS Consolidated Financial Statements on page 139.

SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS

Significant matters in relation to the 2018 IFRS financial statements

How these issues
were addressed

Review of the actuarial valuation process, to include the setting of actuarial assumptions and methodologies, and the robustness of actuarial data

·  Management presented papers to the Life Company Audit Committees detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate. These assumptions and methodologies were debated and challenged by the Life Company Audit Committees, with focus on longevity, persistency and expenses, prior to their approval. 

·  A summary of these papers was presented for oversight review by the Audit Committee, and the Life Company Audit Committees' conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the committees. The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Life Company Audit Committee's conclusions.

·  Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports.

·  The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and actuarial models. 

Valuation of complex and illiquid financial assets

·  Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Life Company Audit Committees. The assumptions, valuations and processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Life Company Audit Committee prior to being approved.

·  The valuation information was then presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation.

Acquisition Accounting

·  The Audit Committee considered the impact of the acquisition of the Standard Life Assurance entities on the Group consolidated IFRS financial statements. This has included consideration of the adoption of Group accounting policies and methodologies by the acquired entities. 

·  Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets including the valuation of tangible net assets, the valuation of intangibles including the Acquired Value of In-Force business and the gain on bargain purchase. The key methodologies and assumptions applied in determining such adjustments were reviewed and approved by the Audit Committee. 

·  The Audit Committee considered and confirmed the appropriateness of the results of annual impairment testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of finite life intangibles.

Operating Profit

·  The Audit Committee reviewed the allocation of key items to operating profit to ensure the allocations were in line with the Group's operating profit framework and consistent with previous practice.

Assessment of whether the Annual Report and Accounts are fair, balanced and understandable

·  The Audit Committee considered an analysis of the processes and conclusions in support of management's conclusions that the Annual Report and Accounts are fair, balanced and understandable. As part of the year-end procedures, the Audit Committee discussed with management and EY the review processes that operated over the production of the Annual report and Accounts.

Going concern analysis

·  A comprehensive going concern assessment was undertaken by the Audit Committee for the 2018 year-end and 2018 interim reporting periods, based on an assessment by management of the Group's liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period.

Viability Statement

·  The Audit Committee reviewed the process to support, and the contents of, the Viability Statement. The Committee concluded that the period covered by the Viability Statement should continue to be five years to align it to the Group's strategic plan.

Note

Please note that references in this table to Life Company Audit Committees include Audit Committees for the acquired Standard Life Assurance entities in respect of post-acquisition activity.

RISK COMMITTEE

The role of the Risk Committee is to advise the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board's overall degree of risk aversion, the current financial situation of the Group and the Group's capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters. 

The performance of the Committee during 2018 was assessed as part of both an overall internal annual Board effectiveness review and a Committee-specific effectiveness review. The conclusions demonstrate that the Committee continues to operate effectively.

Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 39 to 46.

RISK COMMITTEe's Role

·  The Committee is comprised of four Independent Non-Executive Directors. 

·   A set of 'Operating Principles' are in place to define the responsibilities and accountabilities of the Risk Committees of Phoenix Group Holdings and its subsidiary company boards to avoid any overlap of focus or assurance activity.

·  The Committee's meetings are attended by the Chair of the Audit Committee, Alastair Barbour, which allows the review of internal control effectiveness to be managed through collaborative working and oversight.

·  The Chairman of the Phoenix Life and Standard Life Risk Committees and Model Governance Committee, John Lister, is a regular attendee to the Committee and provides members with a regular update on the risk matters pertinent to these key subsidiaries and the matters being dealt with at the Model Governance Committee (which is a Board Committee of the Group's Life Companies). 

·  Other regular attendees to the Committee include the Group Chief Actuary, Deputy Group Finance Director, the Chief Executives of the subsidiary company boards, the Group General Counsel and the Group Head of Internal Audit. 

·  The Committee met a total of seven times in 2018 to including two out of cycle meetings by telephone.

·  A joint briefing session was held between the Phoenix Group and Phoenix Life Risk Committee members to review Emerging Risks and Forward Looking Scenarios, the Counterparty Concentration Exposures Process and a deep dive into Credit and Illiquid Assets.

·  The Chief Risk Officer, Jonathan Pears, who joined from Standard Life Assurance on 31 August 2018, has full access to the Chair and the Committee and attends all meetings. 

·  The Committee receives frequent reporting from the Chief Risk Officer and the Group Risk function on consolidated risk matters affecting the Group to including risk profile assessments and emerging risks.

Significant matters discussed in 2018

Standard Life Assurance acquisition

·  To ensure the safe delivery of the Group's acquisition strategy in line with risk appetite, the Committee evaluated the acquisition and provided a recommendation to the Board based on the risk profile, execution risks and overall risk appetite. In doing so, the Committee considered the financing and capital structure of the acquisition, reverse stress testing, acquiring risk infrastructure and regulatory engagement.

·  Throughout the acquisition, the Risk Committee continued to be informed on any risk matters including review of the Risk Factors included in the acquisition prospectus, the capital policy framework in operation at Standard Life and the execution risks presented at the time of transfer.

Members:

Chair: John Pollock

Alastair Barbour

Wendy Mayall

Belinda Richards

Consequences/Implications of a 'Hard Brexit'

·  Due to the ongoing uncertainty of the UK's exit from the European Union, the Committee reviewed and considered the preparations in place for a 'Hard Brexit' and the potential financial and operational impacts on the Group. This continued to be reflected within the top risk reporting to the Committee during the course of 2018 and 2019 to date.

Implementation of a single, digitally enhanced outsourcer platform

·  The Committee considered the estimated impact that delivery of this platform would have on the risk profile of Phoenix Life. 

Building the UK Financial Sector's Operational Resilience

·  Following the issue of a tripartite discussion paper from the Bank of England, PRA and FCA, the Committee discussed the drive to move the industry toward a more comprehensive risk-based view of operational resilience which is more visible to boards. The Committee considered and supported the prepared response by the Risk function on behalf of the Company. 

RISK COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

In addition to the significant matters discussed in 2018, the Committee also:

·  Reviewed adherence to the Group Risk Management Framework and approved its harmonisation following the acquisition of Standard Life Assurance Limited, to include consideration of the appropriateness of the Group's overall Risk Appetite Statements.

·  Monitored progress against the 2018 Group Risk function plan. 

·  Approved the Group Market Risk Appetite Targets.

·  Considered the refresh of the Group's capital risk appetite.

·  Monitored compliance with the Group's principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient.

·  Reviewed the Group's risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk as well as contingency planning.

·  Received regular updates on Cyber Security.

·  Reviewed Reverse Stress Testing analysis, completed and provided oversight of, and challenge to, the design and execution of the Group's stress and scenario testing, including any changes of assumptions.

·  Informed the Remuneration Committee regarding the management of the Group's material risks to support their consideration of executive's Annual Incentive Plan rewards. 

·  Considered a Line 2 review of the 2019 Annual Operating Plan.

REVIEW OF SYSTEM OF INTERNAL CONTROLS

The Board has overall responsibility for the Group's risk management and internal control systems and for reviewing their effectiveness in accordance with the Code. The Group's systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. 

The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through the Audit and Risk Committees, which draw upon input from all three lines of defence. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2018, in accordance with the 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' published by the Financial Reporting Council. The assessment for 2018 was presented to the Board, following review by both Audit and Risk Committees, on 4 March 2019. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored by both the business and the Committees accordingly.

"DURING 2018, IN ADDITION TO ITS EXISTING PRINCIPAL ACTIVITIES, the COMMITTEE HAS REVIEWED AND CHALLENGED MATTERS RELATING TO THE STANDARD LIFE ACQUISITION AND THE IMPACT OF EXTERNAL POLITICAL AND ECONOMIC UNCERTAINTIES IN ORDER TO ENSURE THE COMPANY IS IN A STRONG POSITION TO DRIVE ITS STRATEGIC OBJECTIVES FORWARD."

JOHN POLLOCK

CHAIR OF RISK COMMITTEE

NOMINATION COMMITTEE

The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size, composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and senior management; and making recommendations to the Board on these matters. 

The Nomination Committee met five times in 2018.

The Nomination Committee also met three times in 2018 as the Chair Selection Committee, chaired by Kory Sorenson, with other members being Karen Green, Wendy Mayall, John Pollock and Belinda Richards. 

The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group and, in the case of executive appointments, also considers internal candidates. Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board. 

This process was used for the appointment of the new Chairman, Nicholas Lyons, in 2018. The search consultancy used in 2018 for Director appointments was Russell Reynolds which has no other connection with the Company.

NOMINATION COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

·  As the Chair Selection Committee, delivered a recommendation to the Board for the appointment of Nicholas Lyons as Chairman following a comprehensive search process led by the Chair Selection Committee with Russell Reynolds search consultancy.

·  Delivered a recommendation to the Board for Alastair Barbour to succeed Ian Cormack as Senior Independent Director.

·  Taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board.

·  Taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board.

·  Reviewed the time spent by Directors in fulfilling their duties, concluding that the time spent appeared to be high in comparison with other FTSE 250 companies.

·  Reviewed the succession plans for Executive and Non-Executive Directors and recommended their approval to the Board.

·  Reviewed progress updates on Diversity and Inclusion, supporting initiatives being undertaken to accelerate and enhance management diversity.

The Board's policy on diversity is as follows:

·  The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new Directors.

·  The Board's overriding aim is to appoint the right Directors to the Board to drive forward the Group's strategy within a robustly compliant framework.

·  The Board will undertake regular skills audits to ensure the Board's skills remain appropriate for its strategy and providing diversity where possible.

"THE NOMINATION COMMITTEE HAS PERFORMED ITS ROLE SUCCESSFULLY OVER THE LAST THREE YEARS OF BOARD RENEWAL, WITH EIGHT NEW NON-EXECUTIVE DIRECTORS APPOINTED OVER 2016, 2017 AND 2018, REFLECTING THE SKILLS AND EXPERIENCE Required TO DRIVE THE GROUP FORWARD."

NIChOLAS LYONS

CHAIRMAN

Members:

Chair: Nicholas Lyons

Alastair Barbour

Nicholas Shott

Ian Cormack (until 2 May 2018)

Kory Sorenson (from 2 May 2018)

Note

Henry Staunton (Chair until 31 October 2018, when he was succeeded by Nicholas Lyons). 

REMUNERATION COMMITTEE

The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met seven times during 2018.

The Remuneration Committee is responsible for making recommendations to the Board on the Company's remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors, Executive Committee members (and other Solvency II identified staff) and the Chairman. Other than in relation to the Chairman, these include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Remuneration Committee's activities in 2018 are provided in the Directors' Remuneration Report on pages 76 to 105.

Our Remuneration Committee terms of reference were updated during the course of this year to reflect the expectations of the new Corporate Governance Code, of which we are fully supportive.

FIT Remuneration Consultants provided advice to the Remuneration Committee until March 2018. PwC provided advice from May 2018 onwards. Both organisations are independent of the Group.

"The Committee believes that Phoenix Group Holdings' approach to remuneration plays a key part in supporting the Group's strategic priorities and alignment with shareholders' and customers' interests."

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

Members:

Chair: Kory Sorenson

Karen Green

Nicholas Shott

Note

There were no changes to the composition of the Committee during 2018.

DIRECTORS' REMUNERATION REPORT

REMUNERATION COMMITTEE CHAIR'S LETTER

DEAR SHAREHOLDER

On behalf of the Board and its Remuneration Committee ('Committee'), I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2018. This report covers remuneration for Executive Directors and Non-Executive Directors of the Company, operated in line with the Remuneration Policy approved by shareholders at the 2017 AGM.

2018 was a transformational year for Phoenix with the acquisition of the Standard Life Assurance businesses, as set out in the Group Chief Executive Officer's report at the beginning of this Annual Report and Accounts. This and other achievements, in line with our strategic objectives, reflect the strong performance, commitment and leadership shown by the Group's management team. 

Particular operational and financial highlights for the year included: 

Highlights 

·  Cash generation of £664 million in 2018 taking the total cash generation in 2017 and 2018 to £1.3 billion and exceeding the upper end of the target range for this period of £1.0 billion to £1.2 billion.

·  Completion of the acquisition of the Standard Life Assurance businesses financed in part by a £950 million rights issue and a £945 million debt issuance.

·  Strategic Partnership with Standard Life Aberdeen plc.

·  Completion of AXA Wealth and Abbey Life integrations. 

·  Completion of three Bulk Purchase Annuity ('BPA') transactions. 

·  Successful on-shoring of the Group.

·  Strong Customer Satisfaction scores of 93%.

INCENTIVE OUTCOMES FOR 2018

The Committee believes that Phoenix's approach to remuneration plays a key part in supporting the Group's strategic priorities and alignment with shareholders' and customers' interests. As indicated in last year's report, following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within our variable pay plans and made the necessary adjustments to ensure that the plans operated as originally intended and properly reflected our aim to reward long-term value generation. 

Specifically: 

·  2018 Annual Incentive Plan ('AIP'):

·  Solvency II Management Action targets have been increased by £260 million to reflect the equity hedging action announced to the market.

·  Solvency II Own Funds targets have been increased by £1,837 million to reflect equity raised as part of the acquisition.

·  No changes were made to other AIP metrics.

·  2016 Long Term Incentive Plan ('LTIP'):

·  No changes were made to the targets, recognising that no net cash is expected from the Standard Life Assurance businesses over the performance period ending December 2018.

For completeness. the targets relating to the 2017 and 2018 LTIP awards were also reviewed and the adjustments are described on page 94.

The Committee evaluated the performance of each Executive Director against both business objectives and individual personal objectives and decided the overall outturns of the AIP and LTIP are appropriate, specifically: 

·  2018 AIP: Clive Bannister and James McConville should receive 85.5% and 88.0% of their maximum bonus opportunity, respectively. 

·  2016 LTIP: Awards will vest at 49.5% of maximum opportunity for both Clive Bannister and James McConville.

Further details of the performance assessment are provided in this report.

REMUNERATION POLICY APPROVAL FOR 2019

The current Directors' Remuneration Policy was approved by shareholders at the 2017 AGM, with a 99% vote in favour. While this policy was put in place for three years, the recent establishment of Phoenix Group Holdings plc as the ultimate parent company of the Group means that the Directors' Remuneration Policy will need to be submitted for a formal binding shareholder approval at this year's AGM before an updated Remuneration Policy is put to shareholders at the 2020 AGM. 

This will largely be a roll forward of the previously approved Phoenix Group Holdings policy. However, in recognition of the 2018 update to the UK Corporate Governance Code, we propose the following two changes to our current Policy: 

·  Alignment of pension contributions for new Executive Directors with those provided to the wider workforce, with a review of the policy for current Executive Directors as part of the full policy review later this year.

·  Introduction of post-cessation shareholding requirements for both new and current Executive Directors. 

AIP and ltip for 2019

The Committee reviewed the AIP and LTIP metrics in light of the acquisition of the Standard Life Assurance businesses and concluded that they continue to reflect the Group's evolving business focus and are aligned to the success of the Enlarged Group. Therefore, we propose no changes for the 2019 performance measures.

AIP 2019 (metrics unchanged from 2018)

Metric

2019 Weightings

Cash Generation

24% (30% of Corporate component)

Adjusted Shareholder Solvency II Own Funds

24% (30% of Corporate component) 

Management Actions

12% (15% of Corporate component) 

Customer Experience

20% (25% of Corporate component)

Personal Objectives

20%

LTIP 2019 (metrics unchanged from 2018)

Metric

2019 Weightings

Cumulative Cash Generation

40%

Return on Adjusted Shareholder Solvency II Own Funds

35%

TSR

25%

BOARD CHANGES

During the year, Henry Staunton announced his retirement from the Phoenix Group Holdings Board. Following an intensive search process, Henry was succeeded by Nicholas Lyons from 31 October 2018. Nicholas brings a wealth of experience in life insurance as well as the broader financial services sector. The Board is delighted to welcome Nicholas and looks forward to working with him in the future. The new Chairman's annual fee is the same as that paid to his predecessor.

LOOKING FORWARD

During 2019 the Committee will conduct a full review of the Remuneration Policy to ensure that it continues to align with the Group's strategy, motivates and incentivises management, and promotes alignment with shareholders' and customers' interests. This review will incorporate the new requirements of the UK Corporate Governance Code, which we have already started to embrace through the early adoption of certain aspects of the Code and expanded remit of the Committee as set out in the Terms of Reference. An updated Remuneration Policy will be put to shareholders at the 2020 AGM.

As part of the review process, I will be formally reaching out to engage with and seek the views of the Group's major shareholders. As ever, I welcome the views of all stakeholders, look forward to these meetings, and am very grateful for your time taken and valuable feedback.

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

4 March 2019

DIRECTORS' REMUNERATION REPORT 

AT A GLANCE

HOW WE PERFORMED IN 2018

Group performance measures

Annual Incentive Plan ('AIP'):

Below we show the target ranges and outturn against the metrics within the 2018 AIP. More details of the 2018 AIP can be found on page 89. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company strategy and remuneration outcomes.

OPERATING CASH GENERATION (£m)

KPI

Threshold

550

Target

640

Maximum

690

Outturn

£664m

SOLVENCY II MANAGEMENT ACTIONS (£m)

Threshold

360

Target

400

Maximum

460

Outturn

£1,080m

ADJUSTED SHAREHOLDER SOLVENCY II OWN FUNDS (£m)

Threshold

4,700

Target

4,750

Maximum

4,850

Outturn

£5,603m

CUSTOMER SATISFACTION (%)

KPI

Threshold

90

Target

91

Maximum

93

Outturn

93.1%

ORIGO TIMESCALES (DAYS)

KPI

Threshold

≤12

Target

≤11

Maximum

≤9.5

Outturn

10.73 days

CAT. B INCIDENT CLOSURES (%)

Threshold

≥70

Target

≥72.5

Maximum

≥75

Outturn

73.4%

SERVICING COMPLAINTS (%)

Threshold

60

Target

65

Maximum

70

Outturn

50%

FOS OVERTURNS (%)1

KPI

Threshold

≤20

Target

≤19

Maximum

≤18

Outturn

17%

1  See note 5 on page 89 for detail of the FOS Overturn Rate used in the AIP.

Long Term Incentive Plan ('LTIP'):

Below we show outturn against the measures which applied for the 2016 LTIP awards which are reflected in the Single Figure Table on page 88. Cumulative cash generation and TSR performance are shown over the three-year performance period (financial years 2016, 2017 and 2018). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts), with median being the 50th percentile and upper quintile being the 80th percentile. Cash generation continues to be one of our key corporate strategic objectives, while TSR provides a direct linkage to shareholder interests. 

CUMULATIVE CASH GENERATION (£bn)

Threshold

1.311

Target

1.511

Outturn

£1.507bn

TOTAL SHAREHOLDER RETURN (percentile)

Threshold

50

Target

80

Outturn

46th percentile

Shareholding Guidelines ('SOGs')

The charts below show the shares and vested LTIP awards held by the Executive Directors as a percentage of salary as at 31 December 2018. The figures are based on a share price of £5.63 as at 31 December 2018. LTIPs which have vested but are subject to a holding period have counted towards the SOGs figure. The LTIP vested figure reflects performance outturn, dividend accrual, and the expected impact of income tax and National Insurance that will be payable on exercise. Further details on shareholding requirements are included in the Remuneration Policy under the Shareholding Guidelines section on page 84.

SHAREHOLDING GUIDELINES (% OF SALARY)

Group Chief Executive Officer - Clive Bannister

 

Shareholding guidelines

200%

Shares held at 31 December 2018

740%

 

Group Finance Director - James McConville

 

Shareholding guidelines

200%

Shares held at 31 December 2018

399%

INTRODUCTION

This report contains the material required to be set out as the Directors' Remuneration Report ('Remuneration Report') for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 ('the DRR regulations').

Phoenix Group Holdings previously voluntarily complied with the DRR regulations as a matter of good practice although it was not strictly required to do so as a non-UK incorporated quoted company. Subsequent to the completion of Phoenix Group Holdings' re-domicile to the UK and following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted as the new ultimate parent company of the Group in place of Phoenix Group Holdings. Accordingly, the Company, as a UK-registered quoted company, must now comply with the DRR regulations as a matter of UK company law.

The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.

The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December 2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of services provided to Phoenix Group Holdings plc or its subsidiaries and this is shown on page 104 with services considered to have been provided effective from 13 December 2018. 

DIRECTORS' REMUNERATION POLICY

The 2019 AGM is the Company's first AGM as a UK-registered quoted company, and so the Company is seeking approval from its shareholders for its Directors' Remuneration Policy ('Remuneration Policy').

The Remuneration Policy which is being put forward for approval by shareholders of Phoenix Group Holdings plc at the 2019 AGM is in all material respects the same as the policy approved by the shareholders of Phoenix Group Holdings at that company's AGM on 11 May 2017. From the date of listing of Phoenix Group Holdings plc on 13 December 2018 the Remuneration Committee has voluntarily applied the policy previously established by Phoenix Group Holdings. This Policy will be reviewed in 2019 in light of changes to the UK Corporate Governance Code and other investor body guidelines and a new revised Policy will be presented to shareholders for approval at the AGM of Phoenix Group Holdings plc in 2020.

Ahead of this full review however, the Group has taken the opportunity to make two immediate updates to the Policy:

·  The alignment of pension entitlement for newly appointed Executive Directors to that of the majority of the workforce.

·  The introduction of a shareholding requirement post cessation of employment.

The Remuneration Policy is set out in section A of this report overleaf.

Section A: This section contains the Directors' Remuneration Policy as proposed for approval by the Company's shareholders at the Company's 2019 AGM on 2 May 2019. 

GENERAL POLICY

The Remuneration Policy for Executive Directors is summarised in the table below along with the policy on the Chairman's and the Non-Executive Directors' fees.

Summary of changes from previous policy:

As explained in the Remuneration Committee Chairman's letter at the beginning of this Directors' Remuneration Report, the Remuneration Policy proposed for adoption by the Company's shareholders at the 2019 AGM is largely unchanged from the Remuneration Policy approved by the shareholders of Phoenix Group Holdings at its 2017 AGM with the exception of the specific details outlined on page 79 and the addition of the 2019 LTIP metrics. In line with legislative requirements, a revised Remuneration Policy will be presented to shareholders in 2020 being three years following the 2017 AGM.

Overall positioning*

The Company's overall positioning on remuneration for Executive Directors remains unchanged from prior years:

·  An appropriate balance is maintained between fixed and variable components of remuneration.

·  Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors is positioned appropriately between these data sets. This benchmark will be reviewed in 2019 in accordance with Phoenix's position within the FTSE market.

*  This section does not form part of the Remuneration Policy and is for information only.

HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2018/potential rewards under various scenarios (£000)

The charts below compare the maximum levels of Total Remuneration payable under the Directors' Remuneration Policy (see page 81) and the actual payments for 2018 detailed in the Single Figure Table (see page 88).

TOTAL REMUNERATION OPPORTUNITY (£000)

Group Chief Executive Officer -
Clive Bannister

Total fixed pay

AIP

LTIP

Share price growth and dividends

Total

Minimum

100%

 

 

 

839

On-target

49%

31%

20%

 

1,717

Maximum

25%

32%

43%

 

3,292

Maximum with growth

21%

26%

35%

18%

3,992

Actual

34%

36%

25%

5%

2,482

 

Group Finance Director -
James McConville

Total fixed pay

AIP

LTIP

Share price growth and dividends

Total

Minimum

100%

 

 

 

533

On-target

49%

30%

21%

 

1,086

Maximum

26%

32%

42%

 

2,076

Maximum with growth

21%

26%

35%

18%

2,516

Actual

34%

37%

24%

5%

1,582

·  Minimum, on-target and maximum represent the scenario charts required under the Directors' Remuneration Policy - see the data assumptions below.

·  'Maximum with growth' is the maximum scenario, but with the LTIP element increased to reflect a 50% share price growth assumption over the three-year period until LTIP vesting. The element of the total representing the value from these assumptions on share price growth and dividends is shown separately.

·  'Actual' represents the values shown in the 2018 Single Figure Table. Within this, the actual share price growth and dividends in the three-year period until LTIP vesting are shown separately.

Name

Base salary

£000

Benefits

£000

Pension

£000

Total fixed

£000

Clive Bannister

700

16

140

856

James McConville

440

16

88

544

 

Minimum

Consists of base salary, benefits and pension:

·  Base salary is the salary to be paid in 2019 (unchanged from 2018).

·  Benefits measured as benefits paid in 2018 as set out in the Single Figure Table.

·  Pension measured as the full entitlement of approximately 17.6% of base salary receivable (after the reduction to payments made in cash for employers' National Insurance Contributions).

On-target

Based on what the Executive Director would receive if performance was on-target:

·  AIP: consists of the on-target annual incentive (75% of base salary).

·  LTIP: consists of the threshold level of vesting (50% of base salary). In addition, the potential value of Sharesave and Share Incentive Plan ('SIP') participation is also recognised.

Maximum

Based on the maximum remuneration receivable:

·  AIP: consists of the maximum annual incentive (150% of base salary).

·  LTIP: assumes maximum vesting of awards and valued as on the date of grant (normal award 200% of base salary). Sharesave and SIP valued on the same basis as in the on-target row.

Remuneration Policy table

Element and purpose

Base Salary

This is the core element of pay and reflects the individual's role and position within the Group with some adjustment to reflect their capability and contribution

Policy and operation

·  Base salaries are reviewed each year against companies of similar size and complexity. Both salary levels and overall remuneration are set by reference to the median data of comparators which the Remuneration Committee considers to be suitable using both the FTSE 31-100 and the FTSE 250 as a whole, and positioning the Executive Directors' salaries around the average of the median positions in these pan-sector groups. Consideration is also given to other relevant insurance company data.

·  The Remuneration Committee uses this data as a key reference point in considering the appropriate level of salary. Other relevant factors including corporate and individual performance and any changes in an individual's role and responsibilities, and the level of salary increases awarded to other employees of the Group are also considered.

·  Base salary is paid monthly in cash.

·  Changes to base salaries normally take effect from 1 January.

Maximum

·  The Remuneration Committee will apply the factors set out above in considering any salary adjustments during the duration of this policy. No increase will be made if it would take an Executive Director's salary above £780,000 (being the median level of salaries for CEOs in the FTSE 31-100 when the prior policy was adopted in 2017), provided that this figure may be increased in line with UK RPI inflation from the adoption of the prior policy in May 2017.

Performance measures

·  N/A

Element and purpose

Benefits

To provide other benefits valued by recipient

Policy and operation

·  The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the Implementation Report. The Remuneration Committee reserves discretion to introduce new benefits where it concludes that it is in the interests of the Group to do so, having regard to the particular circumstances and to market practice.

·  Where appropriate, the Company will meet certain costs relating to Executive Director relocations.

Maximum

·  It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-to-year, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director's base salary.

·  The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the Remuneration Committee considers to be appropriate in all the circumstances.

·  Relocation expenses are subject to a maximum limit of £150,000.

Performance measures

·  N/A

Element and purpose

Pension

To provide retirement benefits and remain competitive within the marketplace

Policy and operation

·  The Group provides a competitive employer sponsored defined contribution pension plan.

·  All Executive Directors are eligible to participate in the Group Personal Pension ('GPP'). Executive Directors receive a contribution to the GPP or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits. Any such cash payments are reduced for the effect of employers' National Insurance Contributions.

·  Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations.

Maximum

·  Pension contributions for new Executive Directors will be aligned with the wider workforce. The exact contribution rate will be disclosed next year following a review of overall Company pension provision.

·  Pension contributions for current Executive Directors are limited to 20% of base salary per annum (reduced to 17.6% when taken as cash in lieu of contribution), with the intention to review this against the wider workforce as part of the full policy review later this year. 

Performance measures

·  N/A

Element and purpose

Annual Incentive Plan ('AIP') and Deferred Bonus Share Scheme ('DBSS')

To motivate employees and incentivise delivery of annual performance targets

Policy and operation

·  AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group's strategy.

·  AIP outcomes are paid in cash in one tranche (less the deferred share award).

·  At least 40% of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares). Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current deferral level or the period of deferral.

·  Deferral of AIP outcomes into shares is currently made under the DBSS.

·  Awards under DBSS will be in the form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual's choice).

·  DBSS awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days' share prices to calculate the number of shares in awards.

·  The three-year period of deferral will run to the third anniversary of the award date.

·  Dividend entitlements will accrue over the three-year deferral period and be delivered as additional vesting shares.

·  Malus/clawback provisions apply to the AIP and to amounts deferred under DBSS as explained in the notes to this table.

Maximum

·  The maximum annual incentive level for an Executive Director is 150% of base salary per annum.

Performance measures

·  The performance measures applied to AIP will be set by the Remuneration Committee and may be financial or non-financial and corporate, divisional or individual and in such proportions as it considers appropriate. However, the weighting of financial performance measures will not be reduced below 50% of total AIP potential in any year for the duration of this policy.

·  In respect of the financial performance measures, attaining the threshold performance level produces a £nil annual incentive payment and for non-financial performance measures the threshold performance level produces an annual incentive outcome that is 10% of the weighting given to these measures.

·  On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice.

·  The AIP operates subject to three levels of moderation:

i.  The Committee seeks to set suitable ranges for each measure in the context both of the Company's own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year-on-year growth is not an inherent objective. Recognising that the business of the Company is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to take account of such activity and ensure the targets continue to reflect performance as originally intended.

ii. There is a specific adjustment factor of 80%-120% of the provisional outturn whereby the Remuneration Committee may adjust the provisional figure (but subject to any over-riding cap) to take account of its broad assessment of performance both against pre-set targets and more generally, of the wider universe of stakeholders. With respect to financial performance measures, this assessment will include consideration of the quality of how particular outcomes were achieved.

iii.      The AIP remains a discretionary arrangement and the Remuneration Committee reserves discretion to adjust the outturn (from zero to any cap) should it consider that to be appropriate. In particular, the Remuneration Committee may operate this discretion in respect of any risk concerns.

Element and purpose

Long Term Incentive Plan ('LTIP')

To motivate and incentivise delivery of sustained performance over the long term, and to promote alignment with shareholders' interests, the Group operates the Phoenix Group Holdings Long Term Incentive Plan

Policy and operation

·  Awards under the LTIP may be in any of the forms of awards to receive shares for nil-cost (as described for DBSS above).

·  LTIP awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days' share prices to calculate the number of shares in awards.

·  The vesting period will be at least three years and run until the third anniversary of the award date (unless a longer vesting period is introduced).

·  A holding period will apply so that Executive Directors may not normally exercise vested LTIP awards until the fifth anniversary of the award date.

·  Dividend entitlements will accrue until the end of the holding period in respect of performance vested shares and be delivered as additional vesting shares.

·  Malus/clawback provisions apply on a basis consistent with the equivalent provisions in the AIP and DBSS and as explained in the notes to this table.

·  The Company will honour the vesting of all awards granted under previous policies in accordance with the terms of such awards.

Maximum

·  The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases).

·  The Remuneration Committee's practice is to make LTIP awards to Executive Directors each year over shares with a value (as at the award date) of 200% of the individual's annual base salary although discretion is reserved to make awards up to the maximum levels for the policy as stated above.

Performance measures

·  The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). The measures for the 2019 LTIP are as set out below (unchanged from 2018):

 

Measure

Weighting



Cumulative Cash Generation

40%



Return on Adjusted Shareholder Solvency II Own Funds

35%



Total Shareholder Return

25%



·  The Remuneration Committee retains discretion to adjust the weightings/substitute metrics but would expect to consult with its major shareholders if it proposed changing materially the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between these performance measures.

·  For every LTIP award, appropriate disclosures regarding the proposed performance conditions will be made in the annual Implementation Report.

·  Once set, performance measures and targets will generally remain unaltered unless events occur which, in the Remuneration Committee's opinion, make it appropriate to make adjustments to the performance measures, provided that any adjusted performance measure is, in its opinion, neither materially more nor less difficult to satisfy than the original measure.

·  For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting will be no more than 25% of that part of the LTIP award. 

·  The performance period for LTIP awards will be at least three years, but the Remuneration Committee reserves discretion to lengthen the applicable performance periods for LTIP awards.





Element and purpose

All-employee share plans

To encourage share ownership by employees, thereby allowing them to participate in the long-term success of the Group and align their interests with those of the shareholders

Policy and operation

·  Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation.

Maximum

·  Sharesave - the Remuneration Committee has the facility to allow individuals to save up to a maximum of £500 each month (or such other level as permitted by HMRC legislation) for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount of up to 20% of the market price set at the launch of each scheme.

·  Share Incentive Plan ('SIP') - the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company and receive up to two matching shares for every purchased share. Maximum saving is £150 each month (or up to such level as permitted by the Company in line with HMRC legislation). SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation).

Performance measures

·  Consistent with normal practice, such awards are not subject to performance conditions.

Element and purpose

Shareholding guidelines

To encourage share ownership by the Executive Directors and ensure interests are aligned

Policy and operation

·  Executive Directors are expected to retain all shares (net of tax) which vest under the DBSS and under the LTIP (or any other discretionary long term incentive arrangement introduced in the future) until such time as they hold a minimum of 200% of their base salary in shares.

·  Only beneficially owned shares and vested share awards (discounted for anticipated tax liabilities) may be counted for the purposes of the guidelines. Share awards do not count prior to vesting (including DBSS awards).

·  Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Remuneration Committee will review shareholdings annually in the context of this policy.

·  Post cessation of employment, Executive Directors are expected to retain their full level of employment shareholding requirement in the first year and half the level of their employment shareholding requirement in the second year. 

Maximum

·  N/A

Performance measures

·  N/A

Element and purpose

Chairman and Non-Executive Director fees

Policy and operation

·  The fees paid to the Chairman and the fees of the other Non-Executive Directors are set to be competitive with other listed companies of equivalent size and complexity.

·  Fee levels are periodically reviewed. The Company does not adopt a quantitative approach to pay positioning and exercises judgement as to what it considers to be reasonable in all the circumstances as regards quantum.

·  Additional fees are paid to Non-Executive Directors who chair a Board committee, or sit on the board of a subsidiary company or on the Solvency II Model Governance Committee, and to the Senior Independent Director ('SID'). No separate Board committee membership fees are currently paid.

·  Fees are paid monthly in cash.

·  Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January.

Maximum

·  The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company's Articles of Association for such fees (currently £2 million per annum in aggregate).

·  The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the establishment of new Board committees.

Performance measures

·  N/A

NOTES TO THE REMUNERATION POLICY TABLE

1. Differences between the Policy on Remuneration for Directors and the Policy on Remuneration of other employees

When determining Executive Directors' remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate.

The Group has (as required by Solvency II regulations) one consistent reward policy for all levels of employees and this policy is made available to all staff. Therefore, the same reward principles guide reward decisions for all Phoenix employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business:

·  AIP - all Phoenix employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by level. The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies for employees in 'control functions' (risk, compliance, internal audit and actuarial) to exclude financial performance measures.

·  LTIP - our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below the Board for future awards.

·  All-employee share plans - the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP), and equivalent arrangements in foreign jurisdictions (including on a tax advantaged basis permitted under local laws). In addition, selected individuals may receive ad-hoc share awards contingent on continued employment. 

2. Stating maximum amounts for the Remuneration Policy

The DRR regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration.

3. Malus and clawback

Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the AIP, DBSS and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following:

·  a review of the conduct, capability or performance of an individual;

·  a review of the performance of the Company or a Group member;

·  any material misstatement of the Company's or a Group member's financial results for any period;

·  any material failure of Risk Management by an individual, a Group member or the Company; or

·  any other circumstances that have a sufficiently significant impact on the reputation of the Company.

4. Travel and hospitality

While the Remuneration Committee does not consider this to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality (whether paid for by the Company or another) and certain instances of business travel (including any related tax liabilities settled by the Company or another Group company) for Directors may technically be considered as benefits and so the Remuneration Committee expressly reserves the right to authorise such activities and reimbursement of associated expenses within its agreed policies.

5. Discretions reserved in operating incentive plans

The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including:

·  (as described in the Remuneration Policy table) the determination of performance measures and targets and resultant vesting and pay-out levels;

·  (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended;

·  (as described in the Termination Policy) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and

·  the ability to make adjustments to existing awards made under the incentive plans in certain circumstances (e.g. rights issues, corporate restructurings or special dividends). Any exercise of discretion will be disclosed in the Implementation Report for the year.

RECRUITMENT REMUNERATION POLICY

The Company's recruitment remuneration policy aims to give the Remuneration Committee sufficient flexibility to secure the appointment and promotion of high calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.

·  In terms of the principles for setting a package for a new Executive Director, the starting point for the Remuneration Committee will be to apply the general policy for Executive Directors as set out above and structure a package in accordance with that policy. 

·  The AIP and LTIP will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.

·  For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment as appropriate.

·  For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.

·  For external candidates, it may be necessary to make awards in connection with the recruitment to buy-out awards forfeited by the individual on leaving a previous employer. For such buy-out awards, Phoenix will not pay more than is, in the view of the Remuneration Committee, necessary and will in all cases seek, in the first instance, to deliver any such awards under the terms of the existing incentive pay structure. It may, however, be necessary in some cases to make such awards on terms that are more bespoke than the existing annual and equity-based pay structures in Phoenix in order to secure a candidate. Details of any buy-out awards will be appropriately disclosed.

·  All such buy-out awards, whether under the AIP, LTIP or otherwise (for example, specific arrangements made under Listing Rule 9.4.2), will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make buy-out awards subject to what are, in its opinion, comparable requirements in respect of service and performance. However, the Remuneration Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interests of shareholders and where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.

·  For the avoidance of doubt, such buy-out awards are not subject to a formal cap.

·  A new Non-Executive Director would be recruited on the terms explained in the Remuneration Policy for such Directors.

DIRECTORS' SERVICE CONTRACTS

Executive Directors

Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, certain fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Remuneration Committee believes the contracts to be consistent with best practice. The Remuneration Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing after the initial period of six months if the Executive Director finds alternative employment. Contracts do not contain change of control provisions. The template contract is reviewed from time to time and may be amended provided it is not overall more generous than the terms described above.

Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group.

Non-Executive Directors

The Non-Executive Directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for an initial fixed term of three years (which may be renewed), terminable by one month's notice from either side (six months in the case of the Chairman). Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance and life insurance.

Copies of Executive Director service contracts and Non-Executive Director letters of appointment are available for inspection at the Company's registered office.

Termination policy summary

In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers. Therefore, it is appropriate for the Remuneration Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the Remuneration Committee may choose to apply under the discretions available to it under the terms of the AIP, DBSS and LTIP plans. The potential treatments on termination under these plans are summarised below.

Incentives

Good Leaver1

Bad Leaver

Exceptional Events

 

A participant is considered a Good Leaver if leaving through redundancy, serious ill health or death or otherwise at the discretion of the Remuneration Committee

A participant would typically be considered a Bad Leaver following a voluntary resignation or leaving for disciplinary reasons

For example change in control or winding-up of the Company

AIP

Pro-rated annual incentive. Pro-rating to reflect only the period worked. Performance metrics determined by the Remuneration Committee

No awards made

Either the AIP will continue for the year or there will be a pro-rated annual incentive. Performance metrics determined by the Remuneration Committee

DBSS

Deferred awards vest at the end of the original vesting period

Deferred awards normally lapse

Deferred awards vest

LTIP

Will receive a pro-rated award subject to the application of the performance conditions at the normal measurement date and, generally, any holding period will continue to apply

Remuneration Committee discretion to disapply pro-rating or to accelerate vesting to the date of leaving (subject to pro-rating and performance conditions) and/or the release of any holding period

All awards will normally lapse

Will receive a pro-rated award subject to the application of the performance conditions at the date of the event. Remuneration Committee discretion to disapply pro-rating

1  Where the reason for leaving is retirement, the individual will be required to provide confirmation of their continued retirement before any payments are released to them after the end of the vesting period.

The Company has power to enter into settlement agreements with executives and to pay compensation to settle potential legal claims. In addition, and consistent with market practice, in the event of termination of an Executive Director, the Company may pay a contribution towards the individual's legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees would be disclosed as part of the detail of termination arrangements. For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments.

In the event of cessation of a Non-Executive Director's appointment (excluding the Chairman) they would be entitled to a one month's notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months' notice period.

Consideration of employment conditions elsewhere in the Group

As explained in the notes to the Remuneration Policy table, the Remuneration Committee takes into account Group-wide pay and employment conditions. The Remuneration Committee reviews the average Group-wide base salary increase and annual incentive costs and is responsible for all discretionary and all-employee share arrangements.

Consistent with previous practice, the Remuneration Committee did not consult with employees in preparing the 2017 Remuneration Policy although will be establishing further employee engagement in 2019 in accordance with the requirement under the Corporate Governance Code. Further details are shown on page 101.

Consideration of shareholders' views

Each year the Remuneration Committee takes into account the approval levels of remuneration-related matters at our AGM in determining that the current Remuneration Policy remains appropriate for the Company.

The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company's executive pay arrangements in particular. The Remuneration Committee consulted extensively with shareholders prior to the approval of the prior policy which was approved with 99.7% support in 2017. As this new policy is largely a rollover of the previous shareholder approved policy subject to the amendments described on page 79, it was not considered necessary to re-consult.

Section B: This section contains the Annual Report on Remuneration which forms part of the Directors' Remuneration Report to be proposed for approval by the Company's shareholders at the Company's 2019 AGM on 
2 May 2019

As explained on page 79 Phoenix Group Holdings plc became the ultimate parent company of the Group and was listed on the London Stock Exchange on 13 December 2018. For ease of comparison to 2017, 2018 full year data is shown below. Details of remuneration paid by each of the two entities Phoenix Group Holdings and Phoenix Group Holdings plc is shown in the Appendix to this report on page 104.

IMPLEMENTATION REPORT - AUDITED INFORMATION

SINGLE FIGURE TABLE

 

Salary/fees1

Benefits2

Annual
Incentive3

Long-term
incentives

Pension6

Total

2018

2017

2018

2017

2018

2017

20184

20175

(restated)

2018

2017

2018

20175

(restated)

Clive Bannister

700

700

16

16

898

902

745

1,147

123

123

2,482

2,888

James McConville

440

440

16

16

581

567

468

724

77

77

1,582

1,824

1  The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections.

2  Benefits for Clive Bannister comprise car allowance and private medical insurance totalling £16,290. Benefits for James McConville comprise car allowance and private medical insurance totalling £16,032.

3  Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 40% of the AIP award for 2018). In 2018 and 2017, £359,100 and £360,835 respectively of Clive Bannister's incentive payment is subject to three-year deferral delivered in shares, and £232,320 and £226,810 of James McConville's incentive payment is subject to a similar deferral. Deferred amounts are subject to continued employment.

4  In accordance with the requirements of the DRR regulations, the 2018 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2016 and which are due to vest on 2 June 2019 for Clive Bannister and James McConville. These vesting levels are at 49.5% reflecting outcomes against the Cumulative cash generation and TSR performance measures to 31 December 2018 (see page 91) and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2018 and 31 December 2018 (600.04p) to produce the estimated long-term incentives figures shown for 2018 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2019. The disclosed LTIP figure of £745,255 for Clive Bannister reflects the proportion of the original award which ultimately vested (£619,744) plus the value of dividend roll-up on those shares (£125,511). For James McConville the equivalent values are £468,433 as the disclosed LTIP figure, comprising £389,547 for the value of the proportion of the original LTIP award which ultimately vested plus the value of dividend roll-up on those shares (£78,886). All values are calculated using the three month average share price to 31 December 2018 (600.04p).

5  For 2015's LTIP awards which are reflected in the 2017 long-term incentives column above, the performance conditions were met as to 64.28% of maximum. The 2017 long-term incentives values in the above table reflect the value of the Company's shares on the date of vesting which was 28 September 2018 (676p per share) multiplied by the number of shares vesting whereas the equivalent figure within the published 2017 Single Figure Table was an estimate which reflected the average share price between 1 October 2017 and 31 December 2017 (759.8462p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting. 

6  Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 17.6% which is paid in cash. Pension contributions paid as cash supplements are reduced for the effect of employers' National Insurance contributions. Both Clive Bannister and James McConville received the pension contributions as cash supplements. No Director participated in a defined benefit pension arrangement in the year and none have any prospective entitlement to a defined benefit pension arrangement.

PAYMENTS FOR LOSS OF OFFICE AND PAYMENTS TO PAST DIRECTORS 

There were no payments made to former Directors and no payments for loss of office in the year.

AIP OUTCOMES FOR 2018- AUDITED INFORMATION

As explained in the Committee Chairman's statement, the business of the Group is to engage in corporate activity and the Remuneration Committee may adjust targets during the year to include such activity and ensure the targets continue to reflect performance as originally intended. 2018 was a transformational year for the Group in terms of corporate activity with respect to the acquisition of the Standard Life Assurance businesses. In light of this acquisition, the Committee approved the following adjustments to the AIP targets: 

Solvency II Management Actions: Threshold, target and maximum levels increased by £260 million to reflect the equity hedging action announced to the market. The range therefore increased from £100 million (threshold), £140 million (target), £200 million (maximum) to £360 million (threshold), £400 million (target), £460 million as shown in the table below.

Solvency II Management Actions are disclosed on page 32 and 33 of the Business Review and includes capital synergies associated with the acquisition of the Standard Life Assurance businesses.

Adjusted Shareholder Solvency II Own Funds: Threshold, target and maximum levels increased by £1,837 million to reflect equity raised as part of the acquisition, net of any dividends paid or payable in the first 12 months arising from the additional equity. The range therefore increased from £2,863 million (threshold), £2,913 million (target), £3,013 million (maximum) to £4,700 million (threshold), £4,750 million (target), £4,850 million as shown below.

Adjusted Shareholder Solvency II Own Funds represents the Group's Own Funds adjusted to remove the impacts of unsupported with-profit funds, the unsupported pension scheme (PGL Pension Scheme), restricted Tier 1 notes and Tier 2 or Tier 3 subordinated liabilities.

Against the specific Corporate measures, outturns were as follows:

Performance measure

Threshold performance level for 

2018 AIP

Target performance level for
2018 AIP

Maximum performance level for
2018 AIP

Performance level attained for
2018 AIP

% of incentive potential based on Performance Measure

% achieved

Operating companies' cash generation 

£550m

£640m

£690m

£664m

30.0%

22.2%

Solvency II Management Actions 

£360m

£400m

£460m

£1,080m

15.0%

15.0%

Adjusted Shareholder Solvency II Own Funds 

£4,700m

£4,750m

£4,850m

£5,603m

30.0%

30.0%

Customer experience 

 

 

 

 

 

 

Customer satisfaction1

90%

91%

93%

93.1%

7.5%

7.5%

Origo timescales2

≤12 days

≤11 days

≤9.5 days

10.73 days

7.5%

4.4%

CAT B incident closures3

≥70%

≥72.5%

≥75%

73.4%

5.0%

3.4%

Servicing complaint closure4

60%

65%

70%

50.0%

2.5%

0.0%

FOS overturn rate5

≤20%

≤19%

≤18%

17.0%

2.5%

2.5%

Total

 

 

 

 

100.0%

85.0%

1  The rating is a customer satisfaction score based on the results of a satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 4 or 5 regarded as satisfied). 93.1% of all questions asked scored a rating of 4 or above.

2  The Origo Options service is a recognised industry-wide initiative for processing Pension Transfers to ensure payments are made in a timely fashion. The service has set a benchmark standard of a 12 calendar day average elapsed time for processing transfers.

3  This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial). It measures the timeliness of actions when things go wrong. The metrics in the table represent the percentage of cases closed within nine months. 

4  This measure looks at servicing (ie not product or advice) complaints which are closed within three days.

5  This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision making in dealings with customers or an aspect of it. For the AIP the FOS overturn rate is calculated based on an average of the H1 current year and H2 prior year rates. This is due to the timing of when the FOS rates are published. The figures exclude cases from past Abbey Life businesses that are subject to the FCA's past business review as such cases must follow an approach prescribed by the FCA and are therefore not an indicator of Phoenix customer treatment.

Before confirming these outcomes for the 2018 AIP, the Committee undertook a review which confirmed that the Company had operated within its stated risk appetite during the year and that there were no other risk-related concerns that required the moderation of 2018 AIP outcomes.

Personal objectives were agreed by the Group Board and shared with the Remuneration Committee at the start of the year. The Board regards a number of the personal objectives set as commercially sensitive and, accordingly, it is not appropriate for such objectives to be disclosed. However a number of achievements for the Executive Directors are shown below:

Clive Bannister, Group Chief Executive Officer ('Group CEO')

Objectives

Achievements

Identify acquisition opportunities capable of individually and collectively, materially enhancing shareholder value, and execute as appropriate

The Group CEO played the critical role in securing and delivering the transformational acquisition of the Standard Life Assurance businesses leading the negotiation, transaction, and pricing of the deal and welcoming Standard Life Aberdeen plc as a strategic partner. Subsequent to the closure of the above acquisition, repositioned the Group to leverage Edinburgh as an operational headquarters alongside sites in London and Wythall, with a joint leadership team appropriately representative of the enlarged entity.

Deliver the financial results at or ahead of plan

The Group CEO has sponsored the achievement of all the financial targets including above target cash flow, reduced expense, reduced leverage.

Maintain or improve solvency

In conjunction with the Group FD, has helped deliver raising £1 billion of equity, £0.9 billion of subordinated debt, retaining a stable outlook from Fitch, delivering the highest Solvency II surplus and the lowest leverage ratio in the Group's history.

Deliver management actions and deliver on the strategic asset allocation strategy

Actively sponsored the Group's evolving strategic asset allocation and the sourcing of £1.4 billion of alternative illiquid assets and the establishment of the Group's Bulk Purchase Annuity capabilities. Drove £570 million of SII management actions and a further £510 million of capital synergies to the Standard Life Assurance businesses.

Maintain strong effective relationships with regulators

Championed another solid year of maintaining a wholly effective and transparent relationship with our regulators.

Complete on-shoring of Phoenix Group Holdings 

Re-domiciled Phoenix Group Holdings to the UK and established Phoenix Group Holdings plc as the new parent company of the Group.

Finalise outstanding integration issues related to AXA and Abbey Life

Completed the outstanding matters related to the AXA and Abbey Life integrations with total cost savings of £27 million per annum, £10 million above target. £1 billion of cash generation delivered from these businesses to date, 75% of total consideration.

Deliver on Diversity targets

Diversity targets were not met as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement. However improved metrics, governance, and accountability have re-enforced the importance of Phoenix's broader diversity agenda.

James McConville, Group Finance Director ('Group FD')

Objectives

Achievements

Complete at least 1 acquisition enhancing of shareholder value

The Group FD has played a critical role in supporting the Group's transformational acquisition of the Standard Life Assurance businesses both as a transaction, with its associated successful rights issue, and in its strategic on-boarding in Q4 2018. The Group FD has taken in Q3 2018 further responsibility as Group Director Scotland, and Head of Transformation for the acquisition. 

Deliver the financial results at or ahead of plan

All financial targets have been exceeded with reference to our Corporate targets: generating £664 million of cash, a reduced expense base (excluding acquisition costs), a reduced Fitch leverage ratio (22%) and an operating profit of £708 million.

Maintain or improve solvency

The Group FD has delivered the raising £1 billion of equity, £0.9 billion of subordinated debt, retaining a stable outlook from Fitch, delivering the highest Solvency II surplus and the lowest leverage ratio in the Group's history. 

Deliver management actions and deliver on the strategic asset allocation strategy

Management actions have been delivered materially ahead of target, including securing of over £1.4 billion of alternative assets. 

Complete on-shoring of Phoenix Group Holdings

Re-domiciled Phoenix Group Holdings plc to the UK and established Phoenix Group Holdings plc as the new parent company of the group.

Finalise outstanding integration issues related to AXA and Abbey Life

Completed the outstanding matters related to the AXA and Abbey Life integrations with total cost savings of £27 million per annum, £10 million above target. £1 billion of cash generation delivered from these businesses to date, 75% of total consideration.

Deliver on Diversity targets

The Group FD chairs the Diversity Committee. Improved metrics, governance, and accountability have re-enforced the importance of Phoenix's broader diversity agenda. Diversity targets were not met as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement. 

Manage investor relations and the external communications function

The Group FD ran a comprehensive Investor engagement programme across debt and equity with 33 investor roadshows and met 414 debt and equity investors, plus a capital markets event attended by 120 investors and analysts. These activities supported the successful rights issue and debt issues undertaken as part of the financing for the acquisition of the Standard Life Assurance businesses. 

Taking account of the attainment of personal objectives, the Group Chief Executive Officer received an 87.5% payout (£183,750) for this element and the Group Finance Director received a 100%payout (£132,000) for this element, consistent with their ratings for 2018. These Personal (individual objectives) measures applied to 20% of incentive opportunity and Corporate (financial and strategic) measures applied to 80% of incentive opportunity. Overall outturns as a percentage of maximum opportunity are 85.5% for the Group Chief Executive Officer and 88.0% for the Group Finance Director.

The table below shows the actual outturn against the annual incentive maximum.

Name

 

Corporate

 

Personal

Total

Maximum

Total

As a % of maximum corporate element

As a %
of salary

As a % of maximum personal
element

As a %
of salary

As a %
of salary

As a %
of salary

As a %
of maximum opportunity

Clive Bannister

85.00

102.00

87.50

26.25

128.25

150.00

85.50

James McConville

85.00

102.00

100.00

30.00

132.00

150.00

88.00

As described in the Remuneration Policy, 40% of 2018 AIP outcomes will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.

In addition, whilst the performance measures for the AIP for 2019 have been disclosed (see Implementation of Remuneration Policy for 2019 on page 97), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for 2019's AIP retrospectively in next year's Remuneration Report on a similar basis to the disclosures made above in respect of 2018's AIP.

LTIP OUTCOMES FOR 2016 AWARDS - AUDITED INFORMATION 

Performance measure and weighting

Target range

Performance achieved

Vesting
outcome

achieved

Cumulative cash generation (50%)

Target range between Cumulative cash generation of £1.311 billion and Cumulative cash generation of £1.511 billion.

£1.507bn

99%

49.5%

TSR (50%)

Target range between median performance against the constituents of the FTSE 250 (excluding Investment Trusts) rising on a pro rata basis until full vesting for upper quintile performance. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.

46th

0%

0.0%

Total

 

 

 

49.5%

The above targets were all measured over the period of three financial years 1 January 2016 to 31 December 2018.

In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and Risk Management within the Group, customer satisfaction and, in exceptional cases, personal performance (as described more fully on page 94, had been achieved in the performance period.

NON-EXECUTIVE FEES - AUDITED INFORMATION

The emoluments of the Non-Executive Directors for 2018 based on the current disclosure requirements were as follows:

Name

Directors'

salaries/fees

2018

£000

Directors'

salaries/fees

2017

£000

Benefits1

2018

£000

Benefits1

2017

£000

Total

2018

£000

Total

2017

£000

Non-Executive Chairman

 

 

 

 

 

 

Henry Staunton2

271

325

-

-

271

325

Nicholas Lyons3

55

-

2

-

57

-

Non-Executive Directors

 

 

 

 

 

 

Alastair Barbour

143

150

12

3

155

153

Ian Cormack4

39

116

-

-

39

116

Campbell Fleming5

-

-

-

-

-

-

Karen Green6

105

52

3

-

108

52

Isabel Hudson7

-

39

-

-

-

39

Wendy Mayall

107

118

2

-

109

118

Barry O'Dwyer5

-

-

-

-

-

-

John Pollock

127

136

-

-

127

136

Belinda Richards8

105

26

1

-

106

26

Nicholas Shott

105

105

2

-

107

105

Kory Sorenson

125

116

-

-

125

116

David Woods9

-

53

-

2

-

55

Total

1,182

1,236

22

5

1,204

1,241

1  The amounts within the benefits columns reflect the fact that the reimbursement of expenses to Non-Executive Directors for travel and accommodation costs incurred in attending Phoenix Group Holdings and Phoenix Group Holdings plc Board and associated meetings represent a taxable benefit. This position has been clarified with HMRC and the amounts shown are for reimbursed travel and accommodation expenses (and the related tax liability which is settled by the Group).

2  Henry Staunton retired from the Board of Phoenix Group Holdings on 31 October 2018.

3  Nicholas Lyons became Chairman designate of Phoenix Group Holdings from 1 September 2018 and was confirmed in this appointment on 31 October 2018. Figure above reflects fee paid from 31 October 2018. 

4  Ian Cormack retired from the Board of Phoenix Group Holdings on 2 May 2018.

5  Campbell Fleming and Barry O'Dwyer joined the Board of Phoenix Group Holdings on 31 August 2018 and waived all current and future emoluments with regard to their Directors' fees.

6  Karen Green joined the Board of Phoenix Group Holdings on 1 July 2017.

7  Isabel Hudson retired from the Board of Phoenix Group Holdings on 11 May 2017.

8  Belinda Richards joined the Board of Phoenix Group Holdings on 1 October 2017.

9  David Woods retired from the Board of Phoenix Group Holdings on 11 May 2017.

The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £4.055 million (2017: £4.082million).

SHARE-BASED AWARDS - AUDITED INFORMATION

As at 31 December 2018, Directors' interests under long-term share-based arrangements were as follows:

LTIP

Name

Date of
grant

Share price
on grant

No. of shares
as at 1 Jan 2018

No. of shares
granted
in 2018

Increase 
in shares
following
right issue

No. of 
dividend
shares
accumulating
at vesting1

No. of shares
exercised2

No. of shares
not 
vested3

No. of shares
as at 
31 Dec 
2018

Vesting
date4

Clive Bannister

 

 

 

 

 

 

 

 

 

 

LTIP

28 Sept 2015

632.8p

198,931

-

22,286

42,737

-

(94,285)

169,669

28 Sept 2018

LTIP

2 Jun 2016

670.9p

187,634

 

21,020

 

-

-

208,654

2 Jun 2019

LTIP

24 Mar 2017

708.7p

177,627

-

19,899

-

-

-

197,526

24 Mar 2020

LTIP

21 Mar 2018

703.6p

-

178,913

20,043

 

 

 

198,956

21 Mar 2021

 

 

 

564,192

178,913

83,248

42,737

-

(94,285)

774,805

 

James McConville

 

 

 

 

 

 

 

 

 

 

LTIP

28 Sept 2015

632.8p

125,041

-

14,008

26,860

-

(59,263)

106,646

28 Sept 2018

LTIP

2 Jun 2016

670.9p

117,940

-

13,212

-

-

-

131,152

2 Jun 2019

LTIP

24 Mar 2017

708.7p

111,651

-

12,508

-

-

-

124,159

24 Mar 2020

LTIP

21 Mar 2018

703.6p

-

112,460

12,598

 

 

 

125,058

21 Mar 2021

 

 

 

354,632

112,460

52,326

26,860

-

(59,263)

487,015

 

The number of shares for outstanding LTIP awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on 9 November 2016 and 27 July 2018. The number of shares for outstanding LTIP awards granted between 2017 and 2018 were increased to take into account the impact of the rights issues which took place on 27 July 2018. All adjustments were based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.

1  In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period (and which for awards made from 2015, will include dividends paid during any applicable holding period).

2  Gains of Directors from share options exercised and vesting shares under the LTIP in 2018 were £nil (2017: £2,533,277). 

3  The 2016 LTIP award vested at 49.5% of maximum.

4  All LTIP awards are now subject to a holding period so that any LTIP awards 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.

LTIP Targets

Following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within the variable pay plans and made the necessary adjustments to ensure that the plans continue to operate as originally intended, properly reflect the aim to reward long-term value generation and are aligned to the market announcements directly in connection with the acquisition. This review resulted in an adjustment to the 2018 targets as follows:

Cumulative Cash Generation: target range increased from £1.474 billion (threshold) to £1.674 billion (maximum) to £1.824 billion (threshold) to £2.024 billion (maximum) as shown below reflecting the additional net cash generation expected by the end of 2020. 

Return on Adjusted Solvency II Shareholders Own Funds: rebasing of the opening position to reflect the equity issued and any synergy benefits expected by the end of 2020.

The Committee were satisfied these adjustments ensured the LTIP continued to operate as originally intended with the targets no easier to satisfy as a result of the acquisition.

No changes were made to the targets for the 2016 and 2017 awards.

The performance conditions for the 2016, 2017 and 2018 awards are set out below and include these adjustments to the 2018 targets.

Performance measure

2016 award
(50% Cumulative cash
generation and 50% TSR)

2017 award
(50% Cumulative cash
generation and 50% TSR)

2018 award
(40% Cumulative cash
generation, 35% Return on Adjusted Shareholder Solvency II Own Funds and 25% TSR)

Return on Adjusted Shareholder Solvency II Own Funds

25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.

Measured over three financial years commencing with the year of award.

Not applicable.

Not applicable.

Between 4% CAGR and 6% CAGR.

Cumulative cash generation

25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.

Measured over three financial years commencing with the year of award. 

Target range of £1.311bn to £1.511bn.

Target range of £1.372bn to £1.572bn.

Target range of £1.824bn to £2.024bn.

TSR

25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.

Measured over three financial years commencing with the year of award.

Target range between median performance against the constituents of the FTSE 250 (excluding Investment Trusts) rising on a pro rata basis until full vesting for upper quintile performance.

 

Target range as for 2016.

Target range as for 2016.

Underpin: Notwithstanding the Return on Adjusted Shareholder Solvency II Own Funds, Cumulative cash generation and TSR performance targets, if the Committee determines that the Group's debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management, capital structuring and Risk Management, the level of awards vesting will either be reduced or lapse in full. The underpin also includes consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance.

DBSS

 

Date of
grant

Share price
on grant

No. of shares
as at
1 Jan 2018

No. of shares
granted

in 2018

Increase 
in shares
following
rights
issue

No. of dividend
shares
accumulating
at vesting1

No. of shares
exercised2

No. of shares
lapsed/
waived

No. of shares
as at 
31 Dec 
2018

Vesting
date

Clive Bannister

 

 

 

 

 

 

 

 

 

 

DBSS

28 Sept 2015

632.8p

33,917

-

 

6,479

(40,396)

-

-

19 Mar 2018

DBSS

2 Jun 2016

670.9p

38,464

-

4,309

-

-

-

42,773

24 Mar 2019

DBSS

24 Mar 2017

708.7p

37,363

-

4,185

-

-

-

41,548

20 Mar 2020

DBSS

21 Mar 2018

703.6p

-

46,112

5,165

 

 

 

51,277

15 Mar 2021

 

 

 

109,744

46,112

13,659

6,479

(40,396)

-

135,598

 

James McConville

 

 

 

 

 

 

 

 

 

 

DBSS

28 Sept 2015

632.8p

22,491

-

 

4,296

(26,787)

-

-

19 Mar 2018

DBSS

2 Jun 2016

670.9p

25,283

-

2,832

-

-

-

28,115

24 Mar 2019

DBSS

24 Mar 2017

708.7p

23,485

-

2,631

-

-

-

26,116

20 Mar 2020

DBSS

21 Mar 2018

703.6p

-

28,985

3,247

-

-

 

32,232

15 Mar 2021

 

 

 

71,259

28,985

8,710

4,296

(26,787)

-

86,463

 

The number of shares for outstanding DBSS awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on 9 November 2016 and 27 July 2018. The number of shares for outstanding DBSS awards granted between 2017 and 2018 were increased to take into account the impact of the rights issues which took place on 27 July 2018. All adjustments were based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.

1  In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually vest) to reflect the dividends paid during the vesting period.

2  Gains of Directors from share options exercised and vesting shares under the DBSS in 2018 were £525,707 (2017: £595,978). Clive Bannister's gain was £316,099 arising from an award exercised on 20 March 2018 at a share price of £7.825. James McConville's gain was £209,608 arising from an award exercised on 20 March 2018 at a share price of £7.825.

The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, other than being subject to continued employment. 

SCHEME INTERESTS AWARDED IN THE YEAR - AUDITED INFORMATION

Recipient

Date of award

Type of award

Basis on which award made

Face value of award

Percentage vesting at threshold performance1

Vesting date

Performance measures

Clive Bannister

21 March 2018

LTIP

Nil cost option

£1,399,854

25%

21 March 2021

See page 94

Clive Bannister

21 March 2018

DBSS1

Nil cost option

£360,785

-

15 March 2021

None

James McConville

21 March 2018

LTIP

Nil cost option

£879,908

25%

21 March 2021

See page 94

James McConville

21 March 2018

DBSS1

Nil cost option

£226,784

-

15 March 2021

None

1  The DBSS awards have no threshold performance level. 

The face value represents the maximum vesting of awards granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of the average of the closing middle market prices of Phoenix shares for the three dealing days preceding the award date. 

SHARESAVE - AUDITED INFORMATION

 

As at
1 Jan 2018

Increase in shares following rights issue

Shares exercised

Shares lapsed

As at
31 Dec 2018

Exercise price

Exercisable from

Date of
expiry

Clive Bannister

-

-

-

-

-

-

-

-

James McConville

2,852

319

-

-

3,171

£5.674

1 Jun 2020

1 Dec 2020

The number of options were increased to take into account the impact of the rights issues which took place on 27 June 2018. This adjustment was based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee and HMRC. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on the share price.

Gains of Directors from share options exercised under Sharesave during 2018 were nil (2017: nil). Sharesave options are granted with an option price that is a 20% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.

Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2018 were £525,707 (2017: £3,129,255).

During the year ended 31 December 2018, the highest mid-market price of the Company's shares was 733p and the lowest mid-market price was 544p. At 31 December 2018, the Company's share price was 563.4p.

DIRECTORS' INTERESTS - AUDITED INFORMATION

The number of shares and share plan interests held by each Director and their connected persons are shown below:

Name

As at
1 January 2018
or date of
appointment
if later

As at
31 December 2018
or retirement
if earlier

Total share plan
interests as at
31 December 2018
- Subject to performance measures 

Total share plan interests as at
31 December 2018
- Not subject to performance measures

Total share plan interests as at 
31 December 2018
- Vested but unexercised
scheme interest

Clive Bannister

727,329

827,178

605,136

135,598

169,669

James McConville

187,493

253,227

380,369

89,634

106,646

Alastair Barbour

6,625

9,716

-

-

-

Ian Cormack

5,779

5,779

-

-

-

Campbell Fleming

-

-

-

-

-

Karen Green

-

-

-

-

-

Nicholas Lyons

20,000

20,000

-

-

-

Wendy Mayall

25,000

30,000

-

-

-

Barry O'Dwyer

-

-

-

-

-

John Pollock

10,000

14,666

-

-

-

Belinda Richards

-

-

-

-

-

Nicholas Shott

5,000

7,333

-

-

-

Kory Sorenson

2,185

15,704

-

-

-

Henry Staunton

70,000

102,666

-

-

-

There have been no changes in the Directors' share interests between 31 December 2018 and 22 February 2019 (being one month prior to the date of the notice of the AGM).

SHAREHOLDING REQUIREMENTS - AUDITED INFORMATION

As explained in the Remuneration Policy under the Shareholding Guidelines section, the Executive Directors are subject to shareholding requirements.

The extent to which Executive Directors have achieved the requirements by 31 December 2018 (using the share price of 563.4p as at 31 December 2018) can be summarised as follows:

Position

Shareholding Guideline

(minimum % of salary)

Value of 

shares held at 

31 December 2018

(% of salary)

Clive Bannister

200%

740%

James McConville

200%

399%

The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with Phoenix, enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any shares which are required to be held for the purposes of the Company's Shareholding requirements or any vested LTIP award shares subject to a LTIP holding period.

IMPLEMENTATION OF REMUNERATION POLICY IN 2019 - NON-AUDITABLE

Element of Remuneration Policy

Detail of Implementation of Policy for 2019

Base Salary

Base salaries are set by reference to appropriate market comparables. Salaries in 2019 will remain unchanged at £700,000 for the Group Chief Executive Officer (unchanged from 2011) and £440,000 for the Group Finance Director (unchanged from 2014). This means that their salaries will not have increased for eight and five years respectively.

Benefits

There are no proposed changes to the benefits offered to Executive Directors in 2019.


Pension

There are no proposed changes to the pension benefits offered to current Executive Directors in 2019. Pension benefits for newly appointed Executive Directors will be aligned to that of the wider workforce.


Annual Incentive Plan ('AIP')

The AIP for 2019 will operate on a basis that is consistent with how the AIP operated in 2018.

The AIP maximum potential and on-target levels remain unchanged at 150% of base salary and at 50% of maximum levels (75% of base salary) respectively.

The overall weightings between Corporate and Personal performance measures for AIP in 2019 are:

·  Corporate (financial and strategic) performance measures - 80% (2018: 80%).

·  Personal (individual objectives) - 20% (2018: 20%).

The weightings of the AIP performance measures for 2019 remain unchanged from 2018 and are summarised below:


Performance measure

% of incentive potential

Corporate measure

 

Operating Companies' Cash Generation

(30% of Corporate component) 24%

Adjusted Shareholder Solvency II Own Funds

(30% of Corporate component) 24%

Solvency II Management Actions

(15% of Corporate component) 12%

Customer Experience

(25% of Corporate component) 20%

Personal

 

Individual Objectives

20%

Total

100%

Outcomes from performance measures for 2019's AIP may be moderated by the Committee in line with the approved Remuneration Policy. This will include a review by the Committee that the Company has operated within its stated risk appetite and that there are no other risk-related concerns before any 2019 AIP outcomes are confirmed.

The targets for the specific performance measures for AIP in 2019 are regarded as commercially sensitive by the Company but will be disclosed retrospectively in the Remuneration Report for 2019.

40% of AIP outcomes for 2019 will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.


Deferred Bonus Share Scheme ('DBSS')

DBSS awards made in 2019 (in respect of 2018's AIP outcome) will be made automatically on the fourth dealing day following the announcement of the Company's 2018 annual results in accordance with the Remuneration Policy.

The number of shares for DBSS awards will be calculated using the average share price for the three dealing days before the grant of the DBSS awards.

The three-year deferral period will run to the three-year anniversary of the making of the DBSS awards. Dividend entitlements for the shares subject to DBSS awards will accrue over the three-year deferral period.


Long-Term Incentive Plan ('LTIP')

Awards under the LTIP will be made automatically on the fourth dealing day following the announcement of the Company's 2018 annual results under a procedure similar to that described above for awards under the DBSS.

The number of shares for LTIP awards will be calculated using the average share price for the three dealing days before the grant of the LTIP awards.

The initial three-year vesting period will run to the three-year anniversary of the making of the LTIP awards. At this time, the performance conditions will be determined.

All annual LTIP awards made to Executive Directors are subject to a holding period so that any LTIP awards for which the performance conditions are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividend accrual for LTIP awards will continue until the end of the holding period.

Award levels for Executive Directors for 2019 are unchanged at 200% of base salary. 

The weightings of the LTIP performance measures for 2019 remain unchanged from 2018 and are summarised below:


Performance measure

Weighting of performance measure

Cumulative cash generation

40%

Return on Adjusted Shareholder Solvency II Own Funds

35%

TSR

25%

Total

100%

The performance measures are measured over a period of three financial years, commencing with financial year 2019.

All 2019 LTIP awards are subject to a further underpin measure relating to debt and risk management within the Group, consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance. These measures and the relative weightings are considered to be appropriate for 2019's LTIP awards.

The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with vesting commencing at median (where 25% of this part of the award vests) and full vesting at upper quintile levels, subject to an underpin regarding underlying financial performance.

The performance targets for the Cumulative cash generation measure are £2,097 million (where 25% of this part of the award vests) and £2,397 million (full vesting of this part of the award).

The performance targets for the return on Adjusted Shareholder Solvency II Own Funds measure are 4.5% in excess of the risk-free rate (where 25% of this part of the award vests) and 6.5% in excess of the risk-free rate (full vesting of this part of the award). 

The rules of the Company's LTIP reserves discretion for the Committee to adjust the outturn for any LTIP performance measures (from zero to any cap) should it consider that to be appropriate. The Committee may operate this discretion having regard to such factors as it considers relevant, including the performance of the Company, any individual or business.


All-Employee Share Plans

Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans on the same basis as all other UK employees.


Shareholding requirements

Requirement levels are 200% of base salary for the Executive Directors.

Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements. Unvested awards under the LTIP and DBSS are not included in this assessment. Details of current shareholding levels are shown on page 97.

Post cessation of employment, Executive Directors are expected to retain their full shareholding requirement in Year 1 and 50% of the requirement in Year 2.


Chairman and Non-Executive Directors' fees

The fee levels for 2019 remain the same as for 2018 and are £325,000 for the Chairman, £105,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable for the role of SID; and/or (ii) £20,000 payable where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also serves on the board of a subsidiary company; and/or (iv) £10,000 payable for service on the Solvency II Model Governance Committee.


Note: All incentive plans are subject to malus/clawback. See page 85 'Notes to the Remuneration Policy' for details.

DISTRIBUTION STATEMENT

The DRR regulations require each quoted company to provide a comparison between profits distributed by way of dividend and overall expenditure on pay.

RELATIVE IMPORTANCE (£m)

Profits distributed by way of dividend (% change +67%)

 

 

Total

2017

 

 

198

2018

 

 

332

 

Overall expenditure on pay
(% change +47%)

SLA businesses

Group (excl.SLA businesses)

Total

2017

 

 

128

2018

66

122

188

Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2018 this is the interim dividend paid (£163 million) and the recommended final dividend of 23.4p per share multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 in the notes to the consolidated financial statements. No share buy-backs were made in either year.

Overall expenditure on pay has been taken as the employee costs as set out in note C2 'Administrative expenses' in the notes to the consolidated financial statements. Expenditure on pay has increased by 47%, and decreased by 5% on a like for like basis excluding the impact of the acquisition of the Standard Life Assurance businesses. 

The decrease was primarily driven by the reduction in the number of AXA Wealth employees during the year, a significant portion of whom transferred to the Group's outsource provider. This was partly offset by small increases in share-based payment costs (see note I2) and AIP costs, increased salaries for new activities such as Bulk Purchase Annuities and also the impact of the salary increase for staff during the year.

PERFORMANCE GRAPH AND TABLE

The graph below shows the value to 31 December 2018 on a TSR basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Company's Premium Listing) compared with the value of £100 invested in the FTSE 250 Index (excluding Investment Trusts).

The FTSE 250 Index (excluding Investment Trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Company is a constituent.

TOTAL SHAREHOLDER RETURN

Value of a 100 unit investment made on 5 July 2010

 

Jul 2010

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Dec 2016

Dec 2017

Dec 2018

Phoenix Group Holdings/Phoenix Group Holdings plc

100

94

87

97

144

177

208

208

237

202

FTSE 250 (excluding investment trusts)

100

127

114

146

197

203

227

239

282

239

Source: Thomson Reuters Datastream

The DRR regulations also require that a performance graph is supported by a table summarising aspects of the Group Chief Executive Officer's remuneration for the period covered by the above graph (which will in due course be for a period of ten years).

GROUP CHIEF EXECUTIVE OFFICER REMUNERATION

 

 

Single figure
of total remuneration (£000)

Annual variable element award rates against maximum opportunity
('AIP')

Long-term incentive vesting rates against maximum opportunity
('LTIP')

2018

Clive Bannister

2,482

86%

49.5%

2017

Clive Bannister

2,8881

86%

64%

2016

Clive Bannister

2,878

84%

55%

2015

Clive Bannister

2,867

82%

57%

2014

Clive Bannister

3,104

68%

57%2

2013

Clive Bannister

2,737

69%

67%2

2012

Clive Bannister

1,583

69%

n/a3

2011

Clive Bannister4

1,333

73%

n/a3

Jonathan Moss4,5

704

n/a

n/a

1  The single figure of total remuneration for 2017 has been restated and now reflects the actual price of shares on the day the 2015 LTIP vested (28 September 2018: 676p per share) rather than the three-month average share price to 31 December 2017 (759.8642p per share) which was required to be used last year for the single figure of total remuneration.

2  The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested.

3  Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years.

4  Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left Phoenix Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011.

5  Jonathan Moss' 2011 single figure of total remuneration does not include compensation for loss of office.

PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2017 TO 2018

In accordance with the DRR regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2017 and 2018 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2017 and 2018 on a matched basis). This group was selected as being representative of the wider workforce using the same process as was used for this comparison in last year's annual report and accounts.

Year-on-year % change

Salary

Taxable Benefits

Annual incentive

Total

Group Chief Executive Officer

0.00%

0.82%

-0.48%

-0.26%

Staff

3.97%

7.80%

1.20%

3.56%

There has been minimal movement overall in the level of remuneration for the Group Chief Executive Officer; the small increase in taxable benefits is due to a rise in the cost of funding for Private Medical Insurance. There was a slight reduction in AIP which was a result of a lower outcome under the Corporate element of the 2018 AIP. 

Staff more generally have seen a slight overall increase, the primary reason for this is due to an increase in taxable benefits as a result of the implementation of Private Medical Insurance to all employees, extending the benefit to c.150 employees within the Company. The median salary increase for staff was 2.5%; this is lower than the figures above which are based on averages. There has been a small increase in average AIP for employees, which is linked in part to increases in employee salary levels.

VOTING OUTCOMES ON REMUNERATION MATTERS

The table below shows the votes cast to approve the Directors' Remuneration Report for the year ended 31 December 2017 at the 2018 AGM held on 2 May 2018 and to approve the Directors' Remuneration Policy at the 2017 AGM held on 11 May 2017.

 

 

For

 

Against

 

Number

% of
votes cast 

Number

% of 
votes cast 

Abstain Number

To approve the Directors' Remuneration Report
for the year ended 31 December 2017 (2018 AGM)

294,152,705

99.15

2,528,520

0.85

1,291,938

To approve the Directors' Remuneration Policy
(2017 AGM)

296,336,785

99.67

976,191

0.33

2,243

DILUTION

The Company monitors the number of shares issued under the Phoenix Group employee share plans and their impact on dilution limits. The Company's practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company's all-employee Sharesave scheme only, new shares are issued. Therefore the usage of shares compared to the 10% dilution limits (in any rolling 10-year period) set by the Investment Association in respect of all share plans as at 31 December 2018 is 0.23%, and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).

CONSIDERATION OF EMPLOYEE PAY

As explained in the Notes to the Remuneration Policy table:

·  when determining Executive Directors' remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate, and

·  the Group has one consistent reward policy for all levels of employees, and therefore the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business.

The Remuneration Committee intends to publish the ratios comparing CEO to employee pay as prescribed by the DRR regulations for financial year 2019. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018, we have been integrating our employee pay systems and are not in the position to adopt this disclosure requirement early. Accordingly, Phoenix has come to the conclusion that it would not be appropriate to publish on a voluntary basis a CEO to employee pay ratio disclosure for 2018. 

GENDER PAY GAP

The reporting entity for Gender Pay Gap reporting remains as Pearl Group Management Services; details of the 2018 Gender Pay Gap are shown on page 27 of the Annual Report and Accounts within the People Section. Employees who transferred from Standard Life Aberdeen are included in the Gender Pay Gap reporting for Standard Life Aberdeen as they were employees of that entity on the relevant date.

ADDITIONAL UNAUDITED INFORMATION 

The information provided below relates to the Directors' membership of both the Phoenix Group Holdings and Phoenix Group Holdings plc boards and committees throughout 2018.

DIRECTORS' SERVICE CONTRACTS

The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows:

Executive Directors' contracts

Name

Date of appointment

Date of contract

Notice period from either party (months)

Clive Bannister

28 March 2011

7 February 2011

12

James McConville

28 June 2012

28 May 2012

12

Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group. The Executive Directors are entitled to retain any external fees. During 2018, Clive Bannister received £45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. He is also Chairman of the Museum of London for which he receives no payment. James McConville received £112,000 from Tesco Personal Finance plc.

Non-Executive Directors' contracts

Name

Date of letter of appointment

Date of
joining the
Phoenix Group
Holdings Board1

Appointment
end date

Unexpired term
(months)

Alastair Barbour

1 November 2018

1 October 2013

2 May 2019

2

Campbell Fleming

1 November 2018

31 August 2018

31 August 2021

30

Karen Green

1 November 2018

1 July 2017

1 July 2020

16

Nicholas Lyons

1 November 2018

31 October 2018

31 October 2021

32

Wendy Mayall

1 November 2018

1 September 2016

1 September 2019

6

Barry O'Dwyer

1 November 2018

31 August 2018

31 August 2021

30

John Pollock

1 November 2018

1 September 2016

1 September 2019

6

Nicholas Shott

1 November 2018

1 September 2016

1 September 2019

6

Belinda Richards

1 November 2018

1 October 2017

1 October 2020

19

Kory Sorenson

1 November 2018

1 July 2014

2 May 2019

2

1  All Directors above joined the Phoenix Group Holdings plc Board on 15 October 2018 and services are considered to have commenced with effect from 13 December 2018.

The above tables have been included to comply with UKLA Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director's appointment (excluding the Chairman) they would be entitled to a one month notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months' notice period.

REMUNERATION COMMITTEE GOVERNANCE

The Group originally established a Remuneration Committee in 2010. On 13 December 2018 the Phoenix Group Holdings plc Remuneration Committee was formally constituted following admission of the new entity to the London Stock Exchange. The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the Committee in 2018 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman's letter to shareholders at the start of the Remuneration Report.

The table below shows the independent Non-Executive Directors who served on the Committee during 2018 and their date of appointment:

Member

From

To

Kory Sorenson (Committee Chair from 11 May 2017)

3 July 2014

To date

Karen Green

1 July 2017

To date

Nicholas Shott

20 October 2016

To date

Under the Committee's Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2018, seven Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 67.

Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the firm-wide remuneration policy in the context of business strategy and changing risk conditions. The firm-wide remuneration policy focuses on ensuring sound and effective risk management so as not to encourage risk-taking outside of the Company's risk appetite. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.

The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration.

ADVICE

During the year, the Committee received independent remuneration advice from its appointed advisers, FIT Remuneration Consultants LLP ('FIT') and PwC (who were appointed by the Committee as their adviser from May 2018 following a competitive tender). Both firms are members of the Remuneration Consultants Group (the professional body for remuneration consultants) and adhere to its code of conduct.

The Committee was satisfied that the advice provided by both firms was objective and independent. FIT's fees in respect of 2018 were £45,250, all of which were attributed to work relating to the Committee and were charged on the basis of the firm's standard terms of business for advice provided. PwC's fees in respect of 2018 were £160,850 all of which were attributed to work relating to the Committee and were charged on the basis of the firm's standard terms of business for advice provided. PwC have not provided any other services to Phoenix Group Holdings plc in relation to remuneration. 

FIT have provided some technical specialist advice to management since stepping down as the Committee's adviser. PwC also provided general consultancy services to management during the year. Separate teams within PwC provided unrelated services in respect of tax, assurance, risk consulting and transaction support during the year. The Committee is satisfied that these activities do not compromise the independence or objectivity of the advice it has received from PwC.

The Committee assesses the performance of its advisers annually, the associated level of fees and reviews the quality of advice provided to ensure that it is independent of any support provided to management.

The Committee consulted with the Group Chief Executive Officer, Group HR Director and Deputy Group Finance Director who attended, by invitation, various Committee meetings during the year although no executive is ever permitted to participate in discussions or decisions regarding his or her own remuneration.

Input is also sought from the Chief Risk Officer (without management present) and from representatives from finance, as appropriate. The Chief Risk Officer is asked to confirm each year that the Company has operated within its stated risk appetite during the year and also to confirm whether there were otherwise any risk-related concerns that required the Committee to consider using its judgement to moderate incentive plan outcomes. There were no such concerns in 2018.

APPENDIX - STATUTORY SINGLE FIGURE TABLES - Audited Information

Following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted into the Group as the new ultimate parent company of the Group in place of Phoenix Group Holdings (further details are included in note A1 to the consolidated financial statements). The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.

The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December 2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of services provided to Phoenix Group Holdings plc or its subsidiaries. Services are considered to have been provided effective from 13 December 2018. As there was no change to the remuneration arrangements this simply reflects the annual data pro-rated from 13 December 2018 to 31 December 2018 and therefore the separate footnotes shown under the Single Figure Table on page 88 have not been repeated. 

For comparison purposes, the remuneration paid for the period up to 13 December in respect of services to Phoenix Group Holdings has also been included. 

Phoenix Group Holdings plc - Single Figure Table from 13 December 2018 to 31 December 2018

£000

Salary/fees

Benefits

Annual Incentive

Long-term
incentives

Pension

Total

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

Clive Bannister

36

-

1

-

47

-

39

-

6

-

129

-

James McConville

23

-

1

-

30

-

24

-

4

-

82

-

Phoenix Group Holdings - Single Figure Table from 1 January 2018 to 12 December 2018

£000

Salary/fees

Benefits

Annual Incentive

Long-term
incentives

Pension

Total

2018

20171

2018

20171

2018

20171

2018

20171

(restated)

2018

20171

2018

20171

(restated)

Clive Bannister

664

700

15

16

851

902

706

1,147

117

123

2,353

2,888

James McConville

417

440

15

16

551

567

444

724

73

77

1,503

1,824

1 The comparative 2017 data represents a full year.

Phoenix Group Holdings plc - NED fees from 13 December 2018 to 31 December 2018

Name

Directors' salaries/fees 2018
£000

Directors' salaries/fees 2017
£000

Benefits
2018
£000

Benefits
2017
£000

Total
2018
£000

Total
2017
£000

Non-Executive Chairman

 

 

 

 

 

 

Henry Staunton

-

-

-

-

-

-

Nicholas Lyons

17

-

-

-

17

-

Non-Executive Directors

 

 

 

 

 

 

Alastair Barbour

7

-

-

-

7

-

Ian Cormack

-

-

-

-

-

-

Campbell Fleming

-

-

-

-

-

-

Karen Green

5

-

-

-

5

-

Isabel Hudson

-

-

-

-

-

-

Wendy Mayall

5

-

-

-

5

-

Barry O'Dwyer

-

-

-

-

-

-

John Pollock

6

-

-

-

6

-

Belinda Richards

5

-

-

-

5

-

Nicholas Shott

5

-

-

-

5

-

Kory Sorenson

6

-

-

-

6

-

David Woods

-

-

-

-

-

-

Total

56

-

-

-

56

-

Phoenix Group Holdings - NED fees from 1 January 2018 to 12 December 2018

Name

Directors' salaries/fees 2018
£000

Directors' salaries/fees 20171
£000

Benefits
2018
£000

Benefits
20171
£000

Total
2018
£000

Total
20171
£000

Non-Executive Chairman

 

 

 

 

 

 

Henry Staunton

271

325

-

-

271

325

Nicholas Lyons

38

-

2

-

40

-

Non-Executive Directors

 

 

 

 

 

 

Alastair Barbour

136

150

12

3

148

153

Ian Cormack

39

116

-

-

39

116

Campbell Fleming

-

-

-

-

-

 

Karen Green

100

52

3

-

103

52

Isabel Hudson

-

39

-

-

-

39

Wendy Mayall

102

118

2

-

104

118

Barry O'Dwyer

-

-

-

-

-

-

John Pollock

121

136

-

-

121

136

Belinda Richards

100

26

1

-

101

26

Nicholas Shott

100

105

2

-

102

105

Kory Sorenson

119

116

-

-

119

116

David Woods

-

53

-

2

-

55

Total

1,126

1,236

22

5

1,148

1,241

1 The comparative 2017 data represents a full year.

APPROVAL

This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by:

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

4 March 2019

DIRECTORS' REPORT

The Directors present their report for the year ended 31 December 2018.

Phoenix Group Holdings plc is incorporated in the United Kingdom (registered no. 11606773) and has a Premium Listing on the London Stock Exchange. 

SHAREHOLDERS

Dividends

Dividends for the year are as follows:

Ordinary shares

 

Paid interim dividend

22.6p per share (2017: 22.6p1 per share)

Recommended final dividend

23.4p per share (2017: 22.6p1 per share)

Total ordinary dividend

46p per share (2017: 45.2p1 per share)

1  2017 dividends per share figures have been rebased to take into account the bonus element of the rights issue completed in July 2018.

As a result of regulatory changes applicable to the Group under Solvency II, dividends declared in respect of the Company's ordinary shares must be capable of being cancelled and withheld or deferred at any time prior to payment. This is in order that the Company's ordinary shares be counted towards Group capital. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The Directors do not expect to exercise this right other than where they believe that it may be necessary to do so as a result of legal or regulatory requirements. 

Share Capital

The issued share capital of the Company* was increased by 327,966,570 during 2018 which related to:

·  shares issued in relation to the acquisition of Standard Life Assurance Limited (SLAL);

·  shares issued to Standard Life Aberdeen plc (SLA plc) in relation to the acquisition of SLAL; 

·  144,114,450 shares were issued to SLA plc on 31 August 2018; and 

·  shares issued under the Company's Sharesave Scheme.

At 31 December 2018, the issued ordinary share capital totalled 721,199,214. Subsequently, 3,531 ordinary shares have been issued in 2019 in connection with the Group's Sharesave Scheme to bring the total in issue to 721,202,745 at the date of this report.

Full details of the issued and fully paid share capital as at 31 December 2018 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements. 

At the General Meeting of Phoenix Group Holdings plc held in October 2018, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under this authority would, subject to the Companies Act 2006 either be cancelled by operation of law or held in treasury.

*  Any references to the Company refer to both Phoenix Group Holdings (the Group's former Cayman Islands registered holding company) and Phoenix Group Holdings plc (the Group's new UK registered holding company)

Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM on 2 May 2019, the Company is authorised to make purchases of its own shares and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Act 2006 including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The Company held no treasury shares during the year or up to the date of this report.

The rights and obligations attaching to the Company's ordinary shares are set out in the Company's Articles of Association (the 'Company's Articles') which are available on the Company's website at www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.

Where the Phoenix Group Employee Benefit Trust ('EBT') holds shares for unvested awards, the voting rights for these shares are exercisable by the trustees of the EBT at their discretion, taking into account the recommendations of the Group.

Restrictions on transfer of shares

Under the Company's Articles, the Directors may in certain circumstances refuse to register transfers of shares. Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Conduct Authority ('FCA') and the Group's own share dealing rules whereby Directors and certain employees of the Group require individual authorisation to deal in the Company's ordinary shares. 

Substantial shareholdings

Information provided to the Company pursuant to the FCA's Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company's website. As at 4 March 2019, the Company had been notified of the following significant holdings of voting rights in its shares.

 

Number of voting rights
in shares

Percentage of shares
in issue

Standard Life Aberdeen plc

194,275,410

26.93%

BlackRock Inc.

37,167,390

5.15%

Annual General Meeting ('AGM')

The AGM of the Company will be held at Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH on Thursday 2 May 2019 at 9.00am.

A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting.

Communication with investors

The Company places considerable importance on communication with investors and regularly engages with them on a wide range of topics.

The Company's Investor Relations department is dedicated to facilitating communication with investors and analysts and maintains an active investor relations programme. Please see page 58 for further details regarding the Company's engagement with investors.

In addition, continued engagement is undertaken with shareholders and proxy advisers on evolving governance issues.

The Directors consider it important to understand the views of the market. Board members regularly receive copies of the latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies, designed to determine the investment community's view of the core business.

The Company's AGM provides another opportunity to communicate with its shareholders. At the 2018 meeting, the Code provisions were complied with. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2019 AGM. 

The Company's Annual Report and Accounts, together with the Company's Interim Report and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group's activities and prospects. These are available on the Company's website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company's financial calendar.

Board

Board of Directors

The membership of the Board of Directors during 2018 is given within the Corporate Governance Report on pages 62 and 63, which is incorporated by reference into this report. Details of Directors' (and persons closely associated with them) interests in the shares of the Company are shown in the Directors' Remuneration Report.

During 2018 and up to the date of this report, the following changes to the Board took place:

·  Ian Cormack resigned from the Board on 2 May 2018

·  Campbell Fleming and Barry O'Dwyer were appointed to the Board on 31 August 2018

·  Henry Staunton resigned from the Board on 31 October 2018

·  Nicholas Lyons was appointed to the Board on 31 October 2018

Details of related party transactions which took place during the year with Directors of the Company and consolidated entities where Directors are deemed to have significant influence, are provided in the Directors' Remuneration Report and in note I5 to the IFRS consolidated financial statements.

The rules about the appointment and replacement of Directors are contained in the Company's Articles. These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next AGM following the appointment.

In accordance with the UK Corporate Governance Code, Directors must stand for election/re-election annually. The Board of Directors will be unanimously recommending that all of the Directors should be put forward for election at the forthcoming AGM to be held on 2 May 2019.

The Articles give details of the circumstances in which Directors will be treated as having automatically vacated their office and also state that the Company's shareholders may remove a Director from office by passing an ordinary resolution.

The powers of the Directors are determined by the Companies Act 2006, the provisions of the Company's Articles and by any valid directions given by shareholders by way of special resolution.

The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under the Company's Articles.

Directors' remuneration and interests

A report on Directors' remuneration is presented within the Directors' Remuneration Report including details of their interests in shares and share options or any rights to subscribe for shares in the Company.

Directors' indemnities

The Company has entered into deeds of indemnity with each of its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply when prohibited by any applicable law.

The deeds of indemnity remains in-force as at the date of signature of this Directors' Report.

Directors' conflicts of interest

The Board has established procedures for handling conflicts of interest in accordance with the Companies Act 2006 and the Company's Articles.

On an ongoing basis, Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise.

Directors' and Officers' liability insurance

The Company maintains Directors' and Officers' liability insurance cover which is renewed annually.

Employees

Diversity and inclusion

The Group is committed to creating a work environment free of discrimination where everyone is treated with dignity and respect. 

We value the individuality, diversity, and creativity that every colleague brings to the workplace. Everyone has the right to be treated with dignity and respect and not to be disadvantaged in any way as a result of their age, race, gender, disability, religion or belief, sexual orientation, gender re-assignment, marriage and civil partnership or pregnancy and maternity. The Company is committed to achieving equality of opportunity and the equal treatment of all colleagues and those applying to join us. Equality of opportunity, which includes equality of pay, is seen as an integral part of our employment practices, policies and procedures. To this end all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination. 

The Company will not tolerate bullying and harassment of any kind. All allegations of bullying and harassment will be investigated and, if appropriate, disciplinary action will be taken. The Company will also not tolerate victimisation of a person for making allegations of bullying or harassment in good faith or supporting someone to make such a complaint.

Employee engagement

Phoenix Group continues to communicate with staff across a wide variety of channels, including regular news bulletins via the intranet, Executive Committee presentations and other face-to-face briefings. The staff briefings and Executive Committee presentations typically include updates on the Company's strategy and plans, progress against key financial and operational targets, regulatory and risk management updates and review of economic or other factors which could affect the Company's strategy and performance. Regular feedback mechanisms are also in place, ensuring communication at Phoenix is a continuous two-way dialogue.

The views and opinions of staff are sought through Phoenix's Engagement Survey and more regular interim surveys and employee communication and engagement forums. While no survey was undertaken in 2018 as a result of the Standard Life acquisition, all employees of the Enlarged Group took part in a Culture survey in December 2018. Phoenix undertakes meaningful consultation with staff representatives on all major organisational changes and other matters affecting employee engagement. An Engagement survey of the Enlarged Group is planned for Q3 2019.

Employee shareholding

The Group also provides the opportunity for employees to participate in the Company's all-employee share schemes, which includes Sharesave and the Share Incentive Plan, to encourage broader share ownership in the Company.

Governance

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group's cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 43 to 45. In addition, the IFRS consolidated financial statements include, amongst other things, notes on the Group's borrowings (note E5), management of its financial risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I6 and I7) and its capital and management (note I3). The Strategic Report (on pages 2 to 47) sets out the business model and how the Group creates value for shareholders and policyholders.

The Board has followed the requirements of the UK Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, (September 2014) when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has undertaken a review of the liquidity and solvency of the Group under both normal and stressed conditions as at the date of preparation of the statement of consolidated financial position. 

Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each principal subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company's ability to continue as a going concern. 

The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. 

The Directors have acknowledged their responsibilities in the Statement of Directors' Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2018.

Viability statement

The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for a period of five years to align to the Group's business planning and is contained in the Risk Management section on page 46.

Corporate governance statement

The disclosures required by section 7.2 of the FCA's Disclosure Guidance and Transparency Rules can be found in the Corporate Governance Report on pages 60 to 75 which is incorporated by reference into this Directors' Report and comprises the Company's Corporate Governance Statement. 

The disclosures required in respect of the Company's diversity policy are addressed in the Strategy and KPIs section of the Strategic Report on page 51. The UK Corporate Governance Code (the 'Code') applies to the Company and full details on the Company's compliance with the Code are included in the Corporate Governance Report. The Code is available on the website of the Financial Reporting Council - www.frc.org.uk.

Greenhouse gas emissions

All disclosures concerning the Group's greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on pages 56 and 57.

Financial risk management

The Group operates a Risk Management Framework ('RMF') consisting of several components, as detailed in the Risk Management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein). At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness, customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories. The Risk Management section also describes how the Enterprise Risk Management (ERM) framework operated by the acquired Standard Life Assurance businesses aligns with the Phoenix RMF.

Articles of Association

Changes to the Company's Articles require prior shareholder approval. 

The Articles are available on the Company's website at www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.

Re-Appointment of the Auditors

Ernst & Young LLP ('EY') has indicated its willingness to continue in office and shareholders' approval will be sought at the AGM on 2 May 2019.

There is no cap on auditor liability in place in relation to audit work carried out on the IFRS consolidated financial statements and the Group's UK subsidiaries' individual financial statements.

Details of fees paid to EY during 2018 for audit and non-audit work are disclosed in note C4 to the IFRS consolidated financial statements.

Disclosure of information to Auditors

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Group Company Secretary

The Group Company Secretary throughout the 2018 financial period was Gerald Watson.

Contractual/Other

Significant agreements impacted by a change of control of the Company

There are change of control clauses contained in certain of the Group's financing agreements. The £900million revolving credit facility and £600million acquisition facility have provisions which would enable the lending banks to require repayment of all amounts borrowed following a change of control. 

All of the Company's employee share and incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.

Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts. None is considered to be significant in terms of their potential impact on the business of the Group.

Disclosures under listing rule 9.8.4R

For the purposes of Listing Rule 9.8.4C, the information required to be disclosed under Listing Rule 9.8.4R can be found within the following sections of the Report and Accounts:

Section

Requirement

Location

1

Statement of interest capitalised

Note E5 to the Consolidated Financial Statements

2

Publication of unaudited financial information

Not applicable

3

Deleted

Not applicable

4

Details of long-term incentive schemes

Not applicable

5

Waiver of emoluments by a Director

Directors' Remuneration Report

6

Waiver of any future emoluments by a Director

Directors' Remuneration Report 

7

Non pre-emptive issue of equity for cash

Not applicable 

8

As per 7, but for major subsidiary undertakings

Not applicable

9

Parent participation in any placing of a subsidiary

Not applicable

10

Contracts of significance

Not applicable

11

Controlling shareholder provision of services

Not applicable

12

Shareholder dividend waiver

Not applicable

13

Shareholder dividend waiver - future periods

Not applicable

14

Controlling shareholder agreements

Not applicable

STATEMENT OF DIRECTORS' RESPONSIBILITIES

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS OF PHOENIX GROUP HOLDINGS PLC

The Directors are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors' Report, the Directors' remuneration report, the consolidated financial statements and the Company financial statements in accordance with applicable law and regulations. 

The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group's business for the year ended 31 December 2018, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries; and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the 'Management Report' can be found in the Strategic Report and this Directors' Report, including the sections of the Annual Report and Accounts incorporated by reference. 

The Directors have prepared the consolidated financial statements and the Company financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU'). The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. 

In preparing these financial statements the Directors are required to:

·  Select suitable accounting policies and then apply them consistently.

·  Make judgements and accounting estimates that are reasonable and prudent.

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

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

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

The Directors are responsible for making, and continuing to make, the Company's Annual Report and Accounts available on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 62 and 63, confirm that, to the best of their knowledge:

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

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

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

The Strategic Report and the Directors' Report were approved by the Board of Directors on 4 March 2019.

By order of the Board

CLIVE BANNISTER                                                              JAMES MCCONVILLE

GROUP CHIEF EXECUTIVE OFFICER                           GROUP FINANCE DIRECTOR AND GROUP DIRECTOR, SCOTLAND

4 March 2019

FINANCIALS

IN THIS SECTION

Independent Auditor's Report

112

IFRS Consolidated Financial Statements

121

Notes to the Consolidated Financial Statements

128

Parent Company Accounts

214

Notes to the Parent Company Financial Statements

216

Additional Life Company Asset Disclosures

222

Additional Capital Disclosures

228

Alternative Performance Measures

230

INDEPENDENT AUDITOR'S REPORT

TO THE MEMBERS OF PHOENIX GROUP HOLDINGS PLC

Opinion

In our opinion:

·  Phoenix Group Holdings plc's consolidated financial statements and parent company financial statements (the 'Financial Statements') give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2018 and of the Group's profit for the year then ended;

·  the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU');

·  the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2006; and 

·  the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.

We have audited the consolidated financial statements of Phoenix Group Holdings plc and its subsidiaries (collectively 'the Group') and the parent company financial statements which comprise:

Group

Parent company

The statement of consolidated financial position as at 31 December 2018

The statement of changes in equity for the period then ended

The consolidated income statement for the year then ended

The statement of financial position as at 31 December 2018 

The consolidated statement of comprehensive income for the year then ended

The statement of cash flows for the period then ended

The statement of consolidated cash flows for the year then ended

Related notes 1 to 17 to the financial statements

The statement of consolidated changes in equity for the year then ended

 

Related notes A1 to I8 to the consolidated financial statements (except for note I3 which is marked as unaudited), including a summary of significant accounting policies

 

The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Basis for opinion 

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs') and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 

Independence

Further to our confirmation that we are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, we have specifically considered the impact of the acquisition of Standard Life Assurance Limited ('SLAL') and other associated entities during the period on our independence. Material business relationships and prescribed non-audit services with the acquired entities at the time of the acquisition were terminated within the provisions of the Ethical Standard and appropriate safeguards were put in place. These safeguards included the migration of our workplace pension scheme arrangement to a different provider. 

Conclusions relating to principal risks, going concern and viability statement

We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to:

·  the disclosures in the Annual Report set out on pages 43 to 45 that describe the principal risks and explain how they are being managed or mitigated;

·  the Directors' confirmation set out on page 110 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

·  the Directors' statement set out on page 108 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;

·  whether the Directors' statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or 

·  the Directors' explanation set out on page 46 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Overview of our audit approach

Key audit matters

·  Valuation of insurance contract liabilities, comprising the following risk areas: 

·  actuarial assumptions;

·  actuarial modelling; and 

·  data.

·  Valuation of certain complex and illiquid financial investments.

·  Accounting for the acquisition of SLAL and other associated entities. 

Audit scope

·  We performed an audit of the complete financial information of the Group Function, Phoenix Life Division and SLAL and audit procedures on specific balances for Other Companies. Our scope is explained further on pages 117 to 118. 

·  The components where we performed full or specific audit procedures accounted for more than 99% of the equity and profit before tax of the Group.

Materiality

·  Overall Group materiality of £100 million (2017: £63 million) which represents 1.9% (2017: 2%) of total equity attributable to owners of the parent ('Group equity').

Key audit matters 

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole and in our opinion thereon, and we do not provide a separate opinion on these matters.

Risk

Valuation of insurance contract liabilities (£92.6bn; 2017: £45.4bn) 

Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 129); Accounting policies and note F1 of the consolidated financial statements (pages 166 to 168) 

We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically, we considered the actuarial assumptions and modelling that are applied, as these involve complex and significant judgements about future events, both internal and external to the business for which small changes can result in a material impact to the resultant valuation. Additionally, the valuation process is conditional upon the accuracy and completeness of the data.

We have split the risks relating to the valuation of insurance contract liabilities into the following component parts:

·  actuarial assumptions; 

·  actuarial modelling; and

·  data.

We assessed management's analysis of movements in insurance contract liabilities over the year and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below:

Risk area

Our response to the risk

Key observations communicated to the Audit Committee

Actuarial assumptions 

There has been no change in our identification of this risk from the prior year. Whilst we consider the risks to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe the identified risk to have a higher magnitude of potential misstatement. 

Economic assumptions are set by management taking into account market conditions as at the valuation date. Non-economic assumptions such as future expenses, longevity and mortality are set based on the Group's past experience, market experience, market practice, regulations and expectations about future trends. 

The assumptions that we consider to have the most significant impact are the base and trend longevity and persistency assumptions.

These assumptions are used as inputs into a valuation model which uses standard actuarial methodologies.

To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we engaged our actuaries as part of our audit team and performed the following procedures: 

·  obtained an understanding and tested the design and operating effectiveness of key controls over management's process for setting and updating actuarial assumptions;

·  challenged and assessed whether the assumptions applied were appropriate based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; 

·  reviewed the results of management's experience analysis to assess whether these justified the adopted assumptions, and checked that the assumptions used are consistent with this experience analysis;

·  in respect of longevity improvements we have evaluated the use of the chosen industry standard Continuous Mortality Investigation ('CMI') model and the parameters used to validate that it was appropriate relative to the industry;

·  benchmarked the demographic and economic assumptions against those of other comparable industry participants; and

·  reviewed and assessed whether the disclosures in the financial statements, relating to insurance contract liabilities, complied with the applicable financial reporting standards.

We performed full scope audit procedures over this risk area in two components and specific scope audit procedures in one component, which covered 100% of the risk amount.

We determined that the actuarial assumptions used by management are reasonable based on the analysis of the experience to date, industry practice and the financial and regulatory requirements. 

In addition, we are satisfied that the disclosures made in the financial statements are in compliance with the applicable financial reporting standards.

Actuarial modelling 

There has been no change in our identification of this risk from the prior year. Whilst we consider the risks

to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe 
the identified risk to have a higher magnitude of potential misstatement. 

We consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities. 

Over £88.0bn of the £92.6bn insurance contract liabilities are modelled using the core actuarial modelling systems with the residual balance modelled outside these systems to cater for any additional required liabilities not reflected in the model. The key risk is therefore associated with the modelling systems but risks also exist in the calculation of amounts outside these systems.

To conclude on core actuarial modelling systems, including balances calculated outside these systems, we engaged our actuaries and performed the following procedures:

·  obtained an understanding of the process and tested the design, implementation and operating effectiveness of key controls over management's process for testing and approval of model changes and key adjustments outside of the actuarial model during the year;

·  we challenged and evaluated the methodology, inputs and assumptions applied for model changes and out of model adjustments, on a sample basis, based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; 

·  reviewed the governance process around model changes and assessed the completeness of identified model changes; and

·  assessed the results of the analysis of movements in insurance contract liabilities in order to corroborate the completeness of model changes. 

We performed full scope audit procedures over this risk area in two components and specific scope audit procedures in one component, which covered 100% of the risk amount.

We determined that the models used are appropriate and that changes to the models were implemented as intended and that controls over management's processes for modelling insurance contract liabilities outside of the actuarial modelling system were operating effectively.

Data

There has been no change in our identification of this risk from the prior year. Whilst we consider the risks to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe 
the identified risk to have a higher magnitude of potential misstatement.

The policyholder data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used.

To obtain sufficient audit evidence to assess the integrity of policyholder data we performed the following procedures:

·  obtained an understanding of the process and tested the design and operating effectiveness of key controls, including information technology general controls, over management's data collection, extraction and validation process;

·  for Outsourced Service Providers ('OSP') where we have placed reliance on the Service Organisation Controls ('SOC1') report, we have reviewed the SOC1 report and concluded on the design effectiveness of the relevant controls;

·  for OSPs where we do not receive a SOC1 we have obtained an understanding of the process and performed direct testing of the operating effectiveness of the key controls; 

·  where we have not relied on controls at the OSP, or for policies administered internally, we have performed additional procedures including agreeing policyholder documentation to the policyholder data used in the actuarial model on a sample basis;

·  assessed the integrity of policy level data, performing corroborative testing on i) changes to static data during the period and ii) unusual trends and anomalies in the data. We did this based upon our knowledge of the Group's products, industry standards and through using advanced data analytics;

·  confirmed that the actuarial model data extracts provided by the OSPs were those used as an input to the actuarial model;

·  assessed the appropriateness of management's grouping of data for input into the actuarial model; and

·  tested the reconciliations of premiums and claims information extracted from the policy adminstration systems to the general ledger, where applicable.

We performed full scope audit procedures over this risk area in two components and specific scope audit procedures in one component, which covered 100% of the risk amount.

We determined based on our audit work that the data used for the actuarial model inputs is materially complete and accurate. 

Valuation of certain complex and illiquid financial investments (£2.5bn; 2017: £1.4bn)

We have refined our assessment of risk from the prior year, focussing on those investments with the highest degree of judgement such as Equity Release Mortgages ('ERM'). In addition, following the acquisition of SLAL and other associated entities, we have identified heightened risk on the Standard Life modelled corporate bonds due to a combination of size of these financial investments and level of judgement involved in valuation.

Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 129); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 143 to 151).

The extent of judgement applied by management in valuing the Group's financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied. 

We performed additional audit procedures on the ERM financial investments and the Standard Life modelled corporate bonds, such as private placements, which require judgement to be applied and for which quoted market prices are not readily available and consequently where management use models and other inputs to estimate their value. 

These investments are referred to as Level 3 assets in the financial statements. 

We engaged our valuation specialists and actuaries to test valuation of ERMs and modelled corporate bonds. 

To obtain sufficient audit evidence to conclude on the valuation of ERMs, we:

·  tested the design and operating effectiveness of key controls over management's process in respect of the valuation of ERMs;

·  tested the completeness and accuracy of the mortgage data used in the valuation model by agreeing a sample of new loans to supporting evidence and validating any movements on static data over the period;

·  evaluated the methodology, inputs and assumptions used (such as house price inflation, residential house price volatility, longevity improvement and base mortality, as well as economic assumptions such as discount rate);

·  we have validated the key assumptions by comparing them to published market benchmarks and demographic and economic assumptions used by other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the instrument type; 

·  assessed the reasonableness of the fair value of the mortgages at the reporting date including an assessment of the valuation approach to the no-negative equity guarantee; and

·  reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of the ERMs to changes in the key assumptions and audited the figures in the sensitivity disclosures.

To obtain sufficient audit evidence to conclude on the valuation of modelled corporate bonds, we:

·  tested the design and operating effectiveness of key controls over management's process in respect of the valuation of modelled corporate bonds;

·  tested inputs in the models including coupons and maturity and assessed reasonableness of assumptions and judgements in particular related to spread at the acquisition date;

·  performed independent valuation of a sample of modelled corporate bonds and benchmarked management's valuation approach against market best practice; and

·  reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of the modelled corporate bonds to changes in the key assumptions and audited the figures in the sensitivity disclosures.

We performed full scope audit procedures over this risk area in two components, which covered 100% of the risk amount.

Based on our procedures performed on the ERM and modelled corporate bonds, we are satisfied that the valuation of these complex and illiquid assets is reasonable.

In addition, we are satisfied that the disclosures made in the financial statements are in compliance with the applicable financial reporting standards.

Accounting for the acquisition of Standard Life Assurance Limited and other associated entities 

This is a new significant risk for the current year. 

Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 130); Accounting policies and notes G7 and H2 of the consolidated financial statements (pages 190 to 192 and pages 195 to 197).

On 31 August 2018, the Group acquired SLAL, Standard Life International Designated Activity Company, Standard Life Assets and Employee Services Limited and other related entities (collectively 'the Standard Life Assurance businesses') from Standard Life Aberdeen plc ('SLA plc') for total consideration of £2,994 million. 

We consider the identification and valuation of identifiable intangible assets, such as acquired in-force business ('AVIF') and other intangibles, arising from the acquisition of the Standard Life Assurance businesses to be a significant risk due to the nature of judgements and estimates involved. 

Under the Group's accounting policy, acquired value of in-force insurance contracts is measured as the difference between the Generally Accepted Accounting Practice ('GAAP') value of the insurance contract liabilities and the determined fair value. 

As a result, we focused on significant judgements in respect of the identification of the intangible assets acquired, GAAP valuation of the SLAL insurance contract liabilities as at the date of acquisition, the fair value adjustments required in the insurance contract liabilities and their impact on the calculation of goodwill and AVIF and the valuation of an intangible asset relating to the Client Service and Proposition Agreement ('CSPA') entered into between the Group and SLA plc.

The primary elements of the valuation exercise assessed the fair value of the identifiable intangible assets in the form of AVIF (£2,931 million) and a separately identifiable intangible asset of £36 million relating to the CSPA, both gross of tax.

This resulted in a gain on acquisition of £141 million that was recognised in the consolidated income statement for the year ended 31 December 2018, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses.

To obtain sufficient audit evidence to assess the impact of the acquisition of the Standard Life Assurance businesses, we:

·  being the first year of our appointment as auditors of the Standard Life Assurance businesses, performed review of the predecessor auditor working papers and discussed the significant risk and judgemental areas with them;

·  agreed the key product features on a sample of products to underlying policy terms/documentations and reviewed the output of management's own model reviews in order to gain assurance that the actuarial models appropriately capture the product features and that the calculations reflect the approved business and reporting requirements;

·  assessed the integrity of data used in the valuation process through a combination of re-performance of key reconciliations and the use of analytic techniques to compare, on a sample basis, policy level data between data in the actuarial models and that contained within the policy administration systems;

·  audited the SLAL statement of financial position as at the date of acquisition;

·  Ensured appropriate recognition of all identifiable intangible assets by understanding the transaction and comparing it to other acquisitions of similar businesses;

·  assessed the methodology and assumptions adopted by management for calculating the fair values of intangible assets arising on acquisition and considered how market participants would value identifiable assets and liabilities in an orderly transaction; 

·  considered whether any fair value adjustments are required in the insurance contract liabilities recognised on a best estimate basis within the acquired business, and assess any impact on the calculation of goodwill and AVIF; 

·  ensured that the acquisition accounting and disclosure of the acquisition are in compliance with IFRS 3 Business Combinations; and

·  read relevant agreements and board minutes which supported the final conclusions in respect of the acquisition accounting.

Based on our procedures performed on the acquisition of the Standard Life assurance businesses, we are satisfied that, on an overall basis, the fair value of the assets and liabilities acquired lies within a reasonable range of what a market participant in an orderly transaction would pay for the identifiable assets and liabilities and there is a justification for the gain on acquisition.

In addition, we are satisfied that the acquisition accounting and disclosures are in compliance with the applicable accounting framework.

An overview of the scope of our audit 

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each reporting unit ('reporting component') within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each reporting component.

In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we identified four reporting components of the Group. The Group reporting components consist of Phoenix Life Division, SLAL, the Group Function and Other Companies. In the Phoenix Life Division component, the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. SLAL is a newly acquired subsidiary of the Group. The Group Function consists of Group entities that primarily hold external debt, PA (GI) Limited and the pension schemes of the Group. The Other Companies include the Phoenix Life service companies and Standard Life International Designated Activity Company ('SLINTL'). 

Details of the four reporting components which were audited by component teams are set out below:

Component

Scope

Auditor

Phoenix Life Division

Full

EY

Standard Life Assurance Limited ('SLAL')

Full

EY

Group Function

Full

EY

Other Companies

Specific

EY

Of the four components selected, we performed an audit of the complete financial information of three components ('full scope components') which were selected based on their size or risk characteristics. For the remaining Other Companies ('specific scope components'), we performed audit procedures on specific accounts of Phoenix Life service companies (provisions, accruals and deferred income, wages and salaries and administrative expenses) and of SLINTL (cash and cash equivalents and insurance contract liabilities). 

The reporting components where we performed audit procedures accounted for more than 99% (2017: 99%) of the Group's equity and the Group's profit before tax. For the current year, the full scope components contributed 93% (2017: 98%) of the Group's equity and 97% (2017: 99%) of the Group's profit before tax. The specific scope component contributed 6% (2017: 2%) of the Group's equity and 2% (2017: 1%) of the Group's profit before tax. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. 

The charts below illustrate the coverage obtained from the work performed by our audit teams.

EQUITY

Phoenix Life Division (full scope)

45%

SLAL (full scope)

33%

Group Function (full scope)

15%

Other Companies (specific scope)

6%

Out of scope

<1%

PROFIT BEFORE TAX

Phoenix Life Division (full scope)

44%

SLAL (full scope)

28%

Group Function (full scope)

25%

Other Companies (specific scope)

2%

Out of scope

<1%

Changes from the prior year 

In prior year, we identified Abbey Life Assurance Company Limited ('ALAC') as a separate component of the Group. In the 2018 financial year, management completed the Part VII transfer of the ongoing insurance business of ALAC into Phoenix Life Division and at 31 December 2018 ALAC is no longer a separate identifiable component of the Group. 

SLAL is a new component of the Group in 2018 following the acquisition completed on 31 August 2018. Due to the size and risk inherent in the component, we have designated it as a full scope component. SLINTL, acquired as part of the Standard Life Assurance businesses, is within the 'Other Companies' component and is designated as a specific scope component. 

Involvement with component teams 

In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. 

The primary audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the relevant risks of material misstatement detailed above, and set out the information required to be reported to the primary audit team. 

Of the three full scope components, audit procedures were performed on one of these directly by the primary audit team whilst the remaining two components were audited by the component audit teams. For Other Companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.

The primary audit team followed a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visited each of the components where the Group audit scope was focused at least once every year and the most significant of them more than once a year. For all full scope components, in addition to the component visits, the primary audit team reviewed key working papers and participated in the component teams' planning, including the component teams' discussion of fraud and error. The primary audit team attended the closing meetings with the management of the Phoenix Life Division and SLAL and attended key Audit Committee meetings at the components.

For the specific scope component, the primary audit team have reviewed the audit procedures performed by the component team on the specific accounts.

The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the consolidated financial statements as a whole.

Our application of materiality 

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. 

Materiality

The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £100 million (2017: £63 million), which is 1.9% (2017: 2%) of Group equity. In the current year we considered profit-based measures for materiality given that the Standard Life Assurance business changed the business mix of the Group to include a greater proportion of open business. Whilst profit before tax or operating profit are common bases used across the life insurance industry and might be an appropriate measure for an open business, we believe that the use of equity as the basis for assessing materiality remains more appropriate given that the Group remains primarily a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be most appropriate. 

The parent company was incorporated in 2018 under the UK Companies Act 2006 and is domiciled in England and Wales. The financial statements for the period ended 31 December 2018 are the first set of financial statements prepared by the parent company. Accordingly, there is no comparative information to disclose in the individual financial statements of the parent company. We determined materiality for the parent company to be £82 million, which is 2% of the parent company equity attributable to owners. We have used a capital based measure for determining materiality for consistency with the approach taken for the Group where we consider equity to be the most appropriate basis when considering against other measures such as IFRS profit before tax with its inherent volatility considering the nature of the parent company as a holding company.

During the course of our audit, we reassessed initial materiality and concluded that materiality assessed at planning stages of our audit remained appropriate.

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 50% (2017: 50%) of our planning materiality, namely £50 million (2017: £31 million). 

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £10 million to £28 million (2017: £6 million to £24 million). 

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £5 million (2017: £3 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. 

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information 

The other information comprises the information included in the Annual Report set out on pages 1 to 110, other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information. 

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

·  Fair, balanced and understandable set out on page 110 - the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or 

·  Audit committee reporting set out on pages 68 to 71 - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or

·  Directors' statement of compliance with the UK Corporate Governance Code set out on page 109 - the parts of the Directors' statement required under the Listing Rules relating to the company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

·  the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and 

·  the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors' Report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

·  adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

·  the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or

·  certain disclosures of directors' remuneration specified by law are not made; or

·  we have not received all the information and explanations we require for our audit

Responsibilities of directors

As explained more fully in the Statement of Directors' Responsibilities set out on page 110, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 

In preparing the financial statements, the Directors are responsible for assessing the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

The objectives of our audit:

·  in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management; and

·  in respect of irregularities, considered to be non-compliance with laws and regulations, are to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements ('direct laws and regulations'), and perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. We are not responsible for preventing non-compliance with laws and regulations and our audit procedures cannot be expected to detect non-compliance with all laws and regulations.

Our approach was as follows: 

·  We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and its subsidiaries and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority ('PRA') and the Financial Conduct Authority ('FCA') and UK Listing Authority ('UKLA). We obtained a general understanding of how Phoenix Group Holdings is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Board and Executive Committee; and gained an understanding of the Company's approach to governance, demonstrated by the Board's approval of the Company's governance framework.

·  For direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.

·  For both direct and other laws and regulations, our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, inquiring about the company's methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA.

·  The Company operates in the insurance industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate.

·  We assessed the susceptibility of the consolidated financial statements to material misstatement, including how fraud might occur by considering the controls that the Company has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, including complex transactions, performance targets, external pressures and the impact these have on the control environment. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk (valuation of insurance contract liabilities). These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.

Financial Reporting Council's website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Other matters we are required to address 

·  Following the completion of the on-shoring exercise and the incorporation of Phoenix Group Holdings plc, we were appointed by the Company Directors on 13 December 2018 and signed an engagement letter on 20 February 2019 to audit the financial statements for the period ending 31 December 2018 and subsequent financial periods. 

·  The non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting the audit. 

·  The audit opinion is consistent with the additional report to the audit committee.

Use of our report

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Ed Jervis (Senior statutory auditor)

for and on behalf of Ernst & Young LLP, Statutory Auditor

London

4 March 2019

Consolidated Income Statement

FOR THE YEAR ENDED 31 December 2018


Notes

2018
£m

2017 restated
(Note A1)
£m

Gross premiums written


2,645

1,297

Less: premiums ceded to reinsurers

F3

(481)

(356)

Net premiums written


2,164

941

 

 

 

 

Fees and commissions

C1

385

173

Total revenue, net of reinsurance payable


2,549

1,114

 

 

 

 

Net investment income

C2

(9,600)

4,986

Other operating income


37

5

Gain on acquisition

H2.1

141

-

Net income


(6,873)

6,105

 

 

 

 

Policyholder claims


(5,295)

(4,064)

Less: reinsurance recoveries


866

594

Change in insurance contract liabilities


4,768

1,392

Change in reinsurers' share of insurance contract liabilities


(20)

(423)

Transfer from/(to) unallocated surplus

F2

88

(46)

Net policyholder claims and benefits incurred


407

(2,547)

 

 

 

 

Change in investment contract liabilities


7,975

(2,673)

Change in present value of future profits

G7

1

5

Amortisation of acquired in-force business

G7

(196)

(109)

Amortisation of other intangibles

G7

(18)

(17)

Administrative expenses

C3

(1,056)

(596)

Net income under arrangements with reinsurers

F3.3

2

-

Net expense/(income) attributable to unitholders


159

(43)

Total operating expenses


7,274

(5,980)

 

 

 

 

Profit before finance costs and tax


401

125

 

 

 

 

Finance costs

C5

(142)

(132)

Profit/(loss) for the year before tax


259

(7)

 

 

 

 

Tax credit/(charge) attributable to policyholders' returns

C6

211

(21)

Profit/(loss) before the tax attributable to owners


470

(28)





Tax credit/(charge)

C6

151

(20)

Add: tax attributable to policyholders' returns

C6

(211)

21

Tax (charge)/credit attributable to owners

C6

(60)

1

Profit/(loss) for the year attributable to owners


410

(27)

 

 

 

 

Attributable to:




Owners of the parent


379

(27)

Non-controlling interests

D4

31

-

 


410

(27)

 


 

 

Earnings per ordinary share


 

 

Basic (pence per share)

B3.1

66.8p

(6.3)p*

Diluted (pence per share)

B3.2

66.7p

(6.3)p*

* Restated following rights issue

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 December 2018


Notes

2018
£m

2017
£m

Profit/(loss) for the year

 

410

(27)

 

 



Other comprehensive income/(expense):

 



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

 



Cash flow hedges:

 



Fair value gains/(losses) arising during the year

 

31

(13)

Reclassification adjustments for amounts recognised in profit or loss

 

(28)

2

Exchange differences on translating foreign operations

 

2

-

 

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

Remeasurement of owner-occupied property

G8

-

1

Remeasurements of net defined benefit asset/liability

G6

(54)

43

Tax (charge)/credit relating to other comprehensive income items

C6

(10)

3

Total other comprehensive (expense)/income for the year

 

(59)

36

 

 

 

 

Total comprehensive income for the year

 

351

9

 

 

 

 

Attributable to:

 

 

 

Owners of the parent


320

9

Non-controlling interests

D4

31

-

 


351

9

Statement of Consolidated Financial Position

As at 31 December 2018

 

Notes

2018
£m

2017 restated (Note A1)
 £m

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Equity attributable to ordinary shareholders of the parent

 

 

 

Share capital

D1

72

39

Share premium

 

3,077

1,413

Shares held by the employee benefit trust

D2

(6)

(2)

Foreign currency translation reserve

 

98

96

Owner-occupied property revaluation reserve

 

5

5

Cash flow hedging reserve

 

(8)

(11)

Retained earnings

 

1,923

1,615

 

 

 

 

Total equity attributable to ordinary shareholders of the parent

 

5,161

3,155

 

 

 

 

Tier 1 Notes

D3

494

-

Non-controlling interests

D4

294

-

 

 

 

 

Total equity

 

5,949

3,155

 

 

 

 

Liabilities

 

 

 

Pension scheme liability

G6

596

633

 

 

 

 

Insurance contract liabilities

 



Liabilities under insurance contracts

F1

91,211

44,435

Unallocated surplus

F2

1,358

925

 

 

92,569

45,360

Financial liabilities

 

 

 

Investment contracts

 

114,463

26,733

Borrowings

E5

2,186

1,778

Deposits received from reinsurers

 

4,438

368

Derivatives

E3

1,093

1,242

Net asset value attributable to unitholders

 

2,659

840

Obligations for repayment of collateral received

 

2,645

1,961

 

E1

127,484

32,922

 

 

 

 

Provisions

G1

377

134

 

 

 

 

Deferred tax

G2

843

366


 



Reinsurance payables

 

30

23

Payables related to direct insurance contracts

G3

902

522

Current tax

G2

20

5

Accruals and deferred income

G4

337

179

Other payables

G5

873

144

Total liabilities

 

224,031

80,288

 

 

 

 

Total equity and liabilities

 

229,980

83,443

 

 

Notes

2018
£m

2017

£m

ASSETS

 

 

 


 

 

 

Pension scheme asset

G6

255

322

 

 

 

 

Intangible assets

 

 

 

Goodwill

 

57

57

Acquired in-force business

 

4,033

1,298

Other intangibles

 

221

202

 

G7

4,311

1,557

 

 

 

 

Property, plant and equipment

G8

48

26

 

 

 

 

Investment property

G9

6,520

612

 

 

 

 

Financial assets

 

 

 

Loans and deposits


3,612

1,812

Derivatives

E3

3,798

2,760

Equities


52,716

17,234

Investment in associate


496

550

Fixed and variable rate income securities


67,932

26,998

Collective investment schemes


70,606

18,901

Reinsurers' share of investment contract liabilities


5,417

6,085

 

E1

204,577

74,340

Insurance assets




Reinsurers' share of insurance contract liabilities

F1

7,564

3,320

Reinsurance receivables

 

42

32

Insurance contract receivables

 

67

7

 

 

7,673

3,359

 

 



Current tax

G2

145

47

Prepayments and accrued income

 

478

355

Other receivables

G10

1,047

580

Cash and cash equivalents

G11

4,926

2,245

Total assets

 

229,980

83,443

Statement of Consolidated CASH FLOWS

For the year ended 31 December 2018

 

Notes

2018
£m

2017

£m

Cash flows from operating activities

 

 

 

Cash (utilised)/generated by operations

I2

(324)

1,156

Taxation paid

 

(29)

(35)

Net cash flows from operating activities

 

(353)

1,121

 

 

 

 

Cash flows from investing activities

 

 

 

Acquisition of Standard Life Assurance subsidiaries, net of cash acquired

H2.1

1,607

-

Net cash flows from investing activities

 

1,607

-

 

 

 

 

Cash flows from financing activities

 

 

 

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

D1

936

2

Ordinary share dividends paid

B4

(262)

(193)

Dividends paid to non-controlling interests

 

(2)

-

Repayment of policyholder borrowings

 

(69)

(77)

Repayment of shareholder borrowings

 

(295)

(1,053)

Proceeds from new shareholder borrowings, net of associated expenses

 

733

830

Proceeds from issuance of Tier 1 Notes, net of associated expenses

D3

494

-

Proceeds from sale of internal holding in £428 million subordinated notes

 

-

32

Coupon paid on Tier 1 Notes

 

(14)

-

Interest paid on policyholder borrowings

 

(5)

(8)

Interest paid on shareholder borrowings

 

(89)

(75)

Net cash flows from financing activities

 

1,427

(542)

 

 

 

 

Net increase in cash and cash equivalents

 

2,681

579

Cash and cash equivalents at the beginning of the year

 

2,245

1,666

Cash and cash equivalents at the end of the year

G11

4,926

2,245

Statement of Consolidated Changes in Equity

FOR THE YEAR ENDED 31 December 2018

 

Share
capital
(note D1)
£m

Share premium
£m

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

Foreign currency translation reserve
£m

Owner-occupied property
revaluation reserve
£m

Cash
 flow hedging reserve
£m

Retained earnings
£m

Total equity attributable to ordinary shareholders of the parent

£m

Tier 1 Notes (note D3)
£m

Non-controlling interests (note D4) £m

Total equity

£m

At 1 January 2018

39

1,413

(2)

96

5

(11)

1,615

3,155

-

-

3,155

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

-

379

379

-

31

410

Other comprehensive income/
(expense) for the year

-

-

-

2

-

3

(64)

(59)

-

-

(59)

Total comprehensive income for the year

-

-

-

2

-

3

315

320

-

31

351

 

 

 

 

 

 

 

 

 

 

 

 

Issue of ordinary share capital, net of associated commissions and expenses (note D1)

33

1,926

-

-

-

-


1,959

-

-

1,959

Dividends paid on ordinary shares

-

(262)

-

-

-

-


(262)

-

-

(262)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

-

9

9

-

-

9

Shares distributed by the employee benefit trust

-

-

4

-

-

-

(4)

-

-

-

-

Shares acquired by the employee benefit trust

-

-

(8)

-

-

-

-

(8)

-

-

(8)

Non-controlling interests recognised on acquisition

-

-

-

-

-

-

-

-

-

265

265

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

-

-

(2)

(2)

Issue of Tier 1 Notes

-

-

-

-

-

-

-

-

494

-

494

Coupon paid on Tier 1 Notes, net of tax relief

-

-

-

-

-

-

(12)

(12)

-

-

(12)

At 31 December 2018

72

3,077

(6)

98

5

(8)

1,923

5,161

494

294

5,949

Statement of Consolidated Changes in Equity

FOR THE YEAR ENDED 31 December 2017

 

Share
capital
(note D1)
£m

Share premium
£m

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

Foreign currency translation reserve
£m

Owner-occupied property revaluation reserve
£m

Cash flow hedging reserve
£m

Retained earnings
£m

Total
£m

At 1 January 2017 - restated (note A1)

39

1,604

(7)

96

4

-

1,597

3,333

 

 

 

 

 

 

 

 

 

Loss for the year

-

-

-

-

-

-

(27)

(27)

Other comprehensive income
for the year

-

-

-

-

1

(11)

46

36

Total comprehensive income for the year

-

-

-

-

1

(11)

19

9

 

 

 

 

 

 

 

 

 

Issue of ordinary share capital, net of associated commissions and expenses (note D1)

-

2

-

-

-

-

-

2

Dividends paid on ordinary shares

-

(193)

-

-

-

-

-

(193)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

-

8

8

Shares distributed by the employee benefit trust

-

-

9

-

-

-

(9)

-

Shares acquired by the
employee benefit trust

-

-

(4)

-

-

-

-

(4)

At 31 December 2017 - restated (note A1)

39

1,413

(2)

96

5

(11)

1,615

3,155

Phoenix Group Holdings ('Old PGH'), the former holding company of the Group was subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group's going concern assessment criteria.

In accordance with Cayman Islands Companies Law, dividends shown in the table above were charged within equity against the share premium account. Upon creation of the new UK-registered holding company (as detailed in note A1), future dividends will be charged to retained earnings in accordance with the UK Companies Act 2006.

The comparative equity structure has been restated to reflect the difference between the par value of shares issued by Phoenix Group Holdings plc (the 'Company') and the shares issued by Old PGH prior to the share for share exchange with a corresponding adjustment to share premium. Further details are provided in note A1.

Retained earnings comprise the owners' interest in the post-acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of retained earnings held within the long-term business funds and surplus assets held within the owners' funds of the life companies is subject to retaining sufficient funds to protect policyholders' interests.

Notes to the Consolidated Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES

A1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2018 set out on pages 121 to 213 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 4 March 2019.

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

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

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

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

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

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

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

Statement of compliance

Following the creation of the new UK-registered holding company, the consolidated financial statements have been prepared in accordance with IFRSs as adopted by the European Union ('EU'). The consolidated financial statements were previously prepared in accordance with IFRSs as issued by the International Accounting Standards Board ('IASB'). As at 31 December 2018 there were no differences between IFRSs adopted by the EU and those issued by the IASB in terms of their application to the Group, and therefore there is no impact on the consolidated financial statements in the current or prior period as a result of this change.

Restatement of prior period information

Following the acquisition of the Standard Life Assurance businesses (see note H2), the Group has chosen to revise the presentation of its 2018 consolidated income statement to aid understanding of the Enlarged Group's results. Where necessary, 2017 comparative amounts and accompanying notes have been restated to reflect line item reclassifications.

The Group has reassessed its operating segments to reflect the way in which the business is now being managed following the acquisition of the Standard Life Assurance businesses. Comparative segmental performance information has been restated in line with the revised segments and further details are provided in note B1.

As noted above the equity structure disclosed for the 2017 comparative period has been restated to reflect the difference between the par value of shares issued by the Company and the shares issued by Old PGH prior to the share for share exchange. This impacts the statement of consolidated financial position and the statement of consolidated changes in equity.

In addition, the presentation of gross premiums written, premiums ceded to reinsurers, policyholder claims and reinsurance recoveries in respect of certain corporate pension de-risking transactions has been updated in the 2017 comparative amounts to better reflect the underlying structure of the transactions.

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

Basis of consolidation

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

·  power over the investee;

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

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

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

A2. Accounting policies

The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling