2020 Annual Financial Results

RNS Number : 4087R

Phoenix Group Holdings PLC

08 March 2021

Phoenix Group Holdings plc: 2020 Full Year Results 8 March 2021

Phoenix Group announces record full year 2020 results

Including new cash generation targets and c.30% increase in ReAssure synergy target

2020 Financial Highlights

Delivering Cash

· Record cash generation¹ of £1.7bn in 2020 exceeds upper end of £1.5bn-to-£1.6bn target range (2019: £707m).

· £13.4bn² of Group long-term free cash³ as at 31 December 2020 is available for Group operational costs, interest, growth and shareholder returns (31 December 2019: £14.1bn⁴).

· Recommended final dividend of 24.1p per share reflects a 3% increase on the 2020 interim dividend (23.4p per share) and equates to a 2020 full year dividend of 47.5p per share (2019: 46.8p per share).

Delivering Resilience

· Resilient Solvency II balance sheet with a £0.9bn increase in surplus to £5.3bn⁵ as at 31 December 2020 reflecting only a £0.2bn adverse impact from economics in 2020 (31 December 2019: £4.4bn⁶).

· Shareholder Capital Coverage Ratio⁷ of 164% as at 31 December 2020, comfortably in the middle of the Group's target range of 140%-to-180% (31 December 2019: 152%⁶).

· Leverage ratio⁸ of 28% as at 31 December 2020 within 25%-to-30% target range (31 December 2019: 22%).

Delivering Growth

· Record incremental Open new business long-term cash generation of £766m in 2020, a 59% year-on-year increase (2019: £483m⁹), and close to achieving the >£800m new business threshold that would fully offset the in-force run-off.

· Retirement Solutions (BPA) new business long-term cash generation increased 122% year-on-year to £522m (2019: £235m) with the external deal capital strain reducing from 9% in 2019 to 8% in 2020.

Other key financial metrics

· Group operating profit of £1,199m in 2020 inclusive of the ReAssure business (2019: £810m).

· Assets under administration of £338bn as at 31 December 2020 (31 December 2019: £248bn).

New cash generation targets and increased ReAssure synergy target announced

· 2021 cash generation target range of £1.5bn-to-£1.6bn.

· 2021-2023 cash generation target increased to £4.4bn (+£0.2bn) primarily due to new business and over-delivery of management actions.

· ReAssure synergy target increased by c.30% from £800m to £1,050m, comprising:

o Increased capital synergy target of £600m (+33%) following delivery of £479m in 2020;

o Increased cost synergies target of £500m¹⁰ (+25%) following delivery of £22m per annum in 2020; and

o Partly offset by integration costs of £50m which are unchanged.

Continuing to deliver on our strategic priorities

· Met or exceeded all customer satisfaction targets and kept our call centres open throughout the pandemic.

· Continued to invest in our customer and digital propositions with key deliverables including the launch of a workplace ESG default fund, in-scheme drawdown for Master Trust and an enhanced client analytics tool.

· Increased colleague advocacy with our colleague engagement score improving 10ppts year-on-year to 75%.

· £2 million donated by Phoenix to support charities across 2020 including donations, colleague fundraising and supplier contributions.

· £1.3bn Solvency II benefit from management actions includes £479m of ReAssure capital synergies and £75m of SLAL capital synergies.

· Robust, high quality £35bn shareholder debt portfolio is 98% investment grade with only 19% rated as BBB.

· £2.0bn of illiquid assets sourced (2019: £1.3bn) including £888m of investment in ESG assets (2019: £250m).

· £1.8bn of external Bulk Purchase Annuity (BPA) premiums contracted in 2020 (2019: £1.1bn).

· 25% (£0.75bn) initial buy-in of Pearl Pension Scheme's £3bn of liabilities completed; agreement with trustee for future buy-ins for the remaining 75% and to release historic PLAL share charge, which enables a future single LifeCo Part VII transfer with >£100m Solvency II benefit.

· Recently announced the simplification of our Strategic Partnership with Standard Life Aberdeen including the acquisition of the Standard Life brand and with it full ownership and control over marketing and distribution.

Sustainability is at the core of our purpose and a key enabler of our strategy

· Net-zero carbon commitment set across the Group's operations by 2025 and its investment portfolio by 2050.

· Phoenix has committed to setting and validating science-based targets through the SBTi initiative.

· On track to have 100% renewable energy contracts across all of our offices by the end of 2021.

· Clear target for reducing our Scope 1 and Scope 2 greenhouse gas emissions from occupied premises by 20% per FTE intensity in 2021.

· Participated in the 2020 IIGCC pilot to build and test Paris Agreement aligned investment portfolios and also became a UN PRI signatory.

· Now baselining and setting reduction plans for the equity and liquid credit asset classes within our portfolios, where we exercise control and influence.

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

"2020 was a landmark year for Phoenix during which we completed the acquisition of ReAssure and became the UK's largest long-term savings and retirement business. We delivered record cash generation of £1.7 billion, our Solvency balance sheet remained resilient, we delivered our highest ever year of Open business growth, and we have recommended a 3% increase in our 2020 final dividend.

We are led by our purpose of 'helping people secure a life of possibilities' to deliver for all of our stakeholders and are putting sustainability at the heart of our business. During the year we have focused on delivering better outcomes for our customers, investing in our people, supporting our local communities, and have made a commitment to be net-zero carbon across our operations by 2025 and our investment portfolio by 2050. COVID-19 has challenged each and every one of us and I am very grateful for the outstanding dedication and professionalism of my colleagues which ensured we protected our customers throughout.

Looking ahead to 2021, we will continue to optimise our in-force Heritage business for cash and resilience, while the recent acquisition of the Standard Life brand will support us in accelerating our Open business growth strategy."

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Enquiries

Investors/analysts:

Claire Hawkins, Director of Corporate Affairs and Investor Relations, Phoenix Group

+44 (0)20 3735 0575

Andrew Downey, Head of Investor Relations, Phoenix Group

+44 (0)20 3735 0160

Media:

Douglas Campbell, Teneo

+44 (0)775 313 6628

Haya Herbert Burns, Teneo

+44 (0)734 203 1051

Shell ie Wells , Head of Corporate Communications, Phoenix Group

+44 (0)20 373 5 0922

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Presentation and financial supplement details

There will be a live virtual presentation for analysts and investors today between 09:00 and 10:30 (GMT).

A link to the live webcast of the presentation, with the facility to raise questions, as well as a copy of the presentation and a detailed financial supplement will be available at: https://www.thephoenixgroup.com/investor-relations/results-centre/

You can also register for the live webcast at:https://phoenixgroup.fy20.virtualhub.events/

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

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Dividend details

The recommended final dividend of 24.1p per share is expected to be paid on 18 May 2021, subject to shareholder approval at Phoenix Group Holdings plc's AGM on 14 May 2021.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 1 April 2021. The record date for eligibility for payment will be 6 April 2021.

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Footnotes

1. 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.

2. 31 December 2020 position on a pro-forma basis to reflect the impact of the sale of Wrap SIPP, Onshore Bond and TIP products to SLA (£0.2bn) and the impact of the expected increase in the rate of corporation tax from April 2023 to 25% announced in the March 2021 budget (£0.3bn).

3. Group long-term free cash is defined as long-term in-force cash generation from the life companies, less M&A and transition costs, add holding company cash, less outstanding shareholder debt.

4. 31 December 2019 position on a pro-forma basis to reflect the acquisition of ReAssure Group plc.

5. 31 December 2020 Solvency II capital position is an estimated position and reflects a dynamic recalculation of transitionals for the Group's Life companies. Had the dynamic recalculation not been assumed, the Solvency II surplus and the Shareholder Capital Coverage Ratio would decrease by £0.1bn and 1% respectively.

6. The 31 December 2019 Solvency II capital position is presented on a pro-forma basis to reflect the acquisition of ReAssure Group plc and assumes the acquisition took place on 31 December 2019. It also reflects a regulator approved recalculation of transitionals as at 31 December 2019.

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

8. Current Fitch leverage ratio is estimated by management.

9. 2019 figures have been restated to include Sun Life incremental long-term cash generation of £8m.

10. Cost synergy target of £50m (previous target £40m) is capitalised over 10 years equating to £500m target.

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Legal Disclaimers

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.

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

Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: domestic and global economic and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, initiatives related to the financial crisis, the COVID-19 pandemic 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, social and economic effects of the COVID-19 pandemic and the UK's exit from 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.

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

Chairman's statement
A clear role in society

2020 has been a year of change for Phoenix as we welcomed Andy Briggs as our new CEO and completed the acquisition of ReAssure, making Phoenix the UK's largest long-term savings and retirement business.

A year of significant progress

Under Andy's leadership, Phoenix is evolving from being a financial consolidator to a purpose-led business with a clear role in society.

The Board recognises that Phoenix has a pivotal role to play as the country navigates the shifting pensions and savings landscape and is committed to fulfilling our purpose of helping people secure a life of possibilities.

It is with great enthusiasm that we have supported Andy as he has built his executive team who will help him deliver this new vision for the Group. This team brings together the strengths of our legacy businesses, with internal promotions being augmented by new colleagues from ReAssure and external appointments to fill gaps in our skills and bring market-leading experience.

Phoenix's journey is one of evolution. We are building on our market-leading capabilities in managing Heritage businesses and undertaking M&A and integration, and are now developing a thriving Open business that supports customer retention and customer acquisition.

In addition to the strategic change we had expected in 2020, we have also been dealing with the challenges resulting from the COVID-19 pandemic. Phoenix's priorities throughout this period have been to protect our customers and colleagues and support the communities in which we operate. The Board has played a key role in these efforts with bi-weekly virtual briefing sessions to keep apprised of the Group's operational and financial position, and to support the executive team as they adapted to the emerging needs of our customers and colleagues.

This challenging period has demonstrated the strength of Phoenix's business model. The Group has continued to deliver cash, resilience and growth and has performed strongly against its strategic objectives. This financial stability has enabled Phoenix to continue to pay dividends as planned. The Board recognises that dividends are an important income stream both for retail shareholders and the end consumer who invests in institutional income funds. They are typically ordinary savers and pensioners who need this income stream, which in turn supports the broader economy.

The successful acquisition of the ReAssure Group has further enhanced the sustainability of our dividend. I am therefore pleased to confirm that, in line with our previous guidance, the Board is recommending a final 2020 dividend of 24.1 pence per share, an increase of 3% compared to the interim dividend.

Another important societal shift is the increasing focus on environmental sustainability. I am therefore delighted that Phoenix has put sustainability at the heart of its strategy and has committed to achieving net-zero carbon by 2025 across our operations and by 2050 across our investment portfolio. Given its importance, the Board wanted to ensure that our sustainability agenda was fully embedded in the business and underpinned by strong governance. We have therefore established a new Board Sustainability Committee chaired by Karen Green. This committee is responsible for the review and oversight of the Group's sustainability strategy which continues to evolve at pace.

Looking ahead

After a very successful year, we look towards the future with optimism. Phoenix's market leading Heritage and thriving Open businesses, combined with a strategy that is closely aligned to our industry's trends, ensure the Group is well positioned to take advantage of emerging opportunities. Phoenix is growing a strong and resilient business to help more people on their journey to and through retirement.

Board changes

In addition to Andy Briggs joining as our new CEO, I was also pleased that Rakesh Thakrar was promoted to the role of Group CFO and joined the Board. Rakesh had previously served as the Group's Deputy CFO and so his promotion is testament to our strong succession planning.

Following completion of the ReAssure acquisition, Christopher Minter and Hiroyuki Iioka joined the Board as part of our relationship agreements with the Swiss Re Group and MS&AD respectively. They bring substantial experience and executive skills to our Board and additional international perspectives. Also, Campbell Fleming from Standard Life Aberdeen has left the Board due to its reduced shareholding following the completion of the ReAssure transaction. On behalf of the Board I would like to thank Campbell for his excellent and insightful contribution during his time with us.

Thank you

Finally, I would like to take the opportunity to thank the Board, my colleagues, our partners and our stakeholders for their hard work and dedication in what has been another successful, albeit challenging, year.

Nicholas Lyons
Chairman

Group Chief Executive Officer's report
A remarkable year of progress

2020 was a landmark year for Phoenix during which the Group became the UK's largest long-term savings and retirement business and once again delivered on its key attributes of Cash, Resilience and Growth.

We delivered our highest ever year of cash generation, exceeding the upper end of our target range, and built good momentum in the growth of our Open business. Phoenix's strong operational and financial resilience ensured we continued to deliver for all of our stakeholders in the face of an unprecedented period of disruption, and it also enabled us to pay our dividends as planned.

In addition, we completed our largest M&A transaction to date with the acquisition of ReAssure Group plc, bringing an additional £7 billion of incremental long-term cash generation to the Group, together with market- leading skills and capabilities.

Supporting our customers, colleagues and communities

2020 has been an unprecedented year for all of us due to the global health crisis caused by the COVID-19 pandemic. Phoenix's key priorities throughout this time have been to protect our customers and colleagues, and to support the communities in which we operate. I am immensely proud of the dedication and resilience our colleagues have shown as they provided the very best support for our customers and supported each other. Our colleagues have lived up to the values we seek to embody and have demonstrated the key attributes of the purpose-led organisation we are.

Delivering cash, resilience and growth

Phoenix has continued its 11-year unbroken track record of delivering against all of its publicly stated financial targets. With £1.7 billion of cash generation in 2020, we exceeded the upper end of our target range of £1.5 to £1.6 billion. We also maintained our strong capital position reflected in a Solvency II surplus of £5.3 billion and a Shareholder Capital Coverage Ratio (SCCR) of 164%.

The growth of our Open business has continued at pace, with strong new business generating £766 million of incremental long-term cash, a 59% increase from 2019 and significant progress towards proving 'the wedge'. Retirement Solutions was the largest contributor during the year at £522 million, where our Bulk Purchase Annuity (BPA) business growth is accelerating and we also made further progress in reducing our external deal capital strain having reduced it to 8%.

The resilience of our business model and the dependable cashflows we generate enabled the Board to approve the payment of our planned dividends throughout 2020, against a backdrop of paused or cancelled dividends across the wider market. This positions Phoenix in the top-30 largest 'dividend payers' in the FTSE 100 and is testament to our sustainable dividend.

A clear role to play in society

It is clear that there is a significant shift in macro and demographic trends that is driving profound change in the UK's long-term savings and pensions market. The market is increasingly complex and people need more support than ever as they journey to and through retirement.

Phoenix therefore has a pivotal role to play as the country navigates the shifting pensions landscape. That is why our purpose is helping people secure a life of possibilities. This means providing the right guidance and products, at the right time, to support the right choices, across the savings life cycle.

I passionately believe that businesses with the best people, focused on their purpose and their role in society, deliver better customer outcomes, and in turn, stronger returns for shareholders.

Our vision is therefore to grow a strong and sustainable business to help more people on their journey to and through retirement.

Committing to a sustainable future

We see sustainability as being at the core of our purpose and a key enabler of our strategy. That is why we recently launched our comprehensive sustainability strategy that addresses the critical trends impacting our industry, including the aging population and the responsibility to address global environmental challenges.

Our strategy focuses on delivering for our c.14 million customers and investing our £338 billion of assets under administration in a sustainable manner.

A key part of this is our commitment to achieving net-zero carbon using science-based techniques across the Group's operations by 2025 and our investment portfolio by 2050.

As the UK's largest long-term savings and retirement business, we are also committed to contributing towards the closure of the UK's growing pensions and intergenerational savings gap. We believe that we can contribute to this through providing innovative ESG-led products for a changing society, by promoting financial inclusion and education with a particular focus on supporting vulnerable customer groups, and by enhancing our digital experience to widen access for all.

For example, this year we undertook an innovative research project aimed at better understanding the needs of our customers in relation to sustainability. This will support the ongoing development of a range of ESG products across the savings life cycle and follows the launch of a workplace ESG passive default fund in December.

Alongside this, as individuals increasingly incorporate ESG considerations into their long-term savings decisions, we are also focused on fostering responsible investment through the active stewardship of assets on behalf of our clients.

Evolving the Phoenix strategy

Our strategy, which we announced at our Capital Markets Day in December 2020, is one of evolution, not revolution. It builds on the strong foundations that underpin Phoenix's market leading capabilities and responds to the shifting pensions landscape to deliver future growth.

Phoenix's strategy is therefore focused on optimising our in-force business to deliver resilient cash generation, deepening the relationships with our c.14 million existing customers by engaging with them and meeting their broader needs, and acquiring new customers through both our Open businesses and M&A as we leverage the industry drivers of change.

Lower for longer interest rates and turbulent equity markets are resulting in insurers continuing to look to free up capital by divesting their legacy or 'heritage' books of business to scale players such as Phoenix. As the market leader in the acquisition and management of closed-book life and pensions insurance businesses, Heritage will remain the bedrock of our business. Here we will continue to focus on delivering improved customer outcomes and managing our in-force book for cash and resilience. In addition, our market-leading M&A and integration expertise provide a differentiated capability that will allow us to deliver value from industry consolidation. There is a huge M&A opportunity for us to explore with the UK Heritage market worth £440 billion alone and we have the integration capacity to do the next transaction when it emerges.

Looking to the future, people's needs are changing as they move through the stages of the life savings cycle. We are seeing strong growth in the workplace market, driven by auto-enrolment, an ageing population and a move from defined benefit to defined contribution pension schemes. We also know that as individuals prepare for retirement and move into the decumulation stage of the savings life cycle, they are increasingly seeking guidance. At the same time, corporate pension schemes are looking to de-risk their balance sheets through BPA transactions. Our strategy is therefore designed to position the Group for sustainable long-term growth by responding to these rapidly evolving sector trends and changing customer needs.

We are already a top-three player in the £40 billion per annum UK workplace market. Our strategy in this segment is to protect our existing business and grow our market share by accelerating the investment in our proposition and aligning to changing sector trends such as the growth in Master Trusts.

Within our Customer Savings & Investments segment we are focused on engaging our c.14 million customers to better understand their savings needs and provide innovative solutions as they journey to and through retirement. We estimate annual flows of about £30 billion per annum into products supporting this stage of the life savings cycle.

And we are an established participant in the £40 billion per annum BPA market which constitutes a dependable growth opportunity. Our strategy here is to grow and expand through further developing our market proposition, building a best in class asset management capability and improving our capital efficiency.

To support the delivery of this strategy we have recently implemented a new organisational design, as we build out our existing team with high calibre new appointments designed to bring on board additional skills and experience.

Investing in our people and culture

I believe that building a strong culture and diverse team of highly engaged colleagues is fundamental to the fulfilment of our purpose and the delivery of our strategy. We are committed to making Phoenix the best place our colleagues have ever worked. To achieve this, we want to be an organisation where diversity of thought and perspective is genuinely embraced. We have made strong progress across our main areas of focus which revolve around employee engagement and culture, diversity and inclusion, wellbeing and mental health, as well as talent and capabilities.

The crafting of our new purpose statement involved a Company-wide consultation initiative to incorporate our colleagues' perspectives and ensure our purpose resonated strongly. We have also launched a number of initiatives including a Group-wide employee engagement exercise aimed at determining our future ways of working, a comprehensive Diversity and Inclusion strategy underpinned by a range of targeted support networks, and an enhanced talent management framework to support development.

As a result, we have already seen some strong momentum in terms of improved colleague advocacy through our annual colleague engagement survey, with a 10ppts increase in overall colleague engagement to 75%.

Delivering for our customers

Delivering for customers is central to our strategy. We are therefore focused on improving customer outcomes, providing strong customer service and investing in developing market leading propositions. 2020 has been a year of delivery across each of these areas.

Within our Heritage business we have been improving customer outcomes through ensuring we deliver good value for money for our customers, making continuous improvements to our customer communications to increase engagement, and by proactively tracing and repatriating unclaimed life insurance policies. Our focus on the customer has seen us continue to provide excellent customer service as evidenced by having met or exceeded all of our key customer satisfaction scores in 2020, despite the pandemic challenges.

In our Open business Workplace unit, we have made significant enhancements to our proposition such as broadening our ESG fund offering with the launch of a new multi-asset ESG Defined Contribution Default fund and the launch of an in-scheme draw-down functionality so that more of our customers can access their pension benefits in a flexible way. While the development of an enhanced client analytics tool, in collaboration with our digital partner Tata Consultancy Services (TCS), will provide enhanced customer insights and allow us to offer a more personalised customer experience.

Meanwhile, the trend to 'digital first' is set to further accelerate and become the preferred method of interaction for our customers. We have made significant digital enhancements across both our Heritage and Open businesses this year and have seen increased usage of our digital solutions with >50% of total log-ins now through our enhanced mobile app and a more than doubling in the use of secure messaging by customers.

Standard Life brand acquisition

The recently announced simplification of our Strategic Partnership with Standard Life Aberdeen plc has seen us acquire the Standard Life brand and with it full control over marketing and distribution. This will enable us to provide a more streamlined, multi-channel customer experience and allow us to accelerate the delivery of a broader set of product and service propositions. We therefore see this as a key enabler for accelerating our Open business growth strategy and delivering incremental new business long-term cash generation over time.

Outlook

Phoenix is well positioned to leverage the key industry drivers of growth while continuing to optimise its market-leading share of in-force business in the UK long-term savings and retirement market.

Phoenix's differentiated operating model epitomises the whole being greater than the sum of the parts. Our Open business benefits from a unique set of advantages from operating alongside our Heritage business.

We are the market leader in the UK Heritage consolidation market and while this remains our priority for M&A, we would also consider the acquisition of Open books of business if they offered a clear strategic fit.

Within our Open business, we are building on our strong foundations to deliver growth by further strengthening our proposition, deepening the engagement with our large existing customer base and acquiring new customers through our Workplace and BPA businesses. All of which is now enhanced by our ownership of the Standard Life brand, marketing and distribution.

Delivering on our Open business growth aspirations will bring enhanced long-term sustainability to the Group's organic cash generation and also has the potential to support future dividend growth subject to two clear conditions.

The first is that we must prove 'the wedge' and see the cash generated from new business more than offset the run off of our in-force business of c.£800m per annum, which we came close to achieving in 2020 at £766m. The second is that our recurring sources of cash must exceed our recurring uses, to support sustainable growth in Group long-term free cash.

Our priorities for 2021 are clear. We will focus on managing our balance sheet for cash and resilience, and we will accelerate our Open business growth strategy. As a purpose-led organisation, we will do this through delivering on our sustainability commitments, ensuring our customers are at the centre of everything we do and by investing in our people and culture.

Thank you

I am proud that Phoenix has continued to progress and evolve in 2020 despite the challenging backdrop. I want to thank all of my colleagues for their dedication and efforts to support each other, our customers and the communities within which we operate. I look forward to delivering another year of significant progress in 2021.

Andy Briggs

Group Chief Executive Officer

Business review
Inspiring confidence through financial delivery

2020 was a year of exceptionally strong performance for the Group. Despite significant market volatility experienced as a result of COVID-19 all of the Group's financial targets were met or exceeded. This demonstrates the Group's resilience and continued focus on growth through new business.

IFRS

The Group generated an increased operating profit of £1,199 million for the year (2019: £810 million), reflecting the contribution of the ReAssure businesses for the five-month period post-completion of the acquisition on 22 July and increased Bulk Purchase Annuity ('BPA') transaction activity in the period.

The IFRS profit after tax attributable to owners for the year is £834 million (2019: £116 million). The increase primarily reflects the increased operating profit together with a gain recognised on the acquisition of the ReAssure businesses of £372 million and gains on hedging positions held in the shareholder funds.

Cash

Cash generation remains our key reporting metric. The Group's cash generation of £1,713 million in the year allowed the Group to exceed the upper end of its £1,500 to £1,600 million target range for that period, and includes £690 million of cash remitted by the ReAssure Life Companies in the period prior to completion of the acquisition.

The Group now monitors an additional cash metric, Long-Term Free Cash ('LTFC'). LTFC provides a measure of the Group's long-term cash available for operating costs, interest, growth and shareholder returns. Group LTFC as at 31 December 2020 was £13.4 billion (2019: £14.1 billion) and is stated on pro forma basis to reflect the £0.2 billion reduction in future long-term cash generation arising as a result of the disposal of the Wrap Self-Invested Personal Pension ('Wrap SIPP'), Onshore Bond and UK Trustee Investment Plan ('TIP') businesses and also £0.3 billion for the adverse impact of the expected increase in the rate of corporation tax from April 2023 to 25%, announced in the March 2021 budget. The Group's ambition is to replenish the cash that it uses year-on-year through growth in long-term cash generation and the delivery of management actions.

Resilience

The Group's capital position of £5.3 billion (2019: £4.4 billion pro forma) remained resilient in the year, and our shareholder capital coverage ratio of 164% (2019: 152% pro forma) remains comfortably in the middle of our target range of 140% to 180%. Despite the market volatility experienced in the year, we have seen only a £0.2 billion strain from economics, reflecting the impact of the Group's hedging programme and active approach to credit portfolio management. The closing surplus has been positively impacted by the delivery of capital synergies following the acquisition of the ReAssure businesses, together with management actions delivered in the year and the issuance of capital qualifying subordinated debt.

Growth

The Group's Assets under Administration ('AUA') increased to £337.7 billion in the year (2019: £248.3 billion). The increase in the year is largely driven by the acquisition of the ReAssure businesses on 22 July, net inflows from the Group's Open business, and net positive market movements. These factors have been partly offset by net outflows from the Group's Heritage businesses.

Long-term cash generation is expected to increase by £766 million as a result of new business transacted in the year (2019: £483 million). This includes the impact of seven BPA transactions executed in the period, together with new business from our Open segment.

Looking ahead

Phoenix remains on track to achieve its long-term cash generation target for the five-year period 2019 to 2023 of £6.8bn. The target has been upgraded to reflect the acquisition of ReAssure, together with the impact of new business and management actions delivered in 2019 and 2020. The Group looks forward to the future from a position of financial strength.

Alternative performance measures

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

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

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

As such, the key performance indicators for the Group mainly focus on cash generation and capital strength. Further information on the Group's APMs can be found on page 309 of our Annual Report and Accounts, 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 309 of our Annual Report and Accounts for further details of this measure. Maintaining strong cash flow delivery underpins debt servicing and repayments, shareholder dividends as well as opportunities for further M&A and investment in new business.

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

Cash receipts

Cash generated by the operating companies during 2020 was £1,713 million (2019: £707 million). This includes £690 million of cash remitted by the ReAssure Life companies in the period prior to completion and accruing to the Group under the 'locked box' acquisition completion mechanism. The total is reported net of a £50 million contribution into the Group's Irish domiciled subsidiary, Standard Life International Designated Activity Company ('SLIDAC'), in order to strengthen its capital position following the fall in yields during the period.

	Year ended 31 December 2020 £m	Year ended 31 December 2019 £m
Cash and cash equivalents at 1 January	346	346
Operating companies' cash generation:
Cash receipts from Life Companies	1,073	932
Cash receipts from Management Services companies	-	25
Cash remittances to Standard Life International	(50)	(250)
Total cash receipts¹	1,023	707
Uses of cash:
Operating expenses	(42)	(43)
Pension scheme contributions	(80)	(50)
Debt interest	(184)	(112)
Non-operating cash outflows	(66)	(137)
Uses of cash before debt repayments and shareholder dividend	(372)	(342)
Shareholder dividend	(403)	(338)
Total uses of cash	(775)	(680)
Debt issuance (net of fees)	1,445	-
Cost of acquisitions	(1,265)	-
ReAssure Holding Company cash acquired	580	-
Support of BPA activity	(228)	(98)
Cash and cash equivalents at 31 December	1,055	275

1 Total cash receipts include £108 million received by the holding companies in respect of tax losses surrendered (2019: £112 million) and exclude £690 million of cash generation from the ReAssure Life Companies arising in the period prior to completion.

All amounts in the Business Review section marked with an 'APM' are alternative performance measures. See 'Alternative Performance Measures' section on page 309 of the Annual Report and Accounts for further details of these measures.

All amounts in the Business Review section marked with a 'REM' are KPIs linked to executive remuneration. See 'Directors' Remuneration Report' on page 124 of the Annual Report and Accounts for further details of executive remuneration including the financial and non-financial performance measures on which it is based.

Uses of cash

The operating expenses of £42 million (2019: £43 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.

Annual pension scheme contributions of £80 million (2019: £50 million) were made during the year and include total contributions of £70 million into the Pearl Group Scheme and £10 million into the Abbey Life Scheme, which includes £4 million paid into Charged Accounts and held in escrow. Following the signing of the new Commitment Agreement with the Scheme Trustees, the Pearl Group Scheme contributions included the balance of the remaining contributions under the 2012 Pensions Agreement (£37 million) in addition to the monthly instalments paid up to this date. No further contributions are expected to be paid to the Pearl Group Scheme.

Debt interest of £184 million (2019: £112 million) increased in the year as a result of the cash settlement of a full annual coupon on the €500 million Tier 2 bond issued in September 2018, the first coupons on the US$750 million Tier 1 bond issued in January and the US$500 million Tier 2 bond issued in June. Additionally debt interest includes a semi-annual coupon paid in the post completion period on three debt instruments which were substituted to the Group as part of the acquisition of the ReAssure businesses (£250 million Tier 2, £500 million Tier 2 and £250 million Tier 3). Coupons on the £500 million Tier 2 bond issued in April are not due until 2022.

Non-operating net cash outflows

Non-operating net cash outflows of £66 million (2019: £137 million) principally comprises £156 million of recharged staff costs and Group expenses associated with corporate-related projects, including the transition programmes, partly offset by £115 million of cash realised or posted as collateral in respect of derivative instruments entered into by the holding companies to hedge the Group's exposure to currency and equity risk. The remainder of the balance includes £22 million of expenses associated with the acquisition of the ReAssure businesses and £3 million of net other items.

Shareholder dividend

The shareholder dividend of £403 million represents the payment of £169 million in May for the 2019 final dividend and the payment of the 2020 interim dividend of £234 million in September. The 2020 final dividend per share proposed is 24.1 pence.

Debt issuance (net of fees)

The £1,445 million debt issuance in the year comprises the net proceeds of the £572 million (US$750 million) Tier 1 bond in January, the £500 million Tier 2 bond issuance in April and the £398 million (US$500 million) Tier 2 bond issuance in June.

Cost of acquisitions

Cost of acquisitions of £1,265 million relates to the cash consideration settlement to finance the acquisition of the ReAssure businesses.

ReAssure Holding Company cash acquired

Cash within the ReAssure holding companies of £580 million was recognised on acquisition of those entities on 22 July.

Support of BPA activity

£228 million (2019: £98 million) of funding has been provided to the life companies to support BPA new business, including the buy-in transaction with the Pearl Group Scheme.

Illustrative stress testing of 2021-23 cash generation target

Illustrative stress testing1	1 Jan 2021 to 31 Dec 2023 £bn
Base case three-year cash guidance	4.4
Following a 20% fall in equity markets	4.4
Following a 12% fall in property values2	4.2
Following a 73bps interest rates rise3	4.7
Following a 88bps interest rates fall4	4.0
Following credit spread widening5	4.3
Following credit downgrade: immediate full letter downgrade on 20% of portfolio⁵	3.8
Following 6% decrease in annuitant mortality rates⁶	3.5
Following a 10% change in lapse rates7	4.2

1 Assumes stress occurs on 1 January 2021 and that there is no market recovery.

2 Represents an average fall in property values of 12%.

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

4 Credit stress varies by rating and term and is equivalent to an average 120bps spread widening (full range of spread widening is 49bps to 204bps). It assumes the impact of a dynamic recalculation of transitionals and makes no allowance for the cost of defaults/downgrades.

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

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

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

Target cash flows

The Group set a short-term cash generation target of £1,500 to £1,600 million for 2020 (including cash generation from the ReAssure Life companies in the period prior to completion) and with £1,713 million of cash generation achieved, the Group has exceeded the upper end of its target range.

The Group had a cash generation target of £3.8 billion for the five-year period 2019 to 2023. Following the acquisition of the ReAssure businesses, this was increased by £2.7 billion to £6.5 billion. £0.7 billion was achieved in 2019 with a further £1.7 billion delivered in 2020.

The target has been updated by £0.3 billion, reflecting £0.2 billion of new business written in 2019 and 2020, £0.3 billion to reflect over-delivery of management actions in 2020 offset by £(0.2) billion for the impact of net adverse economic and market movements, notably credit downgrades in the period.

This takes the target up to £6.8 billion, of which £4.4 billion remains to be delivered over 2021 to 2023. The resilience of the target is demonstrated by the illustrative stress testing in the table to the left.

Expected cash flows after 2024

There is an expected £13.3 billion of cash to emerge from 2024. This does not include any management actions from 2024 onwards or any additional value from future new business from the Group's Open business and BPA transactions. It also does not reflect the impact of any future M&A.

Group Long-Term Free Cash

The Group now monitors an additional cash metric, Long-Term Free Cash ('LTFC'). Group LTFC is comprised of long-term cash to emerge from in-force business, plus holding company cash less M&A and transition costs and shareholder debt outstanding. Group LTFC provides a measure of the Group's total long term cash available for operating costs, interest, growth and shareholder returns.

Increases in Group LTFC will be driven by the sources of long-term cash i.e. new business and over-delivery of management actions.

Decreases in Group LTFC will reflect the uses of cash at holding company level, including expenses, interest, investment in BPA and dividends.

In addition, in 2020, £0.2 billion has been set aside for investment in our growth strategy. This reflects a c.£20 million of cost per annum, capitalised for 10 years to invest in enhancing capabilities in our Open businesses, Asset Management, our brand and in our sustainability strategy.

The other movement of £0.1 billion includes the cash settlement with SLA in relation to historic legacy items and a small net impact from economics and assumption changes.

The impact of the sale of Wrap SIPP, Onshore Bond and 'TIP' to SLA is expected to result in a £0.2 billion reduction in Group LTFC. Further details are set out on page 289 in the Annual Report and Accounts in events after the reporting period.

The impact of the expected increase in the rate of corporation tax from April 2023 to 25% announced in the March 2021 budget is expected to result in a £0.3 billion reduction in Group LTFC.

The Group's ambition is to replenish cash that it uses year-on-year through growth in long-term cash generation and management actions.

Assets Under Administration and new business

The Group's AUA represent assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets. This includes assets recognised in the Group's IFRS statement of consolidated 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 statement of consolidated financial position to the Group's AUA is provided on page 305 of the Annual Report and Accounts. Please see the Alternative Performance Measure ('APM') section on page 309 of the Annual Report and Accounts for further details of this measure.

Group AUA

Group AUA as at 31 December 2020 was £337.7 billion (2019: £248.3 billion). The increase in the year is largely driven by the acquisition of the ReAssure businesses on 22 July, net inflows from the Group's UK Open business, and net positive market movements. These factors have been partly offset by net outflows from the Group's UK Heritage businesses.

UK Heritage net flows

UK Heritage net outflows of £(7.3) billion (2019: £(6.2) billion¹) reflect policyholder outflows on claims such as maturities, surrenders and annuities in payment, net of total premiums received in the period from in-force contracts. The acquisition of the ReAssure Heritage business increased net outflows relative to the prior year.

UK Open flows

The UK Open segment experienced gross inflows of £12.4 billion (2019: £11.7 billion¹) during the year, of which £7.7 billion (2019: £8.2 billion) was received in respect of new contracts transacted in the period.

Gross inflows in Retirement Solutions, which encompasses our Annuity and BPA business, experienced £3.2 billion (2019: £1.9 billion) of inflows. This includes £0.7 billion arising from buy-in transactions with the Group's Pension Schemes and £1.8 billion (2019: £1.1 billion) of new business inflows arising from BPA transactions completed in the year.

Gross inflows in the Workplace product of £4.7 billion (2019: £4.9 billion) were impacted by challenging market conditions relating to COVID-19, however inflows have trended back to pre-COVID-19 levels during the latter months of 2020.

Gross inflows in the Customer Savings & Investment ('CS&I') business unit, which encompasses our Wrap and Retail products, of £4.2 billion (2019: £4.9 billion) were also adversely impacted by challenging market conditions relating to COVID-19, resulting in reduced volumes of inflows.

Outflows for the UK Open business were £(9.6) billion (2019: £(9.8) billion¹) mainly due to run-off, resulting in net inflows of £2.8 billion (2019: £1.9 billion).

1 2019 has been restated to reflect the revised definition of the UK Open segment which now includes the Group's annuity and BPA business.

Europe net flows

The European business contributed a small net inflow of £0.2 billion (2019: small net outflow of £(0.1) billion) to the Group's AUA.

Other movements including markets

AUA increased by £18.5 billion (2019: £26.4 billion) as a result of other movements, largely driven by the net positive impacts of market movements, with the impact of falling yields on the value of the Group's debt security portfolios, rises in several overseas equity markets and a weakening of sterling, more than offsetting the impact of declining UK equities performance.

New business contribution

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.

The new business contribution metric now includes all business written by the Group's Open business units, including Retirement Solutions, having previously excluded the Group's annuity and BPA activity.

New business contribution for 2020 was £362 million (2019: £199 million¹), which benefited significantly from the increase in new BPA deals written, partially offset by the impacts from COVID-19 on gross inflows where sales volumes within both the CS&I (Wrap SIPP product) and European business were lower than the prior year.

Incremental long-term cash generation

Our incremental long-term cash generation measure demonstrates the impact on the Group's future cash generation arising as a result of new business transacted in the year. It is stated on an undiscounted basis. Incremental long-term cash generation increased to £766 million (2019: £483 million)², which includes £522 million from our Retirement Solutions business unit.

The incremental long-term cash generation split by business unit is shown in the table below.

2020 has benefited from improved BPA performance with record incremental long-term cash generation of £350 million (2019: £235 million) reflecting an increase in volume of transactions but also improved deal economics. The average payback period reduced from 6-7 years in 2019 to 5-6 years.

Seven BPA transactions (including the buy-in transaction mentioned below) were completed in the year, reflecting the Group's selective and proportionate approach to its participation in this market.

Following the signing of the new Commitment Agreement with the Scheme Trustees the Group has also recognised £172 million of incremental long-term cash generation as a result of the buy-in transaction with the Pearl Group Scheme.

For our Workplace business unit incremental long-term cash generation has remained resilient despite the effects of COVID-19.

CS&I and Europe incremental long-term cash generation were impacted by the effects of COVID-19 on gross inflows with sales volumes lower than the prior year.

SunLife has seen an increase in incremental long-term cash generation due to an increase in sales volumes during the year.

Business unit	Year ended 31 December 2020 £m	Year ended 31 December 2019² Restated £m
Retirement Solutions	522	235
Workplace	140	155
Customer Savings & Investment (CS&I)	56	59
Europe	25	26
SunLife	23	8
Incremental long-term cash generation	766	483

1 2019 has been restated to reflect the revised definition of the UK Open segment which now includes the Group's annuity and BPA business.

2 2019 has been restated to include incremental long-term cash generation from SunLife.

Capital Management

Group Solvency II Surplus

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

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

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

The Standard Life Assurance businesses determine their capital requirements in accordance with an approved Internal Model ('Standard Life Internal Model'), which was in place prior to the acquisition of the Standard Life Assurance businesses. The one exception to this is SLIDAC, the Group's Irish subsidiary, which remains on Standard Formula.

The Standard Formula is also used in the determination of the capital requirements for the acquired ReAssure businesses.

As a result, the Group currently uses a Partial Internal Model to calculate Group SCR, aggregating outputs from the existing Phoenix Internal Model, the Standard Life Internal Model and the Standard Formula, without further diversification. A harmonisation programme to combine the two Internal Models into a single Internal Model is ongoing.

Change in Group Solvency II Surplus (estimated)

The Group Solvency II surplus has increased to £5.3 billion (2019 pro forma: £4.4 billion). In this section, we focus on an analysis of the movement in the Group's Solvency II surplus on a pro forma basis as if the acquisition of the ReAssure businesses took place on 31 December 2019. Further details regarding the actual comparative position as at 31 December 2019 are set out in the additional capital disclosures on page 307 in the Annual Report and Accounts.

During the year, total proceeds (net of issue costs) from the issuance of hybrid debt were £1.4 billion, comprising the US$750 million Tier 1 bond, £500 million Tier 2 bond and US$500 million Tier 2 bond. On the pro forma basis, £1.2 billion of the debt issued to fund the cash consideration for the acquisition of ReAssure was assumed to have been issued on 31 December 2019. Remaining proceeds of £0.2 billion provides additional flexibility for the refinancing of existing Phoenix borrowings and increased the surplus in the year.

Surplus generation and the impact of the reduction in capital requirements for the Group added £0.6 billion to the surplus during the year.

Management actions undertaken increased the surplus by £1.3 billion. This includes £0.5 billion in respect of capital synergies associated with the acquisition of the ReAssure businesses, primarily resulting from the implementation of additional hedging to protect the value of the acquired business and harmonisation of methodologies for the calculation of transitional measures on technical provisions. The £0.8 billion of other management actions includes expense synergies arising upon the Part VII transfer of the L&G Mature Savings business, further investment in Equity Release Mortgage ('ERM') assets, additional strategic asset allocation activities and the optimisation of matching adjustment portfolios.

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

	Estimated position as at 31 December 2020 £bn	Pro forma⁴ 31 December 2019 £bn
Own Funds1	16.8	15.6
SCR²	(11.5)	(11.2)
Surplus³	5.3	4.4

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 147% as at 31 December 2020 (2019 pro forma: 140%). 4 Stated pro forma as if the acquisition of the ReAssure businesses took place on 31 December 2019.

The impact of new business written during the year reduced the surplus by £0.2 billion. This primarily reflects the capital strain associated with Bulk Purchase Annuity ('BPA') transactions executed in the year.

Financing costs, pension contributions, dividend payments (including accrual for the 2020 final dividend) and corporate expenses amount to £0.9 billion and reduced the surplus in the year.

Assumption changes and experience variances increased the surplus by £0.1 billion. This includes the positive impact of changes to longevity assumptions, partially offset by an increase to the provision for the expected costs associated with the delivery of the Standard Life transition programme and the strengthening of actuarial assumptions in respect of ERM and persistency.

The adverse impact of economic and other variances reduced the surplus by £0.2 billion, driven by the net adverse impact of economic and market movements in the year, notably falling yields and credit downgrades experienced during the period.

Illustrative stress testing of Group Solvency II Surplus

Illustrative stress testing¹	Estimated PGH Solvency II Surplus £bn
Base: 1 January 2021	5.3
Following a 20% fall in equity markets	5.3
Following a 12% fall in property values²	5.1
Following a 73bps interest rates rise³	5.4
Following a 88bps interest rates fall³	5.2
Following credit spread widening⁴	5.1
Following 6% decrease in annuitant mortality rates⁴	4.8
Following 10% increase in assurance mortality rates	4.4
Following a 10% change in lapse rates⁵	5.0

1 Assumes stress occurs on 1 January 2021 and that there is no market recovery.

2 Represents an average fall in property values of 12%.

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

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

Group Shareholder Capital Coverage Ratio (estimated)

The Solvency II surplus excludes the surpluses arising in the Group's unsupported with-profit funds and unsupported Group pension schemes of £2.8 billion (2019 pro forma: £2.4 billion). Surpluses within the with-profit funds and the Group Pension Schemes, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.

In the calculation of the Solvency II surplus, the SCR of the unsupported with-profit funds and the unsupported Group Pension Schemes is included, but the related Own Funds are recognised only to a maximum of the SCR amount. This approach suppresses the regulatory capital coverage ratio calculated as eligible own funds as a percentage of SCR. As a result, the Group focuses on a shareholder view of the capital coverage ratio which it considers to give a more accurate reflection of the capital strength of the Group. The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the unsupported Group Pension Schemes.

The Group targets a shareholder capital coverage ratio in the range of 140% to 180%. As at 31 December 2020, the Group Shareholder Capital Coverage ratio is 164% (2019 pro forma: 152%).

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 in the table above and demonstrate the resilience of the Group's Solvency II surplus.

Life Company Free Surplus

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

As at 31 December 2020, the Life Company Free Surplus is £2.9 billion (2019 pro forma: £2.6 billion). The table below analyses the movement during the period.

As the analysis is presented on a net of tax basis, cash remittances to the holding companies excludes £108 million of amounts received by the holding companies in respect of tax losses surrendered to the Life companies that is included in the Group's Cash Generation metric.

	Estimated position as at 31 December 2020 £bn
Opening Free Surplus (pro forma)¹	2.6
Surplus generation and run-off of capital requirements	0.8
Management actions	1.3
Economics, financing and other	(0.2)
Free Surplus before cash remittances	4.5
Cash remittances to holding companies	(1.6)
Closing Free Surplus	2.9

1 Pro forma as if the acquisition of the ReAssure businesses took place on 31 December 2019.

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 309 in the Annual Report and Accounts for further details of this measure.

The Group generated an increased operating profit of £1,199 million (2019: £810 million), reflecting the contribution of the ReAssure businesses for a full five-month period post completion of the acquisition on 22 July, and increased Bulk Purchase Annuity (BPA) transaction activity in the period.

The IFRS profit after tax attributable to owners is £834 million (2019: £116 million). The increase primarily reflects the increased operating profit described above together with a gain recognised on acquisition of the ReAssure businesses of £372 million and gains on hedging positions held in the shareholder funds.

The aforementioned benefits were partially offset by adverse investment variances, recognition of additional amortisation charges on intangible assets for ReAssure, and financing costs on new debt issuances which supported the acquisition.

Basis of operating profit

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

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

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

The 2019 figures for the operating profit segments have been restated to reflect strategic changes whereby the Group's annuity and BPA business is now part of the UK Open segment, where previously it was included in UK Heritage.

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 £129 million (2019: £135 million) represents the shareholders' one-ninth share of the policyholder bonuses.

The with-profit funds where internal capital support has been provided generated an operating loss of £(1) million (2019: £18 million). The loss in the current year is driven by a net negative impact of updating actuarial assumptions, notably persistency, compared to a net positive impact in the prior year, principally reflecting updates to longevity assumptions.

Profit/(loss) after tax	Year ended 31 December 2020 £m	Year ended 31 December 2019 Restated¹ £m
UK Heritage	278	350
ReAssure	444	-
UK Open	472	417
Europe	44	52
Management Services companies	6	26
Group costs	(45)	(35)
Operating profit	1,199	810
Investment return variances and economic assumption changes on long term business	(47)	(177)
Variance on owners' funds	148	13
Amortisation of acquired in-force business, customer relationships and other intangibles	(482)	(395)
Other non-operating items	281	(169)
Profit before finance costs and tax attributable to owners	1,099	82
Finance costs attributable to owners	(191)	(127)
Profit/(loss) before the tax attributable to owners of the parent	908	(45)
Profit before tax attributable to non-controlling interests	36	31
Profit/(loss) before tax attributable to owners	944	(14)
Tax (charge)/credit attributable to owners	(110)	130
Profit after tax attributable to owners	834	116

The non-profit and unit-linked funds operating profit is £148 million (2019: £224 million). The reduction reflects the impact of short-term expense overruns and project costs, adverse model and methodology changes and the inclusion of one-off positive impacts from balance sheet reviews in the prior period comparative.

The long-term return on owners' funds of £2 million (2019: £(6) million) reflects the return on owners' assets, primarily cash-based assets and fixed interest securities, and the impact of expenses borne by the shareholder.

UK Heritage operating profit	Year ended 31 December 2020 £m	Year ended 31 December 2019¹ Restated £m
With-profit	129	135
With-profit where internal capital support provided	(1)	18
Non-profit and unit linked	148	203
Long-term return on owners' funds	2	(6)
UK Heritage operating profit before tax	278	350

1 During the year, the Group reassessed its operating segments as a result of strategic developments. Specifically, the categorisation of the provision of annuities to existing policyholders with vesting products and from Bulk Purchase Annuity contracts has been revised such that this business is now included within the UK Open segment instead of within the UK Heritage segment. Comparative information has been restated to reflect this new presentation.

ReAssure operating profit

The ReAssure business segment comprises operating profit for the ReAssure businesses for the full five- month period, post-completion of the acquisition on 22 July. The result includes a £214 million benefit from positive actuarial assumption changes in the period principally longevity.

UK Open operating profit

The Group's UK Open business segment delivered an operating profit of £472 million (2019: £417 million1). This includes operating profits generated across the Retirement Solutions (including BPA), Workplace and CS&I business units, including new business distributed through the Strategic Partnership with Standard Life Aberdeen plc and under the Group's SunLife brand. The increase in operating profit compared to the prior year reflects the positive impact from updating longevity assumptions, increased new business profits on Bulk Purchase Annuity (BPA) transactions written in the year together with strong performance in the SunLife business.

Europe operating profit

The Europe business segment which comprises business written in Ireland, Germany and Austria and a mix of Heritage and Open products, generated an operating profit of £44 million during the year (2019: £52 million).

Management Services Companies operating profit

The operating profit for management services of £6 million (2019: £26 million) comprises income from the life and holding companies in accordance with the respective management services agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects a re-phasing of income from the life companies under revised management services agreements and the impacts of run-off.

Group costs

Group costs in the period were £45 million (2019: £35 million). They mainly comprise project recharges from the service companies and the returns on the scheme surpluses/deficits of the Group staff pension schemes. The increase in costs compared to the prior period principally reflects the inclusion of corporate costs associated with the acquired ReAssure businesses.

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

The net adverse investment return variances and economic assumption changes on long-term business of £47 million (2019: £177 million adverse) primarily arise as a result of movements in credit spreads, the impact of credit downgrades in the Group's investment portfolio and a net adverse impact from equity movements. Equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges are 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. Losses have been experienced on hedging positions held by the Life companies in respect of rises in certain overseas equity markets in 2020, and on positions held by the ReAssure businesses as a result of improving UK equity markets in the post-acquisition period. These losses have been partly offset by gains on UK equity market hedges that the Group has had in place since 1 January 2020.

Falling yields and strategic asset allocation activities undertaken by the Group, including investment in higher yielding illiquid assets, also gave rise to positive investment return variances in the period.

Variance on owners' funds

The positive variance on owners' funds of £148 million (2019: £13 million positive) is principally driven by gains on the close out of foreign currency swaps held by the holding companies to hedge exposure of future life company profits and non-sterling denominated shareholder borrowings to foreign currency movements. It also includes gains on hedges in place to protect against equity risk in the ReAssure businesses in the pre-completion period. The prior year positive variance includes gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates.

Amortisation of acquired in-force business and other intangibles

The acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates. Amortisation of acquired in-force business during the year totalled £464 million (2019: £375 million) with the increase from the prior year driven by additional amortisation charges on intangible assets recognised on acquisition of ReAssure. Amortisation of other intangible assets totalled £18 million in the year (2019: £20 million).

Other non-operating items

Other non-operating items of £281 million positive (2019: £169 million negative) includes a gain recognised on acquisition of the ReAssure business of £372 million, and also an £85 million gain arising on completion of the Part VII transfer of the mature savings liabilities and associated assets from the L&G Group (see note H2.2 of the IFRS financial statements for further details). These positive non-operating items are partially offset by a net cost of £43 million associated with the delivery of the Group Target Operating Model for IT and Operations, costs of £37 million associated with the acquisition of the ReAssure businesses, £19 million incurred under the subsequent integration programme.

The balance also includes costs of £20 million associated with the on-going integration of the Old Mutual Wealth business acquired by ReAssure Group plc in December 2019, incurred since the Group's acquisition of ReAssure Group plc in July 2020, costs of £16 million associated with the transfer and integration of the L&G mature savings business, £34 million of other corporate project costs and net other one-off items totalling a cost of £7 million.

The prior period result of £169 million negative included an £80 million benefit arising from updated expense assumptions for insurance contracts, reflecting reduced future servicing costs as a result of transition activity. This benefit was more than offset by staff and external costs incurred or provided for in the period with regard to transition activity and the transformation of the Group's operating model and extended relationship with Tata Consultancy Services, totalling £190 million, of which £175 million related to external costs. Also included in the net other non-operating items were £5 million of costs associated with preparations to ready the business for Brexit, costs associated with other corporate related projects of £41 million, including the Group's Internal Model harmonisation project and the acquisition of the ReAssure businesses and net other items which totalled an expense of £13 million.

Finance costs

Finance costs of £191 million (2019: £127 million) have increased by £64 million, reflecting the interest charges on the new debt issuances in the year including the three debt agreements which were substituted to the Group as part of the acquisition of the ReAssure businesses.

Tax credit atrributable to owners

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the corporate responsibility section of the Group's website. The Group's tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group's approach to its wider Corporate Social Responsibility. The Tax Strategy was refreshed in 2020 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 UKlegislation. Following the acquisition of the Standard Life Assurance businesses, the Group's overseas operations have increased, in Ireland and Germany in particular. The ReAssure businesses acquired in July 2020 are also primarily based in the UK. The Group complies with the local tax obligations in the jurisdictions in which it operates.

The Group tax charge for the period attributable to owners is £110 million (2019: £130 million tax credit) based on a profit (after policyholder tax) of £944 million (2019: loss of £14 million). The tax adjustments to the Owners' profit before tax are primarily due to a deferred tax charge for the impact of the retention of the 19% corporate tax rate and impact of the L&G Mature Savings business Part VII transfer of £(37) million, non-taxable income and gains of £(78) million, amortisation on acquired in-force business at a rate other than 19% of £77 million, a prior year credit for shareholders £(17) million, deferred tax credit for recognition of previously unrecognised tax losses of £(25) million, the impact of non-tax deductible costs of £9 million and profits taxed at a rate other than the 19% statutory corporate tax rate of £(10) million.

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 2020 (as calculated by the Group in accordance with Fitch Ratings' stated methodology) is 28% (2019: 22%). This is within the target range management considers to be associated with maintaining an investment grade rating of 25% to 30%.

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

Principal risks and uncertainties facing the Group

The Group's principal risks and uncertainties are detailed in this section, together with their potential impact, mitigating actions in place and any change in risk exposure since the Group's 2019 Annual Report and Accounts, published in March 2020. These risks reflect the impact of the ReAssure Group plc acquisition on the enlarged Group's risk profile.

Management and the Board Risk Committee have carried out a robust assessment of principal risks and emerging risks. As a result of this, two new strategic risks around 'Open business' and 'Delivery of change' have been introduced. This recognises the growing importance of managing risk in these areas to enable the Group to effectively deliver its strategic objectives.

In addition, a principal risk in the Group's 2019 Annual Report and Accounts involving customer proposition development has been combined with our 'customer outcomes' principal risk. This reflects the importance of delivering propositions that meet the evolving needs of our customers across our Heritage and Open businesses.

Further details of the Group's exposure to financial and insurance risks and how these are managed are provided in note E6 and F4 (to the IFRS consolidated financial statements).

Strategic priorities:

1. Manage capital

2. Create value

3. Meet customer needs

4. Sustainability

5. Inspire our people

Risk	Impact	Mitigation	Strategic priorities	Change from last year
STRATEGIC RISK
The Group fails to make further value adding acquisitions or effectively transition acquired businesses	The Group is exposed to the risk of failing to drive value through inorganic growth opportunities, including acquisitions of life and pensions books of businesses. The transition of acquired businesses into the Group could introduce structural or operational challenges that result in the Group failing to deliver the expected outcomes for customers or value for shareholders.	The Group continues to assess new inorganic growth opportunities and applies a clear set of criteria to assessing these opportunities. Our acquisition strategy is supported by the Group's financial strength and flexibility, its strong regulatory relationships and its track record of managing customer outcomes and generating value. The financial and operational risks of target businesses are assessed in the acquisition phase and potential mitigants are identified. Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations. The Group continues to actively manage operational capacity required to deliver its strategy, including transition activities.	1 2 3	No change Phase 1 of the Standard Life Assurance integration is substantially complete with Phases 2 and 3 progressing well. We remain on track to deliver our synergy targets. In July 2020,the Group successfully completed the acquisition of ReAssure Group plc bringing additional scale to the Heritage business and enhancing our key attributes of cash generation, resilience and growth. Integration of the ReAssure Group plc into the wider Group is underway. Following the ReAssure Group plc acquisition, we have completed the Part VII transfer of business acquired from L&G and migrated customers to our in-house administration platform.
The Group's Strategic Partnerships fail to deliver the expected benefits	Our strategic partnerships are a core enabler for delivery of the Group's strategy; they allow us to meet the needs of our customers and clients and deliver value for our shareholders. The Group's end state operating model will leverage the strengths of our strategic partners whilst retaining in-house key skills which differentiate us. There is a risk that the Group's strategic partnerships do not deliver the expected benefits. Some of our key strategic partnerships include: SLA plc: Provides investment management services to the Group including the development of investment solutions for our customers. TCS: Our enlarged partnership with TCS is also expected to support growth plans for our Open business, enabling further digital and technology capabilities to be developed to support enhanced customer outcomes. HSBC: The Group is continuing its plan to transfer all fund-accounting services to HSBC, enlarging and enhancing our current partnership..	The Group has in place established engagement processes with SLA plc to oversee and develop the strategic partnership. These processes will be adapted to reflect the new simplified extended strategic partnership between the Group and SLA plc that was announced in February 2021. The Group's engagement with Diligenta, and its parent TCS, adheres to a rigorous governance structure, in line with the Group's Supplier Management Model. As a result, productive and consistent relationships have been developed with TCS, which will continue to develop throughout future phases of our enlarged partnership. We have in place established processes to oversee services provided by HSBC. .	2 3 4	Risk improved The changes announced by the Group and SLA plc in February 2021 to simplify and extend the strategic partnership lead to an improvement in this risk, including the conclusion of all legacy issues related to services and expenses in relation to the Transitional Services Agreement, Client Service Proposition Agreement and certain other agreements between the Group and SLA plc entered into when the Group acquired the Standard Life Assurance businesses. The Group continues to effectively develop the partnership with TCS as they support our strategic deliverables. Most notably, in 2020 the blueprint for Phase 3 of the Group's Standard Life Assurance transition activity was finalised and signed with TCS; this was a significant milestone in progressing transition activity. Other strategic activity involving both parties continues to be assessed for COVID-19 impacts with actions being taken to protect strategic and BAU activity.
The Group fails to deliver long-term growth in its Open business	The Group's Open business has strong foundations and is central to our purpose of helping people secure a life of possibilities. It is also fundamental to our plans of delivering the Wedge which assumes that Open business growth can offset the run-off from the in-force business and bring sustainability to organic cash generation. Significant negative reputational damage could occur if the Open business fails to deliver against its strategic objectives, particularly as the Group seeks to promote a 'customer obsessed' mind-set underpinned by strong retention and consolidation as customers journey to and through retirement.	The Group's new Business Unit structure brings renewed focus and accountability. The key areas of growth are Workplace, Customer Savings & Investments and Retirement Solutions. Each Business Unit will hold an annual strategy setting exercise to consider customer needs, the interests of shareholders, the competitive landscape and the Group's overall purpose and objectives. As part of the Annual Operating Plan the Group is committed to making significant investment in our Open business which will include propositions which are driven by customer insight. The Group is established in the Bulk Purchase Annuity ('BPA') market and continues to invest in its operating model to further strengthen its capability to support its growth plans. For new BPA business, the Group continues to be selective and proportionate, focusing on value not volume, by applying the Group's rigorous Capital Allocation Framework.	2 3	New Principal risk
The Group fails to appropriately prepare for and manage the effects of climate change and wider ESG risks	The Group is exposed to market risks related to climate change as a result of the potential implications of a transition to a low carbon economy. In addition, there are long-term market, insurance, reputational, propositional and operational implications of physical risks resulting from climate change (e.g. the impact of physical risks on the prospects of current and future investment holdings, along with potential impacts on future actuarial assumptions). The Group is also exposed to the risk of failing to respond to wider Environmental, Social and Governance ('ESG') risks and delivering on our social purpose; for example, failing to meet our sustainability commitments. COVID-19 has amplified expectations for delivery of the Group's social purpose and sustainability vision. A failure to deliver could result in adverse customer outcomes, reduced colleague engagement, reduced proposition attractiveness and reputational risks.	A Group-wide project is underway to enhance our approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group's RMF, which will meet the requirements of Supervisory Statement 3/19. In March 2020, the Group became a signatory to the Task Force on Climate-related Financial Disclosures ('TCFD'). Our disclosures in line with TCFD recommendations, including planned future priorities across each of the TCFD focus areas are outlined in our ARA. Work is in progress to fully embed material climate-related risks into the Group risk policies. The Group Board has also approved a new Sustainability Risk Appetite Statement. Our new sustainability strategy has evolved to respond to the changing needs of our stakeholders and we have set targets to monitor progress towards our sustainability commitments. Further details on our sustainability strategy are available in our Sustainability Report. The Group continues to actively engage with regulators on progress with all climate change and sustainability-related deliverables.	1 2 3 4	No change The TCFD disclosures in our ARA provide an overview of progress against the recommendations and planned future priorities across each of the TCFD focus areas including, developing internal climate risk appetites linked to metrics and targets framework, embedding climate risk considerations within the Group's RMF and developing internal climate risk reporting. In 2020 the Group committed to supporting the goals of the 1.5° Paris Agreement to limit global warming to 1.5°C above pre-industrial levels, and the Group has set a target of being net-zero carbon by 2025 across our operations and by 2050 across our investment portfolio. Later in 2021 the Group will be participating in the Bank of England's Climate Biennial Exploratory Scenario exercise ('CBES').
The Group does not have sufficient capacity and capability to fully deliver its significant change agenda which is required to execute the Group's strategic objectives	The Group's ability to deliver change on time and within budget could be adversely impacted by insufficient resource and capabilities as well as inefficient prioritisation, scheduling and oversight of projects. The risk could materialise both within the Group and our strategic partners. This could result in the benefits of change not being realised by the Group in the timeframe assumed in our business plans and may result in the Group being unable to deliver its strategic objectives.	The Group's Change Management Framework is to be strengthened over 2021 with a revised change model, consistent with ensuring empowerment and accountability within Business Units to effectively deliver change. An enhanced prioritisation model will be implemented, with clearer alignment to the Group's Strategic Framework. Information setting out the levels of resource demand and supply, both a current and forecast view, will continue to be provided to accountable senior management so that informed decision-making can take place, with all risks to delivery appropriately identified, assessed, managed, monitored and reported.	2 3 4	New Principal risk
CUSTOMER RISK
The Group fails to deliver fair outcomes for its customers or fails to deliver propositions that continue to meet the evolving needs of customers	The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and potential customer detriment. This could also lead to reputational damage for the Group and/or financial losses. In addition a failure to deliver propositions that meet the evolving needs of our customers may result in a failure to deliver our purpose of helping people secure a life of possibilities.	The Group's Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed. The Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, is designed to detect where our customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions. The Group has a suite of customer policies which set out key customer risks and minimum control standards in place to mitigate them. We maintain a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes. The Group's Proposition Development Process ensures consideration of customer needs and conduct risk when developing propositions.	2 3 4	No change Throughout the pandemic the Group has continued to provide ongoing support to customers, including those most vulnerable, both when paying out on their protection plans and when making decisions about their life savings during this period of uncertainty. In addition, one-off initiatives have been undertaken to support customers, with all changes being communicated clearly. In 2020, the Group continued to make significant investments in our propositions, driven by customer insight, with the completion of an enhanced client analytics tool, in-scheme drawdown functionality and the launch of a workplace ESG passive default fund. Following the ReAssure Group plc acquisition, we have completed the Part VII transfer of business acquired from L&G and migrated customers to our in-house administration platform. Work is ongoing to ensure that customer service for the transferring customers meets our internal standards.
OPERATIONAL RISK
The Group is impacted by significant changes in the regulatory, legislative or political environment	Changes in regulation could lead to non-compliance with new requirements that could impact the Group's fair treatment of its customers. These could require changes to working practices and have an adverse impact on resources and the balance sheet. Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate.	The Group undertakes proactive horizon scanning to understand potential changes to the regulatory and legislative landscape. This allows the Group to understand the potential impact of these changes to amend working practices to meet the new requirements by the deadline.	1 2 3	No change There is some uncertainty as to whether the UK government will change the current regulatory and legislative requirements in a post-Brexit environment but it is anticipated that any such change will include a sufficiently long lead in time to allow the Group to react appropriately. There is a lack of clarity in relation to how the post-Brexit environment will impact former UK customers who are now resident in EEA countries. The Group is working with UK regulators who are, in turn, working with European regulators, to better understand the situation. The Group view is that it planned appropriately and as a result has communicated, and will continue to communicate with these customers to ensure they are fully aware of any potential implications.
	The Group is exposed to the risk of causing intolerable levels of disruption to its customers and stakeholders if it cannot maintain the provisions of important business services when faced with a major operational disruption to core IT systems and operations. This could occur either within our own organisation or those of our primary and downstream outsourcers. The Group is also increasing its use of online functionality to meet customer preferences. This, coupled with a move to home working, exposes the Group to the risk of cyber- attacks. Regulatory guidance in respect of operational resilience is expected to be published in 2021, together with a timetable to achieve full compliance. Failure to meet this timetable will expose the business to the potential for regulatory censure and reputational damage.	The Group has established business continuity management frameworks that are subject to an annual refresh and regular testing. The Group has also established an Operational Resilience Programme which will define and implement an operational resilience framework that will enable regulatory compliance with the new guidelines. The Group's response to COVID-19 has contributed towards the mitigation of some aspects of this risk; the current working from home model significantly reduces the exposure to a number of physical risks which could cause disruption to our important business services. The Group continues to utilise cyber security tools and capabilities in order to mitigate Information Security and Cyber risk. Our specialist Line 2 Information Security & Cyber Risk team provides independent oversight and challenge of information security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions.	1 2 3	Risk heightened There are three core drivers for the heightened risk assessment: COVID-19 could still adversely impact the operational resilience of the Group and its operations both in the UK and globally, in regions where some our outsource partners have a presence. Whilst many potential exposures can be effectively mitigated, a large-scale loss of colleagues on a temporary or more permanent basis is more challenging to resolve in the short-term. The threat posed by an Information or Cyber Security breach that affects the availability of the core information technology assets, which underpin the delivery of important business services to our customers, is considered to be increasing. This inevitably leads to greater interest from cyber criminals; subsequently it is critical that the ongoing commitment to continually improving security controls, where appropriate, is maintained. The scale of strategic customer transformation activity across the Group over the coming two to three years creates increased potential for operational disruption to occur.
The Group fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy	Delivery of the Group's strategy is dependent on a talented, diverse and engaged workforce. Periods of prolonged uncertainty can result in a loss of critical corporate knowledge, unplanned departures of key individuals or the failure to attract individuals with the appropriate skills to help deliver our strategy. This risk is inherent in our business model given the nature of our acquisition activity and specialist risk management skillsets. Potential areas of uncertainty include the transition of the Standard Life Assurance and ReAssure businesses into the Group and the expanded strategic partnership with TCS. Prolonged home working, caring and childcare lockdown implications and extended distancing due to COVID-19 can affect colleague engagement, wellbeing and productivity.	Timely communications to our colleagues aim to provide clarity around corporate activities. Communications include details of key milestones to deliver against our plans. We regularly benchmark terms and conditions against the market. We maintain and review succession plans for key individuals. Following the transition to working from home due to COVID-19, the Group has conducted regular Colleague Snapshot Surveys to monitor colleague engagement levels and identify any concerns; appropriate actions are taken following analysis of the results. The Group continues to actively manage operational capacity required to deliver our strategy. This is particularly pertinent given the increasing demands on our workforce at this time. A project to define our 'Future Ways of Working' is underway which is likely to offer colleagues greater flexibility in both where and how they choose to work in future.	1 2 3 5	No change There has been a significant increase in engagement scores in our colleague surveys during 2020. However, there remains the potential for colleague engagement, wellbeing and resilience to be adversely affected by ongoing COVID-19 restrictions, prolonged home working and organisational design changes. The Group continues to manage this carefully through cross-organisational collaboration, health and wellbeing support and regular communications to staff. The Group successfully rolled out its Unified People Proposition creating a more aligned experience for our colleagues. This means the Group is prepared for future acquisition and transition activity, and will be able to respond flexibly to future business needs. The increased scale and presence of the Group, and our success in multi-site and remote working, gives us greater access to a larger talent pool to attract in the future. The 'Phoenix Story' launched in summer 2020 bringing renewed societal and business purpose to the Group. Our colleagues have reacted positively to this.
MARKET RISK
Adverse market movements can impact the Group's ability to meet its cash flow targets, along with the potential to negatively impact customer sentiment	The Group and its customers are exposed to the implications of adverse market movements. This can impact the Group's capital, solvency and liquidity position, fees earned on assets held, the certainty and timing of future cash flows and long-term investment performance for shareholders and customers. There are a number of drivers for market movements including government and central bank policies, geopolitical events, market sentiment, sector specific sentiment, global pandemics and financial risks of climate change, including risks from the transition to a low carbon economy.	The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. The Group continues to implement de-risking strategies to mitigate against unwanted customer and shareholder outcomes from certain market movements such as equities, interest rates and foreign currencies. The Group maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows. The Group's excess capital position continues to be closely monitored and managed. The Group regularly discusses market outlook with our asset managers.	1 2 3	Risk heightened The potential for adverse market risk is further heightened from March 2020 due to the prolonged period of low interest rates and ongoing uncertainty regarding the external environment, particularly COVID-19. Markets reacted favourably to the positive news on the COVID-19 vaccines, but there remains significant uncertainty over the timing and extent of any recovery and the medium to longer term economic consequences of the pandemic. The Group implemented a number of management actions in 2020 that provided resilience against unanticipated market movements. Further contingency actions are available to help manage the Group's capital and liquidity position. The Group's Stress and Scenario Testing Programme considered the changes to the environment as a result of COVID-19 and the potential future implications of the pandemic. During 2020, and as a consequence of COVID-19, a number of our Unit Linked Property funds were put into suspension due to valuation uncertainty; we managed this in line with our standard fund deferral process. At the time of writing the majority of these funds are now out of suspension. Our exposure to residential property continues to increase as a result of our BPA investment strategy, however, exposures are currently relatively small in the context of the Group's AUM and remain within our risk appetite.
INSURANCE RISK
The Group may be exposed to adverse demographic experience which is out of line with expectations	The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if our annuity policyholders live for longer than expected, then the Group will need to pay their benefits for longer. The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group's ability to meet its cash flow targets.	The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions. The Group regularly reviews assumptions to reflect the continued trend of reductions in future mortality improvements. The Group continues to manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite. The Group actively monitors persistency risk metrics and exposures against appetite across the Open and Heritage businesses. Where required the Group continues to take capital management actions to mitigate against adverse demographic experience.	1 2	Risk heightened The heightened risk exposure reflects increased uncertainty around future demographic experience as a result of COVID-19 impacts, particularly mortality, longevity and persistency risk. The long-term impact of COVID-19 on both longevity and persistency experience is not yet clear. The Group has monitoring and triggers in place to ensure current assumptions remain representative of our view on future experience. The Group completed six external bulk annuity transactions in 2020 with a combined premium of c. £1.8 billion. Consistent with previous transactions, we continue to reinsure the vast majority of the longevity risk with existing arrangements reviewed regularly.
CREDIT RISK
The Group is exposed to the risk of downgrade or failure of a significant counterparty	The Group is exposed to the risk of downgrades and a deterioration in the creditworthiness or default of investment, reinsurance or banking counterparties. This could cause immediate financial loss or a reduction in future profits. The Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations.	The Group regularly monitors its counterparty exposures and has specific limits relating to individual exposures, counterparty credit rating, sector and geography. The Group undertakes regular stress and scenario testing of the credit portfolio. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised. The Group regularly discusses market outlook with our asset managers. For mitigation of risks associated with stock-lending, additional protection is provided through indemnity insurance.	1 2	Risk heightened The risk of unexpected downgrades and defaults within the Group's credit risk portfolio is heightened as a result of market volatility and wider economic and social impacts arising from COVID-19. Throughout 2020, the Group took de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital. The Group continues to increase investment in illiquid credit assets as a result of BPA transactions. This is in line with our strategic asset allocation plan and within our risk appetite.

Emerging risks and opportunities

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

Examples of some emerging risks and opportunities the Group currently considers are listed in the table below.

Risk title	Description	Risk Universe Category
Market disruptors	The impact of alternative providers in the market or those with more comprehensive digital propositions.	Strategic
Pensions dashboard	An industry-wide dashboard giving customers a single view of their defined benefit, defined contribution and State pensions. There is an opportunity to play a leading role in the development of the dashboard and to attract pension pot consolidation and deliver good customer outcomes.	Customer
Addressing the UK savings gap	Generations of UK savers face projected funding shortfalls in retirement. The Group is seeking to address this gap through investment and growth in the Open business.	Customer
COVID-19 aftershocks	Multiple political, economic, social, technological and global impacts emerged as COVID-19 pushed the global economy into a recession.	All categories

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 corporate governance statement, the consolidated financial statements and the Company financial statements in accordance with applicable United Kingdom law and regulations.

The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group's business for the year ended 31 December 2020, 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 accounting standards in conformity with the requirements of the Companies Act 2006. 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.

Under the Financial Conduct Authority's Disclosure Guidance and Transparency Rules, the consolidated financial statements are required to be prepared in accordance with international financial reporting standards ('IFRSs') adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

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;

· in respect of the consolidated financial statements, state whether international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;

· in respect of the Company financial statements, state whether international accounting standards in conformity with the requirements of the Companies Act 2006, have been followed, subject to any material departures disclosed and explained in the financial statements; and

· 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. They are also responsible for safeguarding the assets of the Group and the Company 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 Directors' Report, whose names and functions are listed in the Board of Directors section on pages 98 to 100 of the 2020 Annual Report & Accounts, confirm that, to the best of their knowledge:

· the consolidated financial statements, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and its consolidated subsidiaries taken as a whole; and

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

The Strategic Report and the Directors' Report were approved by the Board of Directors on 7 March 2021.

By order of the Board

Andy Briggs
Group Chief Executive Officer

Rakesh Thakrar
Group Chief Financial Officer

7 March 2021

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2020

	Notes	2020 £m	2019 m
Gross premiums written		4,706	4,038
Less: premiums ceded to reinsurers	F3	(796)	(556)
Net premiums written		3,910	3,482

Fees and commissions	C1	794	700
Total revenue, net of reinsurance payable		4,704	4,182

Net investment income	C2	16,935	24,876
Other operating income		121	106
Gain on acquisition	H2.1	372	--
Gain on Part VII portfolio transfer	H2.2	85	-
Net income		22,217	29,164

Policyholder claims		(7,808)	(7,792)
Less: reinsurance recoveries		1,613	1,177
Change in insurance contract liabilities		(3,249)	(5,229)
Change in reinsurers' share of insurance contract liabilities		(568)	(320)
Transfer (to)/from unallocated surplus	F2	(113)	84
Net policyholder claims and benefits incurred		(10,125)	(12,080)

Change in investment contract liabilities		(7,991)	(14,080)
Change in present value of future profits	G2	-	70
Amortisation of acquired in-force business	G2	(469)	(382)
Amortisation of other intangibles	G2	(18)	(20)
Administrative expenses	C3	(1,674)	(1,549)
Net expense under arrangements with reinsurers	F3.3	(219)	(274)
Net income attributable to unitholders		(217)	(336)
Total operating expenses		(20,713)	(28,651)

Profit before finance costs and tax		1,504	513

Finance costs	C5	(234)	(162)
Profit for the year before tax		1,270	351

Tax charge attributable to policyholders' returns	C6	(326)	(365)
Profit/(loss) before the tax attributable to owners		944	(14)

Tax charge	C6	(436)	(235)
Add: tax attributable to policyholders' returns	C6	326	365
Tax (charge)/credit attributable to owners	C6	(110)	130
Profit for the year attributable to owners		834	116

Attributable to:
Owners of the parent		798	85
Non-controlling interests	D5	36	31
		834	116

Earnings per ordinary share
Basic (pence per share)	B3	91.8p	8.7p
Diluted (pence per share)	B3	91.5p	8.6p

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2020

	Notes	2020 £m	2019 m
Profit for the year		834	116

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		129	(40)
Reclassification adjustments for amounts recognised in profit or loss		(79)	41
Exchange differences on translating foreign operations		33	(29)

Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability	G1	(21)	(24)
Tax charge relating to other comprehensive income items	C6	(37)	(57)
Total other comprehensive expense for the year		25	(109)

Total comprehensive income for the year		859	7

Attributable to:
Owners of the parent		823	(24)
Non-controlling interests	D5	36	31
		859	7

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

As at 31 December 2020

	Notes	2020 £m	2019 m
ASSETS

Pension scheme asset	G1	11	314

Intangible assets
Goodwill		57	57
Acquired in-force business		5,013	3,651
Other intangibles		171	271
	G2	5,241	3,979

Property, plant and equipment	G3	119	109

Investment property	G4	7,128	5,943

Financial assets
Loans and deposits		647	516
Derivatives	E3	6,880	4,454
Equities		82,634	58,979
Investment in associate		400	513
Debt securities		109,455	76,113
Collective investment schemes		89,248	69,415
Reinsurers' share of investment contract liabilities		9,559	8,881
	E1	298,823	218,871
Insurance assets
Reinsurers' share of insurance contract liabilities	F1	9,542	7,324
Reinsurance receivables		141	50
Insurance contract receivables		94	54
		9,777	7,428

Current tax	G8	263	75
Prepayments and accrued income		343	259
Other receivables	G5	1,622	1,233
Cash and cash equivalents	G6	10,998	4,466

Total assets		334,325	242,677

	Notes	2020 £m	2019 m
EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Share capital	D1	100	72
Share premium		4	2
Shares held by employee benefit trust	D2	(6)	(7)
Foreign currency translation reserve		102	69
Merger relief reserve	D1	1,819	-
Other reserves	D3	48	(2)
Retained earnings		4,970	4,651
Total equity attributable to owners of the parent		7,037	4,785

Tier 1 Notes	D4	494	494
Non-controlling interests	D5	341	314
Total equity		7,872	5,593

Liabilities
Pension scheme liability	G1	2,036	1,712

Insurance contract liabilities
Liabilities under insurance contracts	F1	133,907	95,643
Unallocated surplus	F2	1,768	1,367
		135,675	97,010
Financial liabilities
Investment contracts		165,106	120,773
Borrowings	E5	4,567	2,119
Deposits received from reinsurers		4,080	4,213
Derivatives	E3	1,001	734
Net asset value attributable to unitholders		3,791	3,149
Obligations for repayment of collateral received		5,205	3,671
	E1	183,750	134,659

Provisions	G7	282	328
Deferred tax	G8	1,036	873
Reinsurance payables		134	101
Payables related to direct insurance contracts	G9	1,669	890
Lease liabilities	G10	84	84
Accruals and deferred income	G11	521	384
Other payables	G12	1,266	1,043
Total liabilities		326,453	237,084

Total equity and liabilities		334,325	242,677

STATEMENT OF CONSOLIDATED
CHANGES IN EQUITY

For the year ended 31 December 2020

	Share capital (note D1) £m	Share premium (note D1) £m	Shares held by the employee benefit trust (note D2) £m	Foreign currency translation reserve m	Merger relief reserve (note D1) £m	Other reserves (note D3) £m	Retained earnings £m	Total m	Tier 1 Notes (note D4) £m	Non-controlling interests (note D5) £m	Total equity £m
At 1 January 2020	72	2	(7)	69	-	(2)	4,651	4,785	494	314	5,593

Profit for the year	-	-	-	-	-	-	798	798	-	36	834
Other comprehensive income/(expense) for the year	-	-	-	33	-	50	(58)	25	-	-	25
Total comprehensive income for the year	-	-	-	33	-	50	740	823	-	36	859

Issue of ordinary share capital, net of associated commissions and expenses	28	2	-	-	1,819	-	-	1,849	-	-	1,849
Dividends paid on ordinary shares	-	-	-	-	-	-	(403)	(403)	-	-	(403)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	-	(9)	(9)
Credit to equity for equity-settled share-based payments	-	-	-	-	-	-	13	13	-	-	13
Shares distributed by the employee benefit trust	-	-	8	-	-	-	(8)	-	-	-	-
Shares acquired by the employee benefit trust	-	-	(7)	-	-	-	-	(7)	-	-	(7)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	-	(23)	(23)	-	-	(23)
At 31 December 2020	100	4	(6)	102	1,819	48	4,970	7,037	494	341	7,872

	Share capital (note D1) m	Share premium (note D1) £m	Shares held by employee benefit trust (note D2) £m	Foreign currency translation reserve m	Other reserves (note D3) £m	Retained earnings £m	Total £m	Tier 1 Notes (note D4) £m	Non-controlling interests (note D5) £m	Total equity £m
At 1 January 2019	72	3,077	(6)	98	(3)	1,923	5,161	494	294	5,949

Profit for the year	-	-	-	-	-	85	85	-	31	116
Other comprehensive (expense)/income for the year	-	-	-	(29)	1	(81)	(109)	-	-	(109)
Total comprehensive income for the year	-	-	-	(29)	1	4	(24)	-	31	7

Issue of ordinary share capital, net of associated commissions and expenses	-	2	-	-	-	-	2	-	-	2
Dividends paid on ordinary shares	-	-	-	-	-	(338)	(338)	-	-	(338)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	(11)	(11)
Credit to equity for equity-settled share based payments	-	-	-	-	-	11	11	-	-	11
Shares distributed by employee benefit trust	-	-	3	-	-	(3)	-	-	-	-
Shares acquired by employee benefit trust	-	-	(4)	-	-	-	(4)	-	-	(4)
Transfer of reserve (note A1)	-	(3,077)	-	-	-	3,077	-	-	-	-
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	(23)	(23)	-	-	(23)
At 31 December 2019	72	2	(7)	69	(2)	4,651	4,785	494	314	5,593

STATEMENT OF CONSOLIDATED
CASH FLOWS

For the year ended 31 December 2020

	Notes	2020 £m	2019 £m
Cash flows from operating activities
Cash generated by operations	I2	7,316	273
Taxation paid		(562)	(205)
Net cash flows from operating activities		6,754	68

Cash flows from Investing activities
Acquisition of ReAssure businesses, net of cash acquired	H2.1	(979)	-
Net cash flows from investing activities		(979)	-

Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and expenses		2	2
Ordinary share dividends paid	B4	(403)	(338)
Dividends paid to non-controlling interests	D5	(9)	(11)
Repayment of policyholder borrowings	E5.2	(55)	(34)
Repayment of shareholder borrowings	E5.2	-	(100)
Repayment of lease liabilities	G10	(18)	(15)
Proceeds from new shareholder borrowings, net of associated expenses	E5.2	1,445	100
Coupon paid on Tier 1 Notes		(29)	(29)
Interest paid on policyholder borrowings		(5)	(4)
Interest paid on shareholder borrowings		(171)	(99)
Net cash flows from financing activities		757	(528)

Net increase/(decrease) in cash and cash equivalents		6,532	(460)
Cash and cash equivalents at the beginning of the year		4,466	4,926

Cash and cash equivalents at the end of the year		10,998	4,466

Notes to the Consolidated Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES

A1. Basis of Preparation

The consolidated financial statements for the year ended 31 December 2020 set out on pages 177 to 289 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 7 March 2021.

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

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

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

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

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 historical cost basis except for investment property, owner-occupied property and those financial assets and financial liabilities (including derivative instruments) that have been measured at fair value.

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

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

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and also in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Basis of consolidation

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

• power over the investee;

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

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

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

Going concern

The consolidated financial statements have been prepared on a going concern basis. In assessing whether the Group is a going concern the Directors have taken into account the guidance issued by the Financial Reporting Council ('FRC'), Guidance for Directors of UK Companies Going Concern and Liquidity, in October 2009. The considerations and approach are consistent with FRC provisions issued in September 2014 and the assessment has taken into account the requirements of the recent pronouncement from the Financial Reporting Lab, 'COVID-19 - Going concern, risk and viability'. Further details of the going concern assessment for the period to 31 March 2022 are included in the Directors' Report on page 161.

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

A2. Accounting Policies

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

A2.1 Foreign currency transactions

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

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

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

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

• all resulting exchange differences are recognised through the statement of consolidated comprehensive income.

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

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

A3 Critical Accounting Estimates and Judgements

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

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

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

A3.1 Insurance and investment contract liabilities

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

The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 231 in note F4.

A3.2 Fair value of financial assets and liabilities

Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.

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

A3.3 Pension scheme obligations

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

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

A3.4 Recognition of pension scheme surplus

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

A3.5 Operating profit

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

A3.6 Acquisition of the ReAssure businesses

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

A3.7 Control and consolidation

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

A3.8 Provisions

The Group holds a number of provisions and the amount of each provision is determined based on the Group's estimation of the outflow of resources required to settle each obligation as at 31 December 2020. The recognition and measurement of these provisions involves a high degree of judgement and estimation uncertainty. Further details of these provisions and the key uncertainties identified are included in note G7.

A4. Adoption of New Accounting Pronouncements in 2020

In preparing the consolidated financial statements, the Group has adopted the following standards, interpretations and amendments effective from 1 January 2020:

• Amendments to IFRS 3 Business Combinations: The amendments have revised the definition of a business and aim to assist companies to determine whether an acquisition is of a business or a group of assets. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. These amendments have not impacted the Group's accounting treatment of business combinations.

• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) Phase 1: The amendments have arisen following the phasing out of interest-rate benchmarks such as interbank offered rates ('IBOR'). Specific hedge accounting requirements have been modified to provide relief from potential effects of the uncertainty caused by IBOR reform. In addition, these amendments require entities to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The Group terminated its hedge accounting relationships at the start of the period and consequently the Group has not needed to use the relief provided in these amendments.

• Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Amendments clarify the definition of material and how it should be applied; and

• Amendments to the References to the Conceptual Framework in IFRS Standards.

A5. New Accounting Pronouncements not yet Effective

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

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

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

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

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

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

IFRS 9 will be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2023. During the year, the Group continued its implementation activities in respect of IFRS 9 and expects to continue to value the majority of its financial assets as at fair value through profit or loss on initial recognition, either as a result of these financial assets being managed on a fair value basis or as a result of using the fair value option to irrevocably designate the assets at fair value through profit or loss. A number of additional disclosures will be required by IFRS 7 Financial Instruments:Disclosures as a result of implementing IFRS 9. Additional disclosures have been made in note E1.2 to the consolidated financial statements to provide information to allow comparison with entities who have already adopted IFRS 9.

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

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

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

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

• IFRS 17 Insurance Contracts (1 January 2023). Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying two of these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with Discretionary Participation Features ('DPF'). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. The Group's implementation project continued through 2020 with an increasing focus on implementation activities alongside ongoing financial and operational impact assessments and methodology development.

In June 2020, the IASB issued its narrow-scope amendments to IFRS 17 to address a number of the concerns and issues identified in the original version of the standard. Whilst the changes have given clarity in some areas there remain a number of implementation challenges which the Group will need to address. Development of the Group's methodologies and accounting policies continues to progress with increasing focus on the application of these methodologies. Progress has been made in data and systems implementations, with development of business processes running in parallel. Following the acquisition of ReAssure Group plc in July 2020 work is progressing to align the IFRS 17 processes. During 2021 the focus is on completing systems build and preparing for the transition date, including business readiness activities.

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

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

The following amendments to standards listed above have been endorsed by the EU:

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

• IFRS 9 Financial Instruments.

On 31 January 2020, the UK left the EU and effective from 1 January 2021, the European Commission will no longer endorse IFRSs for use in the UK. Legislation is in place to onshore and freeze EU-adopted IFRSs and from 1 January 2021 the Group will apply UK-adopted International Accounting Standards. The powers to endorse and adopt IFRSs will be delegated by the Secretary of State to the UK Endorsement Board once the draft statutory instrument, which was laid before Parliament on 1 February 2020, is approved. The following amendments to standards listed above have been endorsed for use in the UK by the Secretary of State:

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

• Amendments to IFRS 4 Insurance Contracts - deferral of IFRS 9 Financial Instruments.

A6. Impacts of COVID-19 during the year

The 'Group Chief Executive Officer's Report', 'Business Review', 'Risk Management', 'Viability Statement' and 'Directors' Report: Going Concern' sections of this Annual Report and Accounts provide information as to the broader effects of COVID-19 on the Group's financial results, its operations and prospects. The Group has given due consideration as to the impact of uncertainty arising from COVID-19 related factors on the production of the consolidated financial statements. This has included an assessment as to the impact of weak economic conditions, market volatility, demographic experience, and government and regulatory intervention on the valuation, recognition and disclosure of the Group's assets and liabilities.

Considerations as to valuation uncertainty and other specific impacts of COVID-19 have been included within the notes to the consolidated financial statements that provide further detail on pension schemes, investment property, liabilities under insurance contracts and financial instruments.

Disclosures have been included in the following notes to the consolidated financial statements to provide additional information as to the impacts of COVID-19 during the year ended 31 December 2020:

	Note
Pension schemes	G1
Investment property	G4
Liabilities under insurance contracts - assumptions and insurance risk management	F4
Financial assets & liabilities - Fair value hierarchy	E2
Financial risk management	E6

B. Earnings Performance

B1. Segmental Analysis

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

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

Following the acquisition of the ReAssure businesses in 2020, the Group reassessed its operating segments to reflect the way the business was subsequently being managed. The Group now has five reportable segments comprising UK Heritage, UK Open, Europe, ReAssure and Management Services, as set out in note B1.1.

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

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

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

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

Following the acquisition of the ReAssure businesses during the year the acquired business is included in a separate segment. This reflects the way that the ReAssure business is currently reported for management purposes.

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

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

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

Segmental measure of performance: Operating Profit

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

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

Operating profit excludes the impact of the following items:

• the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.2 and B2.3);

amortisation and impairments of intangible assets

(net of policyholder tax);

• finance costs attributable to owners;

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

• the financial impacts of mandatory regulatory change;

• the profit or loss attributable to non-controlling interests;

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

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

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

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

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

Restatement of prior period information

During the year, the Group reassessed its operating segments as a result of strategic developments. Specifically, the categorisation of the provision of annuities to existing policyholders with vesting products and from Bulk Purchase Annuity contracts has been revised such that this business is now included within the UK Open segment instead of within the UK Heritage segment.

Comparative segmental performance information has been restated to reflect this new presentation. UK Heritage operating profit has been reduced by £344 million to £350 million and the UK Open operating profit has been increased by the same amount to £417 million. UK Heritage segmental revenue has been reduced by £1,628 million to £729 million and the UK Open segmental revenue has been increased by the same amount to £2,135 million.

B1.1 Segmental Result

	Notes	2020 £m	2019 restated £m

Operating profit
UK Heritage		278	350
UK Open		472	417
Europe		44	52
ReAssure		444	-
Management Services		6	26
Unallocated Group		(45)	(35)
Total segmental operating profit		1,199	810

Investment return variances and economic assumption changes on long-term business	B2.2	(47)	(177)
Variance on owners' funds	B2.3	148	13
Amortisation of acquired in-force business		(464)	(375)
Amortisation of other intangibles	G2	(18)	(20)
Other non-operating items		281	(169)
Finance costs on borrowing attributable to owners		(191)	(127)

Profit/(loss) before the tax attributable to owners of the parent		908	(45)

Profit before tax attributable to non-controlling interests		36	31

Profit/(loss) before the tax attributable to owners		944	(14)

Other non-operating items in respect of 2020 include:

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

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

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

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

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

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

• £34 million of other corporate project costs; and

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

Other non-operating items in respect of 2019 include:

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

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

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

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

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

B1.2 Segmental revenue

2020	UK Heritage £m	UK Open m	Europe £m	ReAssure £m	Management Services £m	Unallocated Group £m	Total £m
Revenue from external customers:
Gross premiums written	602	2,662	1,215	227	-	-	4,706
Less: premiums ceded to reinsurers	(210)	(367)	(29)	(190)	-	-	(796)
Net premiums written	392	2,295	1,186	37	-	-	3,910

Fees and commissions	296	303	50	145	-	-	794
Income from other segments	-	-	-	-	737	(737)	-
Total segmental revenue	688	2,598	1,236	182	737	(737)	4,704

2019 restated	UK Heritage £m	UK Open £m	Europe £m	Management Services £m	Unallocated Group m	Total m
Revenue from external customers:
Gross premiums written	634	2,120	1,284	-	-	4,038
Less: premiums ceded to reinsurers	(225)	(303)	(28)	-	-	(556)
Net premiums written	409	1,817	1,256	-	-	3,482

Fees and commissions	320	318	62	-	-	700
Income from other segments	-	-	-	894	(894)	--
Total segmental revenue	729	2,135	1,318	894	(894)	4,182

Of the revenue from external customers presented in the table above, £3,818 million (2019: £3,131 million) is attributable to customers in the United Kingdom ('UK') and £886 million (2019: £1,051 million) to the rest of the world. The Europe operating segment comprises business written in Ireland and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group's revenue.

The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £7,042 million (2019: £6,005 million) located in the UK and £433 million (2019: £375 million) located in the rest of the world.

B2. Investment Return Variances and Economic Assumption Changes

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

B2.1 Calculation of the long-term investment return

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

The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15-year duration plus 10bps at the start of the year. A risk premium of 349bps is added to the risk-free yield for equities (2019: 350bps), 249bps for properties (2019: 250bps), 55bps for corporate bonds (2019: 120bps) and 15bps for gilts (2019: 50bps).

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

	2020 %	2019 %
Equities	4.7	5.2
Properties	3.7	4.2
Gilts	1.4	2.2
Corporate bonds	1.8	2.9

B2.2 Life assurance business

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

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

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business, the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.

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

	2020 m	2019 m
Investment return variances and economic assumption changes on long-term business	(47)	(177)

B2.3 Owners' funds

For non-long-term business including owners' funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.

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

	2020 m	2019 m
Variances on owners' funds of subsidiary undertakings	148	13

The net positive variance on owners' funds of £148 million (2019: £13 million positive) is principally driven by gains on interest rate hedging positions held within the shareholder funds of the life companies, together with gains arising on the hedge entered into on announcement of the ReAssure acquisition to protect the Group's exposure to equity risk in the period prior to completion. The net positive variance also includes gains on the close out of foreign currency swaps held by the holding companies to hedge exposure of future life company profits and non-sterling denominated shareholder borrowings to foreign currency movements. The prior year result included gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates.

B3. Earnings Per Share

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

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

The basic and diluted earnings per share calculations are also presented based on the Group's operating profit net of financing costs. Operating profit is a non-GAAP performance measure that is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items. The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below.

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

2019	Operating profit £m	Financing costs £m	Operating earnings net of financing costs £m	Other non-operating items £m	Total £m
Profit/(loss) before the tax attributable to owners	810	(127)	683	(697)	(14)
Tax (charge)/credit attributable to owners	(163)	35	(128)	258	130
Profit/(loss) for the year attributable to owners	647	(92)	555	(439)	116
Coupon paid on Tier 1 notes, net of tax relief	-	(23)	(23)	-	(23)
Deduct: Share of result attributable to non-controlling interests	-	-	-	(31)	(31)
Profit/(loss) for the year attributable to ordinary equity holders of the parent	647	(115)	532	(470)	62

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

	2020 Number million	2019 Number million
Issued ordinary shares at beginning of the year	722	721
Effect of ordinary shares issued	123	-
Own shares held by the employee benefit trust	(1)	(1)
Weighted average number of ordinary shares	844	720

The diluted weighted average number of ordinary shares outstanding during the period is 846 million (2019: 722 million). The Group's long-term incentive plan, deferred bonus share scheme and sharesave schemes increased the weighted average number of shares on a diluted basis by 2,316,109 shares for the year ended 31 December 2020 (2019: 1,474,170 shares).

Earnings per share disclosures are as follows:

	2020 pence	2019 pence
Basic earnings per share	91.8	8.7
Diluted earnings per share	91.5	8.6
Basic operating earnings net of financing costs per share	98.8	73.8
Diluted operating earnings net of financing costs per share	98.5	73.7

B4. Dividends

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

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

2020

£m

2019

£m

Dividends declared and paid in the year

403

338

On 6 March 2020, the Board recommended a final dividend of 23.4p per share in respect of the year ended 31 December 2019. The dividend was approved at the Group's Annual General Meeting, which was held on 15 May 2020. The dividend amounted to £169 million and was paid on 19 May 2020.

On 5 August 2020, the Board declared an interim dividend of 23.4p per share for the half year ended 30 June 2020. The dividend amounted to £234 million and was paid on 4 September 2020.

C. Other CONSOLIDATED Income Statement Notes

C1. Fees and Commissions

Fees related to the provision of investment management services and administration services are recognised as services are provided. Front end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract.

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

2020	UK Heritage £m	UK Open £m	Europe £m	ReAssure £m	Total £m
Fee income from investment contracts without DPF	292	293	58	137	780
Initial fees deferred during the year	-	-	(8)	-	(8)
Revenue from investment contracts without DPF	292	293	50	137	772
Other revenue from contracts with customers	4	10	-	8	22
Fees and commissions	296	303	50	145	794

2019 restated	UK Heritage £m	UK Open £m	Europe £m	Total £m
Fee income from investment contracts without DPF	314	308	70	692
Initial fees deferred during the year	-	-	(8)	(8)
Revenue from investment contracts without DPF	314	308	62	684
Other revenue from contracts with customers	6	10	-	16
Fees and commissions	320	318	62	700

The comparative information for fee income from investments without DPF has been restated. UK Heritage fee income has been reduced by £40 million to £314 million and the UK Open fee income has been increased by the same amount to £308 million. For further details of the restatement see note B1.

Remaining performance obligations

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

Significant judgements in determining costs to obtain or fulfil investment contracts

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

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

C2. Net investment income

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

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

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

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

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

	2020 £m	2019 £m
Investment income
Interest income on loans and deposits at amortised cost	8	6
Interest income on financial assets designated at FVTPL on initial recognition	2,313	2,113
Dividend income	3,525	3,712
Rental income	325	298
Net interest expense on Group defined benefit (liability)/asset	(29)	(29)
	6,142	6,100

Fair value gains/(losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition	8,021	17,574
Held for trading - derivatives	2,824	1,257
Investment property	(52)	(55)
	10,793	18,776
Net investment income	16,935	24,876

C3. Administrative expenses

Administrative expenses

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

Deferred acquisition costs

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

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

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

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

	2020 £m	2019 £m
Employee costs	433	334
Outsourcer expenses	175	141
Movement in provision for transition and transformation programme (see note G7)	(31)	159
Professional fees	230	135
Commission expenses	152	135
Office and IT costs	124	116
Investment management expenses and transaction costs	437	415
Direct costs of life companies	4	4
Direct costs of collective investment schemes	25	18
Depreciation	28	18
Pension service costs	2	-
Pension administrative expenses	5	4
Advertising and sponsorship	58	64
Stamp duty payable on acquisition of ReAssure businesses	16	-
Other	45	36
	1,703	1,579
Acquisition costs deferred during the year	(34)	(33)
Amortisation of deferred acquisition costs	5	3
Total administrative expenses	1,674	1,549

Employee costs comprise:

	2020 £m	2019 £m
Wages and salaries	390	304
Social security contributions	43	30
	433	334

	2020 Number	2019 Number
Average number of persons employed	5,752	4,403

C4. Auditor's Remuneration

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

	2020 £m	2019 £m
Audit of the consolidated financial statements	2.1	0.9
Audit of the Company's subsidiaries	9.6	5.1
	11.7	6.0
Audit-related assurance services	2.3	1.0
Reporting accountant assurance services	0.1	0.4
Total fee for assurance services	14.1	7.4

Corporate finance services	-	3.3
Tax services fees	-	-
Other non-audit services	0.4	-
Total fees for other services	0.4	3.3

Total auditor's remuneration	14.5	10.7

No services were provided by the Company's auditors to the Group's pension schemes in either 2020 or 2019.

Audit of the consolidated financial statements includes amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor in both 2020 and 2019. The 2020 balance also includes amounts in respect of the audit of the acquisition balance sheet of the acquired ReAssure businesses.

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

Reporting accountant services relate to assurance reporting on historical information included within investment circulars. In both 2020 and 2019, this includes public reporting associated with the acquisition of the ReAssure businesses.

Corporate finance services fees were £nil (2019: £3.3 million). The 2019 fees principally related to services provided in connection with the acquisition of ReAssure. £1.6 million of the fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition where synergies were anticipated to arise with subsequent audit work. The remaining balance of £1.7 million related to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents.

Other non-audit services were £0.4 million (2019: £nil). The 2020 fees related to services provided to the ReAssure businesses where the engagement occurred prior to completion of the acquisition and which were terminated within the three-month grace period.

Further information on auditor's remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on pages 116 to 121.

C5. Finance Costs

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

	2020 £m	2019 £m
Interest expense
On financial liabilities at amortised cost	230	156
On financial liabilities at FVTPL	-	3
On leases	4	3
	234	162

Attributable to:
• policyholders	10	12
• owners	224	150
	234	162

C6. Tax charge

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

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

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

C6.1 Current year tax charge

	2020 £m	2019 £m
Current tax:
UK corporation tax	306	210
Overseas tax	59	62
	365	272
Adjustment in respect of prior years	(4)	(11)
Total current tax charge	361	261
Deferred tax:
Origination and reversal of temporary differences	111	52
Change in the rate of UK corporation tax	(37)	(50)
Write-down/(up) of deferred tax assets	1	(28)
Total deferred tax charge/(credit)	75	(26)
Total tax charge	436	235
Attributable to:
• policyholders	326	365
• owners	110	(130)
Total tax charge	436	235

The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge attributable to policyholder earnings was £326 million (2019: £365 million).

C6.2 Tax charged to other Comprehensive Income

	2020 £m	2019 £m
Current tax charge	12	1
Deferred tax charge on defined benefit schemes	25	56
	37	57

C6.3 Tax Credited to Equity

2020
£m

2019

£m

Current tax credit on Tier 1 Notes

(6)

C6.4 Reconciliation of Tax Charge

	2020 £m	2019 £m
Profit for the year before tax	1,270	351
Policyholder tax charge	(326)	(365)
Profit/(loss) before the tax attributable to owners	944	(14)

Tax charge/(credit) at standard UK rate of 19%¹	179	(3)
Non-taxable income, gains and losses²	(78)	3
Disallowable expenses³	9	22
Prior year tax credit for shareholders⁴	(17)	(51)
Movement on acquired in-force amortisation at rates other than 19%⁵	77	9
Profits taxed at rates other than 19%⁶	(10)	(13)
Recognition of previously unrecognised deferred tax assets⁷	(25)	(47)
Deferred tax rate change⁸	(37)	(50)
Current year losses not valued⁹	9	-
Other	3	-
Owners' tax charge/(credit)	110	(130)
Policyholder tax charge	326	365
Total tax charge for the year	436	235

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

2 £(71) million relates to the non-taxable gain on acquisition of the ReAssure businesses. The balance primarily relates to non-taxable dividends, gains and non-taxable pension scheme items.

3 Disallowable expense deductions are primarily in relation to the acquisition of the ReAssure businesses.

4 The 2020 prior year credit primarily relates to overseas deferred acquisition costs in Standard Life International Designated Activity Company of £(8) million and a 2019 tax provision true-up in Standard Life Assurance Limited of £(5) million.

5 £65 million charge arising from the movement on acquired in-force amortisation following the L&G Part VII transfer.

6 The 2020 profits taxed at rates other than 19% relates to overseas profits and UK life company profits subject to marginal shareholder tax rates.

7 The 2020 tax credit represents the recognition of tax losses in the Group companies of (3) million, intangible assets in Standard Life International Designated Activity Company of £(6) million and capital losses within ReAssure businesses of £(16) million.

8 The 2020 deferred tax rate change relates to the impact of retaining the 19% corporation tax rate and impact of the L&G Part VII transfer.

9 The 2020 charge for current year tax losses not valued relates to Standard Life International Designated Activity Company.

D. EQUITY

D1. Share Capital

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

	2020 £m	2019 £m
Issued and fully paid:
999.2 million ordinary shares of £0.10 each (2019: 721.5 million)	100	72

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

Movements in issued share capital during the year:

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

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

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

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

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

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

During 2019, 315,730 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group's sharesave schemes (see note I1).

D2. Shares held by the Employee Benefit Trust

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

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

	2020 £m	2019 £m
At 1 January	7	6
Shares acquired by the EBT	7	4
Shares awarded to employees by the EBT	(8)	(3)
At 31 December	6	7

During the year 1,230,763 (2019: 508,639) shares were awarded to employees by the EBT and 1,087,410 (2019: 614,193) shares were purchased. The number of shares held by the EBT at 31 December 2020 was 953,003 (2019: 1,096,356).

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

D3. Other reserves

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

Owner-occupied property revaluation reserve

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

Cash flow hedging reserve

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

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

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

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

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

2019	Owner-occupied property revaluation reserve £m	Cash flow hedging reserve £m	Total other reserves £m
At 1 January 2019	5	(8)	(3)
Other comprehensive income for the year	-	1	1
At 31 December 2019	5	(7)	(2)

D4. Tier 1 Notes

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

	2020 £m	2019 £m
Tier 1 Notes	494	494

On 26 April 2018, Old PGH issued £500 million of Tier 1 Notes, the proceeds of which were used to fund a portion of the cash consideration for the acquisition of the Standard Life Assurance businesses. The Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.75% per annum up to the 'First Call Date' of 26 April 2028. Thereafter the fixed rate of interest will be reset on the First Call Date and on each fifth anniversary of this date by reference to a 5 year gilt yield plus a margin of 4.169%. Interest is payable on the Tier 1 Notes semi-annually in arrears on 26 October and 26 April. The coupon paid in the year was £29 million (2019: £29 million).

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

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

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

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

D5. Non-Controlling Interests

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

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

		SLPET £m
At 1 January 2019		294
Profit for the year		31
Dividends paid		(11)
At 31 December 2019		314

The non-controlling interests of £341 million (2019: £314 million) reflects third party ownership of Standard Life Private Equity Trust ('SLPET') determined at the proportionate value of the third party interest in the underlying assets and liabilities. SLPET is a UK Investment Trust listed and traded on the London Stock Exchange. As at 31 December 2020, the Group held 55.2% of the issued share capital of SLPET (2019: 55.2%).

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

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

SLPET	2020 £m	2019 £m
Statement of financial position:
Investments	335	286
Other assets	9	40
Total assets	344	326
Total liabilities	3	12
Income statement:
Revenue	41	34
Profit after tax	36	31
Comprehensive income	36	31
Cash flows:
Net (decrease)/increase in cash equivalents	(19)	4

E. FINANCIAL ASSETS & LIABILITIES

E1. Fair Values

Financial assets

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

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

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

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

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

Impairment of financial assets

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

Fair value estimation

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

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

Associates

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

Derecognition of financial assets

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

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

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

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

Financial liabilities

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

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

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

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

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

Investment contracts without DPF

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

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

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

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

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

Deposits from reinsurers

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

Net asset value attributable to unitholders

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

Obligations for repayment of collateral received

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

Derecognition of financial liabilities

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

Offsetting financial assets and financial liabilities

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

Hedge accounting

In 2019 the Group previously designated certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note E3 sets out details of the fair values of the derivative instruments used for hedging purposes.

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

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

E1.1 Fair Values Analysis

The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2020:

	Carrying value
2020	Total £m	Amounts due for settlement after 12 months £m	Fair value £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives	6,880	6,429	6,880
Designated upon initial recognition:
Equities¹	82,634	-	82,634
Investment in associate¹ (see note H3)	400	-	400
Debt securities	109,455	94,070	109,455
Collective investment schemes¹	89,248	-	89,248
Reinsurers' share of investment contract liabilities¹	9,559	-	9,559
Financial assets measured at amortised cost:
Loans and deposits	647	60	647
Total financial assets	298,823		298,823

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

1 These assets and liabilities have no expected settlement date.

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

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

1 These assets and liabilities have no expected settlement date.

E1.2 IFRS 9 Temporary exemption disclosures

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

	2020 £m	2019 £m
Financial assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis:
Loans and deposits	647	516
Cash and cash equivalents	10,998	4,466
Accrued income	251	160
Other receivables¹	1,541	1,199
All other financial assets that are measured at fair value through profit or loss²	298,176	218,355

1 Other receivables excludes deferred acquisition costs.

2 The change in fair value during 2020 of all other financial assets that are measured at fair value through profit or loss is a £11,087 million gain (2019: £20,231 million gain).

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

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

2019 Carrying value	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated1 £m	Unit-linked £m	Total £m
Loans and deposits	-	21	47	164	-	284	-	516
Cash and cash equivalents	295	733	3,105	23	-	270	40	4,466
Accrued income	-	-	-	-	-	160	-	160
Other receivables	-	-	-	-	-	1,199	-	1,199
	295	754	3,152	187	-	1,913	40	6,341

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

E2. Fair Value Hierarchy

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

Level 1 financial instruments

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

Level 2 financial instruments

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

Level 3 financial instruments

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

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

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

E2.2 Fair value hierarchy of financial instruments

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

2020	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial assets measured at fair value
Derivatives	320	6,362	198	6,880
Financial assets designated at FVTPL upon initial recognition:
Equities	81,024	47	1,563	82,634
Investment in associate	400	-	-	400
Debt securities	74,043	25,248	10,164	109,455
Collective investment schemes	86,677	2,170	401	89,248
Reinsurers' share of investment contract liabilities	8,962	597	-	9,559
	251,106	28,062	12,128	291,296

Total financial assets measured at fair value	251,426	34,424	12,326	298,176
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	632	15	647
	251,426	35,056	12,341	298,823

2020	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	119	720	162	1,001
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	84	84
Net asset value attributable to unit-holders	3,791	-	-	3,791
Investment contract liabilities	-	165,106	-	165,106
	3,791	165,106	84	168,981

Total financial liabilities measured at fair value	3,910	165,826	246	169,982
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	4,812	204	5,016
Deposits received from reinsurers	-	3,983	97	4,080
Total financial liabilities for which fair values are disclosed	-	8,795	301	9,096
	3,910	174,621	547	179,078

2019	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial assets measured at fair value
Derivatives	284	3,995	175	4,454
Financial assets designated at FVTPL upon initial recognition:
Equities	57,383	-	1,596	58,979
Investment in associate	513	-	-	513
Debt securities	38,176	31,911	6,026	76,113
Collective investment schemes	67,513	1,256	646	69,415
Reinsurers' share of investment contract liabilities	8,856	25	-	8,881
	172,441	33,192	8,268	213,901

Total financial assets measured at fair value	172,725	37,187	8,443	218,355
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	516	-	516
	172,725	37,703	8,443	218,871

2019	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	76	584	74	734
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	99	99
Net asset value attributable to unitholders	3,149	-	-	3,149
Investment contract liabilities	-	120,773	-	120,773
	3,149	120,773	99	124,021

Total financial liabilities measured at fair value	3,225	121,357	173	124,755
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	1,974	249	2,223
Deposits received from reinsurers	-	4,213	-	4,213
Total financial liabilities for which fair values are disclosed	-	6,187	249	6,436
	3,225	127,544	422	131,191

E2.3 Level 3 Financial instrument sensitivities

As explained in note A6, weak economic conditions from COVID-19 and market volatility have resulted in the fair valuation of all Level 3 assets being subject to increased uncertainty. In response to this, additional analysis has been performed to confirm that the fair value of financial instruments included in the consolidated financial statements is reasonable.

A proportion of the Group's level 3 financial assets are held to back unit linked business and unsupported with-profit funds. As such, movements in the fair value of those assets will typically be offset by corresponding movements in insurance and investment contract liabilities. From a financial reporting perspective, valuation risk is centered on those assets held in the shareholder funds or to back liabilities in the non-profit or supported with-profit funds. The table below shows the shareholder exposure to Level 3 assets as at 31 December 2020:

	Shareholder, NPF & Supported WPF £m	Unit linked & Unsupported WPF £m	Total fair value £m
Financial assets measured at fair value
Derivatives	198	-	198
Financial assets designated at FVTPL upon initial recognition:
Equities	761	802	1,563
Debt securities	9,299	865	10,164
Collective investment schemes	11	390	401

Total financial assets measured at fair value	10,269	2,057	12,326

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

E2.3.1 Debt securities

Analysis of Level 3 debt securities	2020 £m	2019 £m
Unquoted corporate bonds:
Local authority loans	646	262
Private placements	2,351	1,147
Infrastructure loans	1,564	341
Equity release mortgages	3,484	2,781
Commercial real estate loans	1,075	388
Income strips	692	690
Bridging loans to private equity funds	320	320
Corporate transactions (see E2.3.3)	29	43
Other	3	54
Total Level 3 debt securities	10,164	6,026

The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of £4,561 million (2019: £1,750 million). These unquoted corporate bonds are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £246 million (2019: £81 million) and a decrease of 35bps would increase the value by £190 million (2019: £87 million).

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

Included within debt securities are investments in equity release mortgages with a value of £3,484 million (2019: £2,781 million). The loans are valued using a discounted cash flow model and a Black-Scholes model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property.

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

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

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

The significant sensitivities arise from movements in the yield curve, inflation rate, house prices, mortality and voluntary redemption rate. An increase of 100bps in the yield curve would decrease the value by 351 million (2019: £265 million) and a decrease of 100bps would increase the value by £397 million (2019: £296 million). An increase of 1% in the inflation rate would increase the value by £29 million (2019: £26 million) and a decrease of 1% would decrease the value by £48 million (2019: £43 million).

An increase of 10% in house prices would increase the value by £16 million (2019: £15 million) and a decrease of 10% would decrease the value by £26 million (2019: £25 million). An increase of 5% in mortality would decrease the value by £11 million (2019: £8 million) and a decrease of 5% in mortality would increase the value by £7 million (2019: £5 million). An increase of 15% in the voluntary redemption rate would decrease the value by £24 million (2019: £17 million) and a decrease of 15% in the voluntary redemption rate would increase the value by £22 million (2019: £15 million).

The Group also holds investments in commercial real estate loans with a value of £1,075 million (2019: £388 million). The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a basket of comparable securities. The valuation is sensitive to changes in the discount rate. An increase of 35bps in the discount rate would decrease the value by £15 million (2019: £7 million) and a decrease of 35bps would increase the value by £16 million (2019: £7 million).

Also included within debt securities are income strips with a value of 692 million (2019: £690 million). Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30-45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1). The income strips are valued using an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. The valuation is sensitive to movements in yield. An increase of 35bps would decrease the value by £68 million (2019: £66 million) and a decrease of 35bps would increase the value by £86 million (2019: £79 million).

E2.3.2 Borrowings

Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £84 million (2019: £99 million), measured using an internally developed model. The valuation is sensitive to key assumption of the discount rate. An increase in the discount rate of 1% would decrease the value by £1 million (2019: £1 million) and a decrease of 1% would increase the value by £1 million (2019: £1 million).

E2.3.3 Corporate transactions

Included within financial assets and liabilities are related debt securities of £29 million (2019: £43 million) and derivative liabilities of 2 million (2019: £4 million) pertaining to a reinsurance and retrocession arrangement (see note E3.2 for further information on these arrangements). These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2020, the net of these balances was an asset of £27 million (2019: asset of £39 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £1 million (2019: £2 million) and a decrease of 100bps would increase the aggregate value by £1 million (2019: £2 million).

Included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £155 million (2019: £134 million) and £85 million (2019: 70 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.

An increase of 100bps in the swap curve would decrease the net value by £15 million (2019: £13 million) and a decrease of 100bps would increase the net value by £17 million (2019: £17 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £11 million (2019: £10 million) and a decrease of 1% would decrease the value by £12 million (2019: £10 million).

E2.3.4 Derivatives

Included within derivative assets are forward local authority loans, forward private placements and forward infrastructure loans with a value of £43 million (2019: £41 million). These investments include a commitment to acquire or provide funding for fixed rate debt instruments at specified future dates. These investments are valued using a discounted cash flow model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spreads are derived from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £19 million (2019: 25 million) and a decrease of 35bps would increase the value by £20 million (2019: £28 million).

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

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

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

2019	From Level 1 to Level 2 £m	From Level 2 to Level 1 £m
Financial assets measured at fair value
Financial assets designated at FVTPL upon initial recognition:
Collective investment schemes	19	16
Debt securities	349	25

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

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

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

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

Total financial assets	8,443	407	6,515	(3,081)	65	(23)	12,326	451

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

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

Total financial assets	6,734	321	2,269	(1,121)	243	(3)	8,443	231

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

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

E3. Derivatives

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

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

E3.1 Summary

The fair values of derivative financial instruments are as follows:

	Assets 2020 £m	Liabilities 2020 £m	Assets 2019 £m	Liabilities 2019 £m
Forward currency	286	134	138	90
Credit default swaps	108	13	138	33
Contracts for difference	7	4	1	-
Interest rate swaps	2,754	98	1,738	143
Total return bond swaps	52	-	33	-
Swaptions	2,643	27	1,800	16
Inflation swaps	59	132	46	111
Equity options	543	322	344	161
Stock index futures	53	90	10	52
Fixed income futures	63	20	70	54
Retrocession contracts	-	1	-	4
Longevity swap contracts	155	85	134	70
Currency futures	1	-	2	-
Cross-currency swaps	156	-	-	-
Equity Release Income Plan total return swap	-	75	-	-
	6,880	1,001	4,454	734

E3.2 Corporate transactions

The Group has in place longevity swap arrangements with corporate pension schemes which do not meet the definition of insurance contracts under the Group's accounting policies. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £155 million and derivative liabilities of £85 million have been recognised as at 31 December 2020 (2019: £134 million and £70 million respectively).

In addition, the Group has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group's accounting policies. The fair value of amounts due from the cedant are recognised within debt securities (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £1 million at 31 December 2020 (2019: £4 million).

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

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

E4. Collateral Arrangements

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

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

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

E4.1 Financial instrument collateral arrangements

The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2020 (2019: none).

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

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

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

		Related amounts not offset
2019 Financial assets	Gross and net amounts of recognised financial assets £m	Financial instruments and cash collateral received £m	Derivative liabilities £m	Net amount £m
OTC derivatives	3,908	3,542	43	323
Exchange traded derivatives	546	6	-	540
Stock lending	3,050	3,050	-	-
Total	7,504	6,598	43	863

		Related amounts not offset
Financial liabilities	Gross and net amounts of recognised financial liabilities £m	Financial instruments and cash collateral pledged £m	Derivative assets £m	Net amount £m
OTC derivatives	650	313	43	294
Exchange traded derivatives	84	10	-	74
Total	734	323	43	368

E4.2 Derivative collateral arrangements

Assets accepted

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

The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £885 million (2019: £437 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2020 are set out below.

	OTC derivatives
	2020 £m	2019 £m
Financial assets	5,205	3,671
Financial liabilities	(5,205)	(3,671)

The maximum exposure to credit risk in respect of OTC derivative assets is £6,523 million (2019: £3,908 million) of which credit risk of £5,608 million (2019: £3,585 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).

Credit risk on exchange traded derivative assets of £357 million (2019: £546 million) is mitigated through regular margining and the protection offered by the exchange.

Assets pledged

The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2020 in respect of OTC derivative liabilities of £886 million (2019: £650 million) amounted to £1,216 million (2019: £692 million).

E4.3 Stock lending collateral arrangements

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

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

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

The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to 2,686 million (2019: £3,306 million).

The maximum exposure to credit risk in respect of stock lending transactions is £2,435 million (2019: £3,050 million) of which credit risk of £2,435 million (2019: £3,050 million) is mitigated through the use of collateral arrangements.

E4.4 Other collateral arrangements

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

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

E5. Borrowings

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

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

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

E5.1 Analysis of borrowings

	Carrying value		Fair value
	2020 £m	2019 £m	2020 £m	2019 £m
Limited recourse bonds 2022 7.59% (note a)	-	35	-	38
Property reversions loan (note b)	84	99	84	99
Total policyholder borrowings	84	134	84	137

£200 million 7.25% unsecured subordinated loan (note c)	200	196	204	211
£300 million senior unsecured bond (note d)	122	121	125	130
£428 million Tier 2 subordinated notes (note e)	426	426	517	503
£450 million Tier 3 subordinated notes (note f)	449	449	470	473
US $500 million Tier 2 bonds (note g)	364	376	416	396
€500 million Tier 2 bonds (note h)	442	417	516	472
US $750 million Contingent Convertible Tier 1 notes (note i)	545	-	585	-
£500 million Tier 2 notes (note j)	484	-	622	-
US $500 million Fixed Rate Reset Tier 2 notes (note k)	364	-	395	-
£500 million 5.867% Tier 2 subordinated notes (note l)	556	-	620	-
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note m)	272	-	280	-
£250 million 4.016% Tier 3 subordinated notes (note n)	259	-	266	-
Total shareholder borrowings	4,483	1,985	5,016	2,185

Total borrowings	4,567	2,119	5,100	2,322

Amount due for settlement after 12 months	4,245	2,107

a.In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of Embedded Value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The 120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £36 million as at 31 December 2019 were due to mature in 2022. During 2019, repayments totalling £12 million were made. As at 31 December 2019, Phoenix Life Assurance Limited ('PLAL') had provided collateral of £14 million to provide security to the holders of the recourse bonds in issue. On 4 August 2020, Mutual Securitisation plc redeemed all the outstanding class A2 limited recourse bonds in issue.

b. The Property Reversions loan from Santander UK plc ('Santander') was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2020, repayments totalling £19 million were made (2019: £22 million). Note G4 contains details of the assets that support this loan.

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

On 8 February 2021, the Group provided notice that it would repay the loan notes on their first call date in March 2021 and accordingly they are presented as due within 12 months.

d. On 7 July 2014, the Group's financing subsidiary, PGH Capital plc ('PGHC'), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% ('£300 million senior bond'). On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond.

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

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

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

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

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

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

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

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

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

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

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

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

o. The Group has in place a £1.25 billion unsecured revolving credit facility, maturing in June 2025. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayment obligations and voluntary prepayments are permissible. The facility accrues interest at a margin over LIBOR that is based on credit rating. The facility remains undrawn as at 31 December 2020.

E5.2 Reconciliation of liabilities arising from financing activities

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

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

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

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

E6. Risk Management - Financial and Other Risks

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

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

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

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

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

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

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

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

E6.2 Financial risk analysis

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

A Group-wide project is underway to enhance our approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group's Risk Management Framework, which will meet the requirements of Supervisory Statement 3/19. The Group's disclosures in line with the Task Force for Climate-related Financial Disclosures (TCFD), including planned future activity across each of the TCFD focus areas, are outlined on page 67 of the Annual Report and Accounts.

E6.2.1 Credit risk

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

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

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

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

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

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

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

The Group holds £23,799 million (2019: £10,800 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £1,156 million (2019: £583 million) to fund against the risk of default.

A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £5 million (2019: £70 million).

A 100bps narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £2 million (2019: £26 million).

Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through credit risk tolerances. Credit risk on derivatives and securities lending is mitigated through the use of collateral with appropriate haircuts. The credit risk borne by the shareholder on with-profit policies is dependent on the extent to which the underlying insurance fund is relying on shareholder support.

Credit quality of assets

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

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

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

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

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

1 For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring credit risk. £51 million of AAA, £433 million of AA, £1,354 million of A, £272 million of BBB and £90 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as 'non-rated'.

2 Non-rated debt securities includes equity release mortgages with a value of £2,781 million (further details are set out in note E2.3) and non-rated bonds. Credit ratings have not been disclosed in the above tables for the directly held assets of the unit-linked funds since the shareholder is not directly exposed to credit risks from these assets. Included in unit-linked funds are assets which are held as reinsured external fund links. Under certain circumstances, the shareholder may be exposed to losses relating to the default of the reinsured external fund link.

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

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

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

The risk of unexpected downgrades and defaults within the Group's credit risk portfolio is heightened as a result of market volatility and wider economic and social impacts arising from COVID-19. Throughout 2020, the Group took de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital.

The Group has increased exposure to illiquid credit assets such as equity release mortgages, private placements and commercial real estate loans) with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board.

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

Please refer to page 303 for additional life company asset disclosures which include the life companies' exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group's exposure to peripheral Eurozone debt continues to be relatively small compared to total assets. The additional life company asset disclosures also include the Group's market exposure analysed by credit rating for the shareholder debt portfolio.

Concentration of credit risk

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

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

Reinsurance

The Group is exposed to credit risk as a result of insurance risk transfer contracts with reinsurers. This also gives rise to concentration of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group manages its exposure to reinsurance credit risk through the operation of a credit policy, collateralisation where appropriate, and regular monitoring of exposures at the Reinsurance Management Committee.

Collateral

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

E6.2.2 Market risk

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

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

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

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

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

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

• the constituents of market risk for the Group;

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

• the asset allocation and portfolio limit structure;

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

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

• control over hedging activities;

• reporting of market risk exposures and activities; and

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

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

The potential for adverse market risk is heightened in 2020 due to the prolonged period of low interest rates and ongoing uncertainty regarding the external environment, particularly COVID-19. Details of how the Group has managed this heightened market risk are included on page 88 of the Risk Management section of the Annual Report.

Interest rate and inflation risk

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

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

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

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

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

An increase of 1% in interest rates, with all other variables held constant would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £287 million (2019: £114 million).

A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £461 million (2019: £233 million).

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

Equity and property risk

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

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

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

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

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

A 10% decrease in equity prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £281 million (2019: £254 million).

A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £263 million (2019: £200 million).

A 10% decrease in property prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £25 million (2019: £26 million).

A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £16 million (2019: £16 million).

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

Currency risk

With the exception of Standard Life business sold in Germany and the Republic of Ireland, some historic business written in the latter, and Ark Life domiciled in the Republic of Ireland, the Group's principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.

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

Some of the Group's with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks. Over the course of 2020 the Matching Adjustment Portfolios (MAPs) have increased investment in overseas investment grade credit (primarily US) again with the purpose of increasing returns whilst reducing overall risk through diversification. The currency risk arising from these investments is hedged back into sterling, therefore not increasing the Group's currency exposure.

Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2020, since unhedged exposure to foreign currency was relatively low (2019: not considered significant).

E6.2.3 Financial soundness risk

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

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

Tax risk is defined as the risk of financial failure, reputation damage, loss of earnings/value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording, reporting, understanding of tax legislation and disclosure of financial, taxation and regulatory information. Tax risk is managed by maintaining an appropriately-staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. In addition, the Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks.

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

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

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

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

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

• Holding appropriate assets to meet liquidity buffers;

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

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

• Effective liquidity portfolio management; and

• Liquidity risk contingency planning.

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

Forecasts are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances. These forecasts incorporate an estimated view of the potential economic downturn that is anticipated to be experienced due to the impacts of COVID-19. Further details are included within the Viability Statement on page 90.

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

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

Some of the Group's commercial property investments are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. This was invoked as a result of the market volatility experienced following the result of the referendum on membership of the European Union in 2016 in line with other firms across the industry. In March 2020, property collective investment schemes were suspended due to Material Valuation Uncertainty clauses being applied by independent property valuers immediately prior to the COVID-19 lockdown. In line with contractual terms, certain transactions, including transfers-out, surrenders and switches were not permitted while funds were in deferral. However, claims in respect of retirement transactions, policy maturities, deaths and regular maturities are deemed 'non-discretionary' and were paid based on available daily prices. All funds have since had suspensions lifted and no further restrictions apply.

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

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

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

2019	1 year or less or on demand £m	1-5 years £m	Greater than 5 years £m	No fixed term £m	Total £m
Liabilities under insurance contracts	16,135	23,299	56,209	-	95,643
Investment contracts	120,773	-	-	-	120,773
Borrowings¹	122	1,119	1,382	99	2,722
Deposits received from reinsurers¹	463	907	2,886	-	4,256
Derivatives¹	347	103	346	-	796
Net asset value attributable to unitholders	3,149	-	-	-	3,149
Obligations for repayment of collateral received	3,671	-	-	-	3,671
Reinsurance payables	101	-	-	-	101
Payables related to direct insurance contracts	890	-	-	-	890
Lease liabilities¹	13	32	78	-	123
Accruals and deferred income	375	6	3	-	384
Other payables	1,002	16	25	-	1,043

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

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

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

E6.2.4 Strategic risk

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

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

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

E6.2.5 Operational risk

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

• indirect exposures through outsourcing service providers (OSPs) and suppliers;

• direct exposures through internal practices, actions or omissions;

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

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

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

E6.2.6 Customer risk

Customer risk is the risk of reductions in earnings and/or value through inappropriate or poor customer treatment (including poor advice). It can arise as a result of:

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

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

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

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

Risk capital requirement for customer risk is assessed using the Group's PRA approved Internal Model which is calibrated to withstand a stress event to a 99.5% confidence level over a one-year period. The methodology is based on scenarios assessed by experts within the business. From a qualitative perspective, the customer risks for the Group are regularly reported to management oversight committees.

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

F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE

F1. Liabilities Under Insurance Contracts

Classification of contracts

Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder.

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts or derivatives and accounted for as financial liabilities (see notes E1 and E3 respectively).

Some insurance and investment contracts contain a Discretionary Participation Feature ('DPF'). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.

Contracts with reinsurers are assessed to determine whether they contain significant insurance risks. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are classified as financial instruments and are valued at fair value through profit or loss.

Insurance contracts and investment contracts with DPF

Insurance liabilities

Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies:

• where there are no guaranteed surrender values; or

• in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time.

For unit-linked insurance contract liabilities the provision is based on the fund value, together with an allowance for any excess of future expenses over charges, where appropriate.

For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology:

• liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners' share of projected future bonuses;

• acquisition costs are not deferred; and

• reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.

The With-Profit Benefit Reserve ('WPBR') for an individual contract is determined by either a retrospective calculation of 'accumulated asset share' approach or by way of a prospective 'bonus reserve valuation' method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account of future trends.

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

Where policyholders have valuable guarantees, options or promises in respect of the with-profit business, these costs are generally valued using a stochastic model.

In calculating the realistic liabilities, account is taken of the future management actions consistent with those set out in the Principles and Practices of Financial Management ('PPFM').

Standard Life Assurance Limited ('SLAL'), a wholly owned subsidiary of the Group, includes the Heritage With Profits Fund ('HWPF'). In 2006, the Standard Life Assurance Company demutualised. The demutualisation was governed by its Scheme of Demutualisation ('the Scheme'). Under the Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company were transferred to SLAL.

The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund ('SHF') or the Proprietary Business Fund ('PBF') of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL.

Under the realistic valuation, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the cost of future policy related liabilities (as a reduction where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to the cost of future policy related liabilities. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.

Applying the policy noted above for the HWPF:

• The value of participating investment contract liabilities on the consolidated statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts.

• Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF on the consolidated statement of financial position. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to reduce the value of participating insurance and participating investment contract liabilities on the consolidated statement of financial position

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

For UK with-profit life funds, an amount may be recognised for the present value of future profits ('PVFP') on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value.

Where the value of future profits can be shown to be due to policyholders, this amount is recognised as a reduction in the liability rather than as an intangible asset. This is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus.

Where it is not possible to apportion the future profits on this
non-participating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement (see note G2).

The value of the PVFP is determined in a manner consistent with realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note F4.

Embedded derivatives

Embedded derivatives, including options to surrender insurance contracts, that meet the definition of insurance contracts or are closely related to the host insurance contract, are not separately measured. All other embedded derivatives are separated from the host contract and measured at fair value through profit or loss.

Liability adequacy

At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared to the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement.

The Group's accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4 Insurance Contracts, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement.

Consolidated income statement recognition

Gross premiums

In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.

Gross benefits and claims

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

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.

Reinsurance ceded

The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers' share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.

Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers' share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.

Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments and are accounted for on a payable basis. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related payables are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement.

Reinsurance claims are recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.

Gains or losses on purchasing reinsurance are recognised in the consolidated income statement at the date of purchase and are not amortised. They are the difference between the premiums ceded to reinsurers and the related change in the reinsurers' share of insurance contract liabilities.

Reinsurance accepted

The Group accepts insurance risk under reinsurance contracts. Amounts paid to cedants at the inception of reinsurance contracts in respect of future profits on certain blocks of business are recognised as a reinsurance asset. Changes in the value of the reinsurance assets created from the acceptance of reinsurance are recognised as an expense in the consolidated income statement, consistent with the expected emergence of the economic benefits from the underlying blocks of business.

At each reporting date, the Group assesses whether there are any indications of impairment. When indications of impairment exist, an impairment test is carried out by comparing the carrying value of the asset with the estimate of the recoverable amount. When the recoverable amount is less than the carrying value, an impairment charge is recognised as an expense in the consolidated income statement. Reassurance assets are also considered in the liability adequacy test for each reporting period.

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

	Gross liabilities 2020 £m	Reinsurers' share 2020 £m	Gross liabilities 2019 £m	Reinsurers' share 2019 £m
Life assurance business:
Insurance contracts	103,012	9,542	70,685	7,324
Investment contracts with DPF	30,895	-	24,958	-
	133,907	9,542	95,643	7,324

Amounts due for settlement after 12 months	113,880	8,546	79,508	6,532

	Gross liabilities 2020 m	Reinsurers' share 2020 £m	Gross liabilities 2019 m	Reinsurers' share 2019 £m
At 1 January	95,643	7,324	91,211	7,564
Premiums	4,706	796	4,038	556
Claims	(7,808)	(1,613)	(7,792)	(1,177)
Foreign exchange adjustments	851	4	(841)	(3)
Acquisition of ReAssure businesses (see note H2.1)	24,606	2,782	-	-
L&G Part VII transfer (see note H2.2)	9,558	-	-	-
Other changes in liabilities¹	6,351	249	9,027	384
At 31 December	133,907	9,542	95,643	7,324

1 Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience. Other changes in liabilities in 2019 also included the recognition of an additional £44 million of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision.

F2. Unallocated Surplus

The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group's life operations. For the Group's with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts.

If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil.

In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF.

• The unallocated surplus of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the realistic value and the IFRS accounting policy value of all assets and liabilities other than participating contract liabilities recognised in the HWPF.

• The recourse cash flows are recognised as they emerge as an addition to shareholders' profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German branch business they are recognised as an addition to equity holders' profits.

	2020 £m	2019 £m
At 1 January	1,367	1,358
Transfer from/(to) consolidated income statement	113	(84)
Acquisition of ReAssure businesses (see note H2.1)	136	-
L&G Part VII transfer (see note H2.2)	261	-
Foreign exchange movements	(109)	93
At 31 December	1,768	1,367

F3. Reinsurance

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

F3.1 Premiums ceded to reinsurers

Premiums ceded to reinsurers during the period were £796 million (2019: £556 million).

F3.2 Collateral arrangements

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

Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,324 million (2019: £3,217 million).

Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as 'Deposits received from reinsurers'. Where there is interest payable on such collateral, it is recognised within 'Net expense under arrangements with reinsurers' (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2020 are set out below

	Reinsurance transactions
	2020 £m	2019 £m
Financial assets	427	333
Financial liabilities	427	333

F3.3 Net expense under arrangements with reinsurers

The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. The amount recognised in the statement of consolidated financial position in respect of this deposit is £3.7 billion as at 31 December 2020 (31 December 2019: £3.9 billion). Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring fenced assets. This has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer. The investment return on the ring fenced assets included within net investment return in the consolidated income statement is equal to an equivalent amount recognised in net expense under arrangements with reinsurers.

	2020 £m	2019 £m
Interest payable on deposits from reinsurers	(13)	(33)
Premium adjustments	(206)	(241)
Net expense under arrangements with reinsurers	(219)	(274)

F4. Risk Management - Insurance Risk

Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Life businesses are exposed to the following elements of insurance risk:

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

Objectives and policies for mitigating insurance risk

The Group uses several methods to assess and monitor insurance risk exposures for both individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes.

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

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

The Group's longevity risk exposures have increased as a result of the Bulk Purchase Annuity deals it has successfully acquired, however the vast majority of these exposures are reinsured to third parties. This longevity exposure has further been increased following the acquisition of the ReAssure businesses and also due to the fall in yields during the year.

Insurance risk and COVID-19

There is currently increased uncertainty around future demographic experience as a result of COVID-19 impacts, particularly mortality, longevity and persistency risk. Some allowance has been made in the valuation and capital calculations for the potential short term effects of COVID-19 on timing of cash flows relating to the insurance risks to which the Group is exposed. The impact over the longer term continues to be monitored on a regular basis however given the uncertainty no adjustments have been deemed necessary to date.

Sensitivities

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

A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £70 million (2019: 58 million).

An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £70 million (2019: 58 million).

A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £619 million (2019: £288 million).

An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £627 million (2019: £298 million).

A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £40 million (2019: £20 million).

An increase of 10% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £44 million (2019: £20 million).

F4.1 Assumptions

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

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

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

Discount rates

The Group discounts participating and non-participating insurance contract liabilities at a risk-free rate derived from the swap yield curve, plus an illiquidity premium of 10bps.

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

Expense inflation

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

Mortality and longevity rates

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

Lapse and surrender rates (persistency)

The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis funds.

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

Discretionary participating bonus rate

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

Policyholder options and guarantees

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

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

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

Some pensions contracts include guaranteed annuity options. The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £2,590 million (2019: £1,986 million) and £131 million (2019: £109 million) respectively.

In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £374 million (2019: £225 million) and £6 million (2019: £6 million) respectively.

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

Demographic prudence margin

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

Assumption changes

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

	(Decrease)/ increase in insurance liabilities 2020 £m	(Decrease)/ increase in insurance liabilities 2019 £m
Change in longevity assumptions	(369)	(186)
Change in persistency assumptions	6	19
Change in mortality assumptions	31	17
Change in expenses assumptions	(36)	(68)

2020:

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

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

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

Factors related to the COVID-19 pandemic are expected to have impacted policyholder behaviour (including persistency) and demographic experience in the period and are likely to continue to do so in the future. The Group's results have been impacted during the period by adverse mortality experience on the protection business, but this has been offset by positive longevity experience on the annuity business. The impact over the longer-term continues to be monitored on a regular basis, however given the uncertainty no adjustments to assumptions as a result of the impacts of COVID-19 have been deemed necessary to date.

Following the 'second wave' of COVID-19 deaths at the end of 2020, the Group has recognised a short-term actuarial provision of £10 million in anticipation of excess deaths relative to valuation assumptions at 31 December 2020.

2019:

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

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

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

F4.2 Managing product risk

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

	Gross1		Reinsurance
2020	Insurance contracts £m	Investment contracts with DPF £m	Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	10,095	62	917	-
Deferred annuities - without guarantees	1,835	340	-	-
Immediate annuities	7,478	-	4,377	-
Unitised with-profit	14,375	28,210	-	-
Total pensions	33,783	28,612	5,294	-

Life:
Immediate annuities	365	-	2	-
Unitised with-profit	9,869	1,210	-	-
Life with-profit	2,445	-	7	-
Total life	12,679	1,210	9	-

Other	1,348	-	212	-

Non-profit funds:
Deferred annuities - with guarantees	636	-	-	-
Deferred annuities - without guarantees	1,966	-	(115)	-
Immediate annuities	35,641	-	2,459	-
Protection	3,012	-	1,713	-
Unit-linked	14,062	1,064	31	-
Other	(115)	9	(61)	-
	103,012	30,895	9,542	-

1 £7,883 million (2019: £5,320 million) of liabilities are subject to longevity swap arrangements.

	Gross		Reinsurance
2019	Insurance contracts £m	Investment contracts with DPF £m	Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	8,468	63	924	-
Deferred annuities - without guarantees	1,133	-	-	-
Immediate annuities	7,178	-	4,580	-
Unitised with-profit	12,940	23,021	-	-
Total pensions	29,719	23,084	5,504	-

Life:
Immediate annuities	173	-	4	-
Unitised with-profit	6,386	774	-	-
Life with-profit	2,171	-	4	-
Total life	8,730	774	8	-

Other	1,061	-	205	-

Non-profit funds:
Deferred annuities - without guarantees	824	-	-	-
Immediate annuities	19,635	-	1,567	-
Protection	686	-	76	-
Unit-linked	10,182	1,083	33	-
Other	(152)	17	(69)	-
	70,685	24,958	7,324	-

With-profit fund (unitised and traditional)

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

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

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

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

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

Deferred annuities

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

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

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

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

Immediate annuities

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

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

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

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

Protection

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

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

G. OTHER STATEMENT OF consolidated FINANCIAL POSITION NOTES

G1. Pension Schemes

Defined contribution pension schemes

Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.

Defined benefit pension schemes

The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted.

The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contract liabilities and investment contract liabilities.

As required by IFRIC 14, IAS 19 -'The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', to the extent that the economic surplus (prior to the elimination of the insurance policies issued by Group entities) will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.

Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the Scheme, a liability is recognised when the obligation arises. The net defined benefit asset/liability represents the economic surplus net of all adjustments noted above.

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

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

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

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

	2020 £m	2019 £m
Pearl Group Staff Pension Scheme
Economic surplus	527	521
Adjustment for insurance policies eliminated on consolidation	(596)	-
Net economic (deficit)/surplus	(69)	521
Minimum funding requirement obligation	-	(24)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(185)	(183)
Net pension scheme (liability)/asset	(254)	314


PGL Pension Scheme
Economic surplus	30	37
Adjustment for amounts due to subsidiary eliminated on consolidation	-	13
Adjustment for insurance policies eliminated on consolidation	(1,749)	(1,687)
Net pension scheme liability	(1,719)	(1,637)

Abbey Life Staff Pension Scheme
Net pension scheme liability	(61)	(75)

ReAssure Staff Pension Scheme
Economic surplus	16	-
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(5)	-
Net pension scheme asset	11	-

ReAssure Private Retirement Trust
Net pension scheme liability¹	(2)	-

1 The balance includes plan assets of £382,000 which are primarily held within equities.

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

Risks

The Group's defined benefit schemes typically expose the Group to a number of risks, the most significant of which are:

Asset volatility - the value of the schemes' assets will vary as market conditions change and as such is subject to considerable volatility. The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. The majority of the assets are held within a liability driven investment strategy which is linked to the funding basis of the schemes (set with reference to government bond yields). As such, to the extent that movements in corporate bond yields are out of line with movements in government bond yields, volatility will arise.

Inflation risk - a significant proportion of the schemes' benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are held within a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.

Life expectancy - the majority of the schemes' obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. For the Pearl and PGL schemes, this is partially offset by the buy in policies that move in line with the liabilities. These buy in policies are eliminated on consolidation (see sections G1.1 and G1.2 for further details).

Information on each of these schemes is set out below.

Guaranteed Minimum Pension ('GMP') Equalisation

GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs needed to be equalised. In 2018, the Group undertook an initial assessment, and included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. During the year, following a review of the current methodology and assumptions the allowance for the potential cost of equalising GMP has been updated and the resulting reductions in the defined benefit obligation of £26 million for the Pearl Scheme, £16 million for the PGL Scheme and £4 million for the Abbey Life Scheme have been recognised in other comprehensive income as an experience gain.

In 2018, the ReAssure Scheme made allowance for the estimated impact of GMP equalisation and a provision of 0.1% of the defined benefit obligation was made to allow for the cost of GMP equalisation. The methodology and assumptions used to calculate this impact remain appropriate as at 31 December 2020.

On 25 November 2020, the GMP equalisation ruling covering transfers out was released and this confirmed that pension schemes are required to equalise all transfers with 17 May 1990 to 5 April 1997 GMPs even if they were taken as far back as 1990. A further exercise was undertaken to estimate the additional costs of allowing for GMP equalisation on transfers out and during the year a further cost of £1 million for the Pearl Scheme and £1 million for the PGL Scheme was recognised as a past service cost in the consolidated income statement. No adjustments were required for either the Abbey Life Scheme or the ReAssure Scheme.

Impacts of COVID-19

The market volatility experienced as a result of COVID-19 has contributed towards the movement in the pension scheme IAS 19 valuations for the year ended 31 December 2020. Discount rates used to calculate the IAS 19 defined benefit obligations have fallen by 60bps since 31 December 2019 to 1.4% and this has resulted in a significant increase in the value of the defined benefit obligations at 31 December 2020. This impact has been partially offset in relation to the Pearl Scheme, the Abbey Scheme and the ReAssure Scheme by an increase in the fair value of the plan assets. Falling yields in the period have resulted in an increase to the value of government bonds and corporate bonds which form a substantial part of the plan assets for these Schemes. There is a similar offset in respect of the PGL Pension Scheme as the impact of the increase in the discount rate has been offset by an increase in the fair value of the collateral assets which primarily consist of government bonds.

G1.1 Pearl Group Staff Pension Scheme

Scheme details

The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The Pearl Scheme is closed to new members, and has no active members.

Defined benefit scheme

The Pearl Scheme is established under, and governed by, the trust deeds and rules and has been funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited ('PGH2'), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate Trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The Trustee company is comprised of four representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company's articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.

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

The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2020, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

A triennial funding valuation of the Pearl Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £104 million, on the agreed technical provisions basis. The cash flows utilised in the IFRS valuation as at 31 December 2018 were updated to reflect the latest data available from the 30 June 2018 funding valuation. The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are gilt-based for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high quality AA-rated corporate bonds. In addition the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.

Pension Scheme Commitment Agreement and buy-in

On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with PGH2 to complete a series of buy-ins that are scheduled to be executed by 31 December 2023. At the same time, the Pearl Scheme completed the first buy-in with Phoenix Life Limited ('PLL') covering 25% of the Scheme's pensioner in-payment and deferred member liabilities, transferring the associated risks of longevity improvement to PLL effective from 30 September 2020.

The Scheme transferred £731 million of plan assets to PLL which constituted the payment of £735 million of premium to PLL and was net of a £4 million payment by PLL to the scheme in respect of benefits for October and November 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the consolidated statement of financial position. The economic effect of the 'buy-in' transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is subsequently eliminated on consolidation. The value of this insurance policy at 30 September 2020 was £604 million and at 31 December 2020 was £596 million.

The Commitment Agreement replaced the 2012 Pensions Agreement, which had previously included provisions covering contribution payments, additional contributions payable should agreed funding targets not be met, share charge over certain Group entities and covenant tests. The main terms of the Commitment Agreement are outlined below.

The new agreement contains provisions under which payments by PGH2 to the Scheme are required in the event that the Group does not meet the minimum buy-in completion schedule. There are two different types of payments as follows:

• Gilts Deficit Recovery Contributions: These operate in a similar way to the security under the 2012 Pension Agreement. Contributions calculated as amounts required to reach full funding on a gilts-basis by 30 June 2027.

• Contingent Contributions: These represent a new form of security for the Trustee. The amount of these contributions is initially capped at £200 million, with the cap running off in line with completion of the buy-ins.

The new agreement also introduces a new form of security provided by PGH2 to the Trustee which will be in place until the final buy-in is completed. The share charges over certain Group entities have been replaced by a new surety bond arrangement. The Surety Bond has been written by two external third-party insurers, each providing £100 million of cover payable to the Scheme following any one of the following trigger events:

• Insolvency of the Company, PGH2, PGS, Standard Life Assurance Limited, PLL, or Phoenix Life Assurance Limited; and

• Failure to pay any contributions to the Scheme due under the terms of the Commitment Agreement.

The cover provided by the surety bonds will be reduced from £200 million to £100 million (in aggregate) once the completed aggregate buy-in proportion exceeds 75%. The agreements between the Trustee and the surety providers are backed by a guarantee and an indemnity from the Company, PGH2 and PGS to the surety providers to repay them in the event of a claim under the surety bond. A liability would only be recognised upon the occurrence of one of the above trigger events.

Contributions totalling £70 million were paid into the Pearl Scheme in 2020 (2019: £40 million). Following the signing of the new Commitment Agreement PGH2 paid the balance of the remaining contributions under the 2012 Pensions Agreement (£37 million) in addition to the monthly instalments paid up to this date. No further contributions are expected to be paid to the Pearl Scheme however, PGH2 will continue to meet the administrative and non-investment running expenses of the Scheme as set out in the schedule of contributions.

Following the revisions to the schedule of contributions, no additional liability has been recognised at 31 December 2020 (2019: 24 million), to reflect a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions (2019: £69 million) in accordance with the minimum funding requirement. At 31 December 2019, a deferred tax asset of £12 million was also recognised to reflect tax relief at a rate of 17% that was expected to be available on the contributions, once paid into the Scheme.

Summary of amounts recognised in the consolidated financial statements

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

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Minimum funding requirement obligation £m	Total £m
At 1 January	2,834	(2,313)	(183)	(24)	314

Interest income/(expense)	53	(45)	(4)	(1)	3
Past service cost	-	(1)	-	-	(1)
Included in profit or loss	53	(46)	(4)	(1)	2

Remeasurements:
Return on plan assets excluding amounts included in interest income	198	-	-	-	198
Gain from changes in demographic assumptions	-	51	-	-	51
Loss from changes in financial assumptions	-	(205)	-	-	(205)
Experience gain	-	19	-	-	19
Change in provision for tax on economic surplus available as a refund	-	-	2	-	2
Change in minimum funding requirement obligation	-	-	-	25	25
Included in other comprehensive income	198	(135)	2	25	90

Employer's contributions	70	-	-	-	70
Income received from insurance policies	5	-	-	-	5
Benefit payments	(110)	110	-	-	-
Assets transferred as premium for Scheme buy-in	(735)	-	-	-	(735)
At 31 December	2,315	(2,384)	(185)	-	(254)

2019	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Minimum funding requirement obligation £m	Total £m
At 1 January	2,631	(2,182)	(157)	(37)	255

Interest income/(expense)	73	(60)	(4)	(1)	8
Included in profit or loss	73	(60)	(4)	(1)	8

Remeasurements:
Return on plan assets excluding amounts included in interest income	202	-	-	-	202
Gain from changes in demographic assumptions	-	12	-	-	12
Loss from changes in financial assumptions	-	(206)	-	-	(206)
Experience gain	-	11	-	-	11
Change in provision for tax on economic surplus available as a refund	-	-	(22)	-	(22)
Change in minimum funding requirement obligation	-	-	-	14	14
Included in other comprehensive income	202	(183)	(22)	14	11

Employer's contributions	40	-	-	-	40
Benefit payments	(112)	112	-	-	-
At 31 December	2,834	(2,313)	(183)	(24)	314

Scheme assets

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

	2020		2019
	Total £m	Of which not quoted in an active market £m	Total £m	Of which not quoted in an active market £m
Hedging portfolio	1,505	(30)	1,569	(18)
Fixed interest gilts	50	-	56	-
Other debt securities	1,301	-	1,329	-
Properties	140	140	266	266
Private equities	5	5	19	19
Hedge funds	5	5	6	6
Cash and other	98	-	111	-
Obligations for repayment of stock lending collateral received	(789)	-	(522)	-
Reported scheme assets	2,315	120	2,834	-
Add back:
Insurance policies eliminated on consolidation	596	596	-	-
Economic value of assets	2,911	716	2,834	273

The Group ensures that the investment positions are managed within an Asset Liability Matching ('ALM') framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 37% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 100% of the interest rate and inflation rate risk measured on a gilts-basis.

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

Defined benefit obligation

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

• Deferred scheme members: 40% (2019: 40%); and

• Pensioners: 60% (2019: 60%)

The weighted average duration of the defined benefit obligation at 31 December 2020 is 16 years (2019: 16 years).

Principal assumptions

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

	2020 %	2019 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	2.85	2.90
Rate of increase for deferred pensions ('CPI')	2.10	2.20
Discount rate	1.40	2.00
Inflation - RPI	2.90	3.00
Inflation - CPI	2.10	2.20

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

It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2017 are based on amended CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 30.1 years and 31.0 years for male and female members respectively (2019: 29.8 years and 32.2 years respectively).

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

2020
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	2,384	(95)	98	76	(87)	86	(86)

2019
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	2,313	(85)	93	71	(65)	84	(84)

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

G1.2 PGL Pension Scheme

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

Scheme details

Defined contribution scheme

On 1 July 2020 the Group closed the defined contribution section of the PGL Scheme and ceased making contributions from this date. Contributions in the period to 1 July 2020 were £5 million (2019: £7 million).

Defined benefit scheme

The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and to future accrual for active members.

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

The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2020, undertaken by independent qualified actuaries.

A triennial funding valuation of the PGL Pension Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £246 million. The IFRS valuation cash flows have been updated to reflect the latest valuation data.

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

Insurance policies with Group entities

In March 2019, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL which covered the remaining pensioner and deferred members of the Scheme not covered by the first such agreement concluded in December 2016. The scheme transferred £1,115 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL. An adjustment of £13 million to the value of the premium was paid to PLL in 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position. As with the initial 'buy-in' transaction completed in December 2016, the economic effect of the transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at the date of the buy-in was £670 million.

The value of the insurance policies with Group entities at 31 December 2020 is £1,749 million (2019: £1,687 million).

Summary of amounts recognised in the consolidated financial statements

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

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	54	(1,691)	(1,637)

Interest income/(expense)	1	(31)	(30)
Administrative expenses	(3)	-	(3)
Past service cost	-	(1)	(1)
Included in profit or loss	(2)	(32)	(34)

Remeasurements:
Return on plan assets excluding amounts included in interest income	(4)	-	(4)
Experience gains	-	41	41
Loss from changes in financial assumptions	-	(154)	(154)
Gain from changes in demographic assumptions	-	7	7
Included in other comprehensive income	(4)	(106)	(110)

Benefit payments	(75)	75	-
Income received from insurance policies	75	-	75
Assets transferred as premium for 2019 scheme buy-in	(13)	-	(13)
At 31 December	35	(1,754)	(1,719)

2019	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Total £m
At 1 January	1,157	(1,528)	(151)	(522)

Interest income/(expense)	10	(39)	(5)	(34)
Administrative expenses	(3)	-	-	(3)
Included in profit or loss	7	(39)	(5)	(37)

Remeasurements:
Return on plan assets excluding amounts included in interest income	10	-	-	10
Experience loss	-	(34)	-	(34)
Loss from changes in financial assumptions	-	(175)	-	(175)
Gain from changes in demographic assumptions	-	11	-	11
Change in provision for tax on economic surplus available as a refund	-	-	156	156
Included in other comprehensive income	10	(198)	156	(32)

Benefit payments	(74)	74	-	-
Income received from insurance policies	69	-	-	69
Assets transferred as premium for 2019 scheme buy-in	(1,115)			(1,115)
At 31 December	54	(1,691)	-	(1,637)

Scheme assets

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

	2020		2019
	Total £m	Of which not quoted in an active market £m	Total £m	Of which not quoted in an active market £m
Cash and other	35	-	54	-
Reported scheme assets	35	-	54	-
Add back:
Insurance policies eliminated on consolidation	1,749	1,749	1,687	1,687
Adjustment for amounts due to subsidiary eliminated on consolidation	-	-	(13)	-
Economic value of assets	1,784	1,749	1,728	1,687

Defined benefit obligation

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

• Deferred scheme members: 36% (2019: 36%); and

• Pensioners: 64% (2019: 64%)

The weighted average duration of the defined benefit obligation at 31 December 2020 is 16 years (2019: 16 years).

Principal assumptions

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

	2020 %	2019 %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower)	2.90	3.00
Rate of increase for deferred pensions ('CPI')	2.10	2.20
Discount rate	1.40	2.00
Inflation - RPI	2.90	3.00
Inflation - CPI	2.10	2.20

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

It has been assumed that post-retirement mortality is in line with 86%/94% of S1PL base tables with future longevity improvements from 1 January 2017 based on modified CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.4 years (2019: 28.3 years) and 29.3 years (2019: 29.6 years) for male and female members respectively.

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

2020
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	1,754	(67)	70	55	(53)	65	(65)

2019
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	1,691	(65)	67	53	(51)	63	(63)

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

G1.3 Abbey Life Staff Pension Scheme

Scheme details

On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the Trustee), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants. The last active member ceased employment with the Group and consequently the Abbey Life Scheme no longer recognises a current service cost.

The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2020 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

Funding

The last funding valuation of the Abbey Life Scheme was carried out by a qualified actuary as at 31 March 2018 and showed a deficit of £98 million.

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

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

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

• annual payments of £4 million into the 2016 Charged Account by 31 July each year, with the next payment being made by 31 July 2019, and the last payment due by 31 July 2025.

The Charged Accounts are Escrow accounts which were created in 2010 to provide the Trustees with additional security in light of the funding deficit. The amounts held in the Charged Accounts do not form part of Abbey Life Scheme assets.

Under the terms of the 2013 Funding Agreement dated 28 June 2013, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2021. A payment will be made from the 2013 Charged Account to the Abbey Life Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2013 Charged Account.

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

Summary of amounts recognised in the consolidated financial statements

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

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	254	(329)	(75)

Interest income/(expense)	5	(7)	(2)
Administrative expenses	(1)	-	(1)
Included in profit or loss	4	(7)	(3)

Remeasurements:
Return on plan assets excluding amounts included in interest income	28	-	28
Experience gain	-	8	8
Loss from changes in financial assumptions	-	(31)	(31)
Gain from changes in demographic assumptions	-	6	6
Included in other comprehensive income	28	(17)	11

Employer's contributions	6	-	6
Benefit payments	(12)	12	-
At 31 December	280	(341)	(61)

2019	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	233	(307)	(74)

Interest income/(expense)	6	(9)	(3)
Administrative expenses	(1)	-	(1)
Included in profit or loss	5	(9)	(4)


Remeasurements:
Return on plan assets excluding amounts included in interest income	26	-	26
Experience gain	-	2	2
Loss from changes in financial assumptions	-	(33)	(33)
Gain from changes in demographic assumptions	-	2	2
Included in other comprehensive income	26	(29)	(3)


Employer's contributions	6	-	6
Benefit payments	(16)	16	-
At 31 December	254	(329)	(75)

Scheme assets

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

	2020		2019
	Total £m	Of which not quoted in an active market £m	Total £m	Of which not quoted in an active market £m
Diversified income fund	118	-	105	-
Fixed interest government bonds	70	-	73	-
Corporate bonds	86	-	71	-
Derivatives	2	2	(10)	(10)
Cash and cash equivalents	4	-	15	-
Pension scheme assets	280	2	254	(10)

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

Defined benefit obligation

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

• Deferred scheme members: 49% (2019: 49%); and

• Pensioners: 51% (2019: 51%)

The weighted average duration of the defined benefit obligation at 31 December 2020 is 17 years (2019: 17 years).

Principal assumptions

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

	2020 %	2019 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	2.85	2.90
Rate of increase for deferred pensions ('CPI' subject to caps)	2.10	2.20
Discount rate	1.40	2.00
Inflation - RPI	2.90	3.00
Inflation - CPI	2.10	2.20

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

It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2018, using the SAPS S2 'Light' tables for males and for females based on year of use. Future longevity improvements are based on amended CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.4 years and 26.5 years for male and female members respectively (2019: 25.7 years and 27.2 years respectively).

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

2020
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	341	(14)	15	10	(11)	13	(13)

2019
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	329	(13)	14	10	(9)	12	(12)

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

G1.4 ReAssure Life Staff Pension Scheme

Scheme details

The ReAssure Scheme was consolidated within the Group financial statements following the acquisition of the ReAssure businesses on 22 July 2020 (see note H2.1). The ReAssure Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer ReAssure Midco Limited ('RML'). The scheme is administered by ReAssure Pension Trustees Limited, a corporate trustee. There are six Trustee Directors, two of whom are nominated by the ReAssure Scheme members and four of whom are appointed by RML. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The ReAssure Scheme is closed to future accrual.

The valuation has been based on an assessment of the liabilities of the ReAssure Scheme as at 31 December 2020 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

Funding

The last funding valuation of the ReAssure Scheme was carried out by a qualified actuary as at 31 December 2017 and showed a deficit of £59 million.

Following the completion of the last triennial funding valuation a Recovery Plan was agreed between the Trustee and the Group in order to make good the deficit. Under the Recovery Plan, a further £17 million was paid into a Custody Account in 2019 and no further amounts have since been paid. The amounts held in this account do not form part of the Scheme's plan assets and are instead included within financial assets in the statement of consolidated financial position.

The total amount held in the Custody Account will be assessed at future valuations and additional payments will be made by the Group if this is deemed insufficient to meet the balance of the funding shortfall as at 31 December 2025. If the assumptions documented in the Statement of Funding Principles are borne out in practice, the amount expected to be held in the Custody Account as at 31 December 2025 would be more than sufficient to remove any remaining deficit at 31 December 2025.

There were no contributions made in respect of current service for the current and prior years. The Group agrees to cover those expenses incurred by the ReAssure Scheme and the cost of the death-in-service benefits for those members of the scheme who are entitled only to those benefits. Payments of £1 million were made since 22 July 2020 to cover these costs.

Summary of amounts recognised in the consolidated financial statements

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

2020	Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Total £m
At 1 January	−	−	−	−
Acquisition of ReAssure businesses (see note H2.1)	459	(424)	(12)	23

Interest income/(expense)	4	(4)	−	−
Administrative expenses	(1)	−	−	(1)
Included in profit or loss	3	(4)	−	(1)

Remeasurements:
Return on plan assets excluding amounts included in interest income	19	−	−	19
Experience gain	−	2	−	2
Loss from changes in financial assumptions	−	(25)	−	(25)
Loss from changes in demographic assumptions	−	(15)	−	(15)
Change in provision for tax on economic surplus available as a refund	−	−	7	7
Included in other comprehensive income	19	(38)	7	(12)

Employer's contributions	1	−	−	1
Benefit payments	(5)	5	−	−
At 31 December	477	(461)	(5)	11

Scheme assets

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

2020	Total £m	Of which not quoted in an active market £m
Equities	56	-
Government bonds	121	-
Corporate bonds	181	-
Real Estate	41	-
Other Quoted Securities	70	-
Cash and cash equivalents	8	-
Pension scheme assets	477	-

Defined benefit obligation

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

• Deferred scheme members: 74%; and

• Pensioners: 26%.

The weighted average duration of the defined benefit obligation at 31 December 2020 is 21 years.

Principal assumptions

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

			2020 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)			2.85
Rate of increase for deferred pensions			2.10
Rate of increase in salaries			3.10
Discount rate			1.40
Inflation - RPI			2.90
Inflation - CPI			2.10

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

The mortality base table is based on the SAPS Series 2 light tables with a 96% multiplier for males and a 92% multiplier for females, with CMI 2014 projections in line with a 1.50% pa long term trend up to and including 2014. Improvements from 2015 onwards are in line with CMI 2019 projections with a long term trend of 1.5% pa and an initial addition to improvements parameter of 0.25% p.a.

Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 60 is 29.8 years and 31.4 years for male and female members respectively.

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

2020
Assumptions	Base	Discount rate		RPI		Life expectancy
Sensitivity level		25bps increase	25bps decrease	25bps increase	25bps decrease	1 year increase	1 year decrease
Impact on the defined benefit obligation (£m)	461	(25)	25	21	(21)	18	(18)

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

G2. Intangible Assets

Goodwill

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

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

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

Acquired in-force business

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

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

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

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

Customer relationships

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

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

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

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

Brands and other contractual arrangements

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

			Other intangibles
2020	Goodwill £m	Acquired in-force business £m	Customer relationships £m	Present value of future profits £m	Brands and other £m	Total other intangibles £m	Total £m
Cost or valuation
At 1 January	57	5,197	297	82	56	435	5,689
Acquisition of ReAssure businesses (see note H2.1)	-	1,831	-	-	-	-	1,831
Reclassification to investment contract liabilities	-	-	-	(82)	-	(82)	(82)
At 31 December	57	7,028	297	-	56	353	7,438

Amortisation and impairment
At 1 January	-	(1,546)	(154)	-	(10)	(164)	(1,710)
Amortisation charge for the year	-	(469)	(14)	-	(4)	(18)	(487)
At 31 December	-	(2,015)	(168)	-	(14)	(182)	(2,197)

Carrying amount at 31 December	57	5,013	129	-	42	171	5,241

Amount recoverable after 12 months	57	4,457	115	-	10	125	4,639

			Other intangibles
2019	Goodwill £m	Acquired in-force business £m	Customer relationships £m	Present value of future profits £m	Brands and other £m	Total other intangibles £m	Total £m
Cost or valuation
At 1 January	57	5,197	297	12	56	365	5,619
Revaluation	-	-	-	70	-	70	70
At 31 December	57	5,197	297	82	56	435	5,689

Amortisation and impairment
At 1 January	-	(1,164)	(139)	-	(5)	(144)	(1,308)
Amortisation charge for the year	-	(382)	(15)	-	(5)	(20)	(402)
At 31 December	-	(1,546)	(154)	-	(10)	(164)	(1,710)

Carrying amount at 31 December	57	3,651	143	82	46	271	3,979

Amount recoverable after 12 months	57	3,296	128	82	40	250	3,603

G2.1 Goodwill

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

£47 million of goodwill is attributable to the Management Services segment including £8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk adjusted discount rate of 9.2% (2019: 8.3%) and are consistent with those adopted by management in the Group's operating plan and, for the period 2026 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management's best estimates with regards to longevity, persistency, mortality and morbidity.

The remaining £10 million relates to the goodwill recognised on the acquisition of AXA Wealth during 2016 and has been allocated to the UK Open segment. This represents the value of the workforce assumed and the potential for future value creation, which relates to the ability to invest in and grow the SunLife brand. Value in use has been determined as the present value of certain future cashflows associated with that business. The cash flows used in the calculation are consistent with those adopted by management in the Group's operating plan, and for the period 2026 and beyond, assume a zero growth rate. The underlying assumptions of these projections include market share, customer numbers, commission rates and expense inflation. The cashflows have been valued at a risk adjusted discount rate of 11% that makes prudent allowance for the risk that future cash flows may differ from that assumed.

Impairment tests have been performed using assumptions which management consider reasonable. Management does not believe that a reasonably foreseeable change in key assumptions would cause value in use to be materially lower than the carrying value.

G2.2 Acquired In-Force Business

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

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

Acquired in-force business of £1,831 million was recognised during the year upon acquisition of the ReAssure businesses (see note H2.1).

G2.3 Customer Relationships

The customer relationships intangible at 31 December 2020 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically
top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20 year period, and had a remaining useful life as at 31 December 2020 of 8.9 years.

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

The principal assumptions used to calculate the present value of future profits ('PVFP') are the same as those used in calculating the insurance contract liabilities given in note F4.1.

The PVFP held in intangibles represented future profits on specific blocks of business in the NPL with-profit fund that was partly attributable to the holders of the limited recourse bonds (see note E5). As a consequence, the value of future profits was not attributable solely to policyholders and the PVFP was therefore presented as a separate intangible asset.

Following the repayment of the limited recourse bonds during the year, the PVFP can be shown as fully attributable to policyholders and it has therefore been reclassified as investment contract liabilities.

G2.5 Other intangibles

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

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

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

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

This intangible was valued on a 'multi-period excess earnings' basis and was being amortised over a period of 15 years.

On 23 February 2021, the Group entered into an agreement with SLA plc to simplify the arrangements of the Strategic Partnership. As part of the changes, the CSPA entered into following the acquisition of the Standard Life Assurance businesses will be dissolved. As a consequence, the carrying value of the CSPA as at 31 December 2020 is expected to be recoverable within 12 months. Further details have been provided in Note I7.

G3. Property, plant and equipment

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

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

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

2020	Owner-occupied properties £m	Right-of-use assets - property £m	Right-of-use assets - equipment £m	Equipment £m	Total £m
Cost or valuation
At 1 January 2020	25	75	2	27	129
Acquisition of ReAssure businesses (see note H2.1)	8	3	-	4	15
Additions	-	-	-	23	23
At 31 December 2020	33	78	2	54	167


Depreciation
At 1 January 2020	-	(11)	-	(9)	(20)
Depreciation	-	(12)	-	(16)	(28)
At 31 December 2020	-	(23)	-	(25)	(48)

Carrying amount at 31 December 2020	33	55	2	29	119

2019	Owner-occupied properties £m	Right-of-use assets - property £m	Right-of-use assets - equipment £m	Equipment £m	Total £m
Cost or valuation
At 1 January 2019	31	-	-	19	50
Transition to IFRS 16	-	75	2	-	77
At 1 January 2019 restated	31	75	2	19	127
Additions	2	-	-	8	10
Disposals	(1)	-	-	-	(1)
Reclassification to investment property	(7)	-	-	-	(7)
At 31 December 2019	25	75	2	27	129

Depreciation
At 1 January 2019	-	-	-	(2)	(2)
Depreciation	-	(11)	-	(7)	(18)
At 31 December 2019	-	(11)	-	(9)	(20)

Carrying amount at 31 December 2019	25	64	2	18	109

Owner-occupied properties have been valued by accredited independent valuers at 31 December 2020 on an open market basis in accordance with the Royal Institution of Chartered Surveyors' requirements, which is deemed to equate to fair value. The fair value measurement for the properties of £33 million (2019: £25 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used. Unrealised gains for the current and prior years are £nil.

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

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

G4. Investment property

Investment property, including right of use assets, is initially recognised at cost, including any directly attributable transaction costs. Subsequently investment property is measured at fair value. Fair value is the price that would be received to sell a property in an orderly transaction between market participants at the measurement date. Fair value is determined without any deduction for transaction costs that may be incurred on sale or disposal. Gains and losses arising from the change in fair value are recognised as income or an expense in the Statement of comprehensive income.

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

	2020 £m	2019 £m
At 1 January	5,943	6,520
Acquisition of ReAssure businesses (see note H2.1)	556	-
L&G Part VII transfer (see note H2.2)	1,221	-
Additions	157	214
Improvements	9	5
Disposals	(709)	(722)
Reclassified from owner-occupied property	-	7
Remeasurement of right-of-use asset	(1)	(15)
Movement in foreign exchange	4	(11)
Losses on adjustments to fair value (recognised in consolidated income statement)	(52)	(55)
At 31 December	7,128	5,943
Unrealised losses on properties held at end of year	(43)	(124)

As at 31 December 2020, a property portfolio of £7,025 million (2019: £5,824 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.

Investment properties also include £86 million (2019: £101 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details) and from the Group's interest in the residential property of policyholders who have previously entered into an Equity Release Income Plan ('ERIP') policy.

Certain investment properties held by the life companies possess a ground rent obligation which gives rise to both a right-of-use asset and a lease liability under IFRS 16. Under IAS 17, these leases were accounted for as finance leases. The right-of-use asset associated with the ground rent obligation is valued at fair value and is included within the total investment property valuation. The value of the ground rent right-of-use asset as at 31 December 2020 was £17 million (2019: £18 million). The remeasurement gives rise to a reduction of £1 million (2019: £15 million). There were no disposals of ground rent right-of-use assets during the period (2019: £47 million).

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

The NPI residential property reversions, an interest in customers' properties which the Group will realise upon their death, are valued using a DCF model based on the Group's proportion of the current open market value, and discounted for the expected lifetime of the policyholder derived from published mortality tables. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year-end date. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.7% (2019: 3.6%). Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.

The ERIP residential property reversions, an interest in the residential property of policyholders who have previously entered into an ERIP policy and been provided with a lifetime annuity in return for the legal title to their property, are valued using unobservable inputs and management's best estimates. As the inward cash flows on these properties will not be received until the lifetime lease is no longer in force, which is usually upon the death of the policyholder, these interests are valued on a reversionary basis which is a discounted current open market value.

The open market values of the properties are independently revalued every two years by members of the Royal Institution of Chartered Surveyors and in the intervening period are adjusted by reference to the Nationwide Building Society regional indices of house prices. The discount period is based on the best estimates of the likely date the property will become available for sale and the discount rate applied is determined by the general partner as its best estimate of the appropriate discount rate. The mortality rates are projected using future mortality improvements from the CMI Mortality Projection Model. No explicit allowance is made for house price inflation in the year through to their realisation.

Therefore, the key assumptions used in the valuation of the reversionary interests are the interest discount rate and the mortality assumption. The interest discount rate was 5%.

During the year, the valuation of investment properties reflected the fall in market values that have been evidenced throughout the property sector in the first half of the year as a result of the impacts of COVID-19. A significant portion of the investment

property valuations at 30 June 2020 included standard valuation uncertainty clauses from the independent RICS valuers, reflective of the increased uncertainty in determining fair values in the market environment. In the second half of the year, the uncertainty clauses were removed by the valuers. At 31 December 2020, updated valuations were obtained for the majority of investment properties and movements in fair values were compared to property indices to provide additional assurance that fair values had moved as expected during the period.

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

Description	Valuation techniques	Significant non-observable inputs	Weighted average 2020	Weighted average 2019 restated
Commercial Investment Property	RICS valuation	Expected income per sq. ft.	£22.55	£25.46
		Estimated rental value per hotel room¹	£8,689	£8,894
		Estimated rental value per parking space	£1,169	£1,170
		Capitalisation rate	5.26%	5.15%

1 Comparative figure has been restated which has increased the estimated rental value per hotel room by £595.

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

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

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

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

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

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

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

• the discount rate were to be lower (higher);

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

Direct operating expenses (offset against rental income in the consolidated income statement) in respect of investment properties that generated rental income during the year amounted to £13 million (2019: £22 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £1 million (2019: £1 million).

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

	2020 £m	2019 £m
Not later than 1 year	304	259
Later than 1 year and not later than 5 years	959	850
Later than 5 years	2,820	2,654

G5. Other Receivables

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

	2020 m	2019 £m
Investment broker balances	362	167
Cash collateral pledged and initial margins posted	608	538
Reimbursement assets (note G7)	-	15
Property related receivables	139	99
Deferred acquisition costs	81	34
Other debtors	432	380
	1,622	1,233

Amount recoverable after 12 months	76	20

G6. Cash and Cash Equivalents

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

	2020 £m	2019 restated £m
Bank and cash balances¹	6,355	3,267
Short-term deposits (including notice accounts and term deposits)¹	4,643	1,199
	10,998	4,466

1 Comparative figures have been restated to reclassify £561 million from short-term deposits to bank and cash balances.

Deposits are subject to a combination of fixed and variable interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and consolidated collective investment schemes of £10,584 million (2019: £4,201 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.

G7. Provisions

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

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

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

								Restructuring provisions
2020	Leasehold properties £m	Staff related £m	Known incidents £m	PA(GI) provision £m	FCA thematic reviews provision £m	Input VAT recovery provision £m	Customer remediation for operational tax £m	Transition and Transformation provision £m	Transfer of policy administration provision £m	ReAssure provision £m	Other £m	Total £m
At 1 January	4	16	32	7	6	7	3	159	59	-	35	328
Acquisition of ReAssure businesses (see note H2.1)	2	-	-	-	17	-	6	-	-	11	2	38
L&G Part VII transfer (see note H2.2)	-	-	12	-	-	-	-	-	-	-	-	12
Additions in the year	6	1	11	-	1	8	3	-	12	7	19	68
Utilised during the year	-	-	(16)	(4)	(14)	-	-	(19)	(36)	(8)	(18)	(115)
Released during the year	(2)	-	(4)	(2)	(6)	-	-	(31)	-	(3)	(1)	(49)
At 31 December	10	17	35	1	4	15	12	109	35	7	37	282

Leasehold properties

The leasehold properties provision includes a £9 million (2019: £3 million) dilapidations provision in respect of obligations under leases and £1 million (2019: £1 million) in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties.

Staff related

Staff related provisions include provisions for unfunded pensions of £13 million (2019: £13 million), and private medical and other insurance costs for former employees of £4 million (2019: £3 million).

Known incidents

The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced. These balances represent the best estimates of costs payable to customers. As at 1 January 2020, £3 million of the balance has been reclassified as a 'customer remediation for operational tax' provision and a further £7 million as an 'input VAT recovery provision, see notes below for further details. Additional information has been given below in respect of the significant balances within this provision.

On 7 September 2020, following completion of the Part VII transfer of the Legal & General business, a £12 million compensation provision was recognised in respect of amounts owed to customers due to various system and processing errors resulting in incorrect rules being applied to policies. There has been no movement in this provision since that date but it is expected to be fully utilised within one year.

The balance also includes a provision of £10 million (2019: £12 million) which reflects the Group's exposure in relation to a historical underpayment of guaranteed payments to certain pension customers as a result of a systems error. £2 million was utilised in the year and it is expected that the balance will be fully utilised within one year.

The remaining provisions of £13 million as at 31 December are expected to be utilised within one year.

PA(GI) provision

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

The PA(GI) provision of £1 million (2019: £7 million) represents the Group's best estimate of the likely future costs. Following the passing of the FCA deadline for submission of complaints the level of uncertainty with respect to the remaining exposure has reduced. At 31 December 2020, £nil (2019: £15 million) of reimbursement asset has been recognised in other receivables in connection with the Group's exposure to these complaints. This represents recoveries due from third parties under contractual arrangements. Recoveries of £11 million (2019: £10 million) have been received during the year.

FCA thematic reviews provision - SLAL

On 14 October 2016, the FCA published its thematic review of non-advised annuity sales. In its findings, the FCA identified concerns in a small number of firms relating to significant communications that took place orally, usually on the telephone. The FCA also identified other areas of possible concern, including in relation to the recording and maintenance of records of calls. The FCA encouraged all firms to consider its feedback and take appropriate action to address the points raised.

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

The FCA's review has now completed and SLAL received a final notice in July 2019 which imposed a financial penalty on the entity of 31 million. This was subsequently settled in 2019. During the year, £3 million of the provision was utilised and the remaining £3 million provision was released.

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

To the extent that total costs are less than £225 million, Old PGH is required to pay the balance to SLA plc, together with any interest that may have accrued on such sum, and subject to recovery of any lost tax relief on the £225 million. In light of the release from the thematic review provision in the year, a liability of £68 million (2019: £64 million) has been recognised within other payables at 31 December 2020 to reflect obligations to SLA plc in this regard.

FCA thematic reviews provision - ReAssure

On acquisition of the ReAssure businesses on 22 July 2020, £17 million of obligations were recognised on a fair value basis. In 2018, ReAssure Limited performed an internal thematic review and consequently recognised a provision in respect of charges for the attached benefits of paid-up policies. A provision for the remaining expected costs of £8 million was recognised on 22 July 2020 which has since been utilised during the year. A further £9 million was recognised in respect of ReAssure Life Limited ('RLL') to reflect the costs of voluntary remediation to customers of certain legacy products. During the year, £3 million of this provision was utilised, a further £3 million was released and there was an increase of £1 million, resulting in a balance at 31 December 2020 of £4 million.

Input VAT recovery provision

The provision of £15 million (2019: £7 million) reflects the potential outcome of on-going negotiations to agree a new VAT partial exemption method with HMRC in relation to the basis of the recovery of input VAT on the Transitional Services Arrangement with SLA plc. The provision is based upon a likely alternative basis for recovery and was increased by £8 million in the year to reflect input VAT recovered in the period. The provision is subject to uncertainty as the final VAT recovery percentage agreed with HMRC may change. It is currently expected that the provision will be utilised within one to two years.

Customer remediation for operational tax provision

The customer remediation for operational tax provision relates to tax penalties payable to HMRC following failure to notify certain customers of changes to their lifetime allowance usage. The Group is currently in discussion with HMRC in respect of these items and the provision represents the Group's best estimate of the likely future costs.

On acquisition of the ReAssure businesses on 22 July 2020, £6 million of obligations were recognised on a fair value basis and a further £3 million was recognised in respect of other life companies. The balance at 31 December 2020 of £12 million is expected to be utilised within three years.

Restructuring provisions

Transfer of policy administration

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

An initial provision of £76 million was recognised in 2018 for the expected cost of the platform migration and for severance and other costs associated with exiting from the current arrangements. The migration elements of the provision are subject to limited uncertainty as a consequence of the signed agreements that are in place. There is a higher degree of uncertainty in relation to the severance and associated exit costs which will be impacted by the number of staff that ultimately transfer to Diligenta. During the year the provision was increased by £12 million, £36 million of the balance was utilised and the remaining £35 million is expected to be utilised within one year.

Transition and Transformation provision

Following the acquisition of the Standard Life Assurance businesses in August 2018, the Group established a transition and transformation programme which aims to deliver the integration of the Group's operating models via a series of phases. During 2019, the Group announced its intention to extend its strategic partnership with TCS to provide customer servicing, to develop a digital platform and for migration of existing Standard Life policies to this platform by 2022 which raised a valid expectation of the impacts in those likely to be affected. An initial provision of £159 million was established in 2019 and included migration costs, severance costs and other expenses. Migration costs payable to TCS are subject to limited uncertainty as they are fixed under the terms of the agreement entered into. The severance costs are subject to uncertainty and will be impacted by the number of staff that transfer to TCS, and the average salaries and number of years' service of those affected. During the year, £19 million of the provision has been utilised, £31 million released, and the remaining £109 million is expected to be utilised within three years.

ReAssure restructuring provision

On acquisition of the ReAssure businesses on 22 July 2020, an £11 million restructuring provision was recognised on a fair value basis and included severance costs for Legal & General employees following completion of the Part VII transfer. During the year, £8 million of the provision has been utilised and the remaining £3 million released.

An additional £7 million restructuring provision was established during the year in respect of the recently acquired Old Mutual Wealth Life Assurance entity to cover severance costs. The majority of this provision is expected to be utilised within one year.

Other provisions

Other provisions includes £6 million (2019: £10 million) of obligations arising under a gift voucher scheme operated by the SunLife business and a commission clawback provision which represents the expected future clawback of commission income earned by the SunLife business as a result of assumed lapses of policies or associated benefits. A further £23 million (2019: £23 million) is provided for in respect of indemnities and obligations arising under agreements entered into in association with corporate activity undertaken by the Group. The balance will be utilised within the next 12 months.

The remaining other provisions of £8 million (2019: £2 million) consist of a number of small balances all of which are less than £2 million in value.

The impact of discounting on all provisions during the year from either the passage of time or from a change in the discount rate is not material.

G8. Tax Assets and Liabilities

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

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

	2020 £m	2019 £m
Current tax:
Current tax receivable	263	75

Deferred tax:
Deferred tax liabilities	(1,036)	(873)

Movement in deferred tax liabilities

2020	1 January £m	Recognised in consolidated income statement £m	Recognised in other comprehensive income £m	Acquisition of ReAssure businesses £m	L&G Part VII transfer £m	Other movements £m	31 December £m
Trading losses	14	15	-	-	-	1	30
Capital losses	-	14	-	22	-	-	36
Expenses and deferred acquisition costs carried forward	20	(90)	-	102	10	-	42
Provisions and other temporary differences	32	(27)	-	124	-	-	129
Non refundable pension scheme surplus	(68)	(36)	(24)	-	-	-	(128)
Committed future pension contributions	12	(13)	1	-	-	-	-
Pension scheme deficit	14	1	(2)	-	-	-	13
Accelerated capital allowances	8	(1)	-	1	-	-	8
Intangibles	40	(3)	-	-	-	2	39
Acquired in-force business	(691)	123	-	(230)	-	-	(798)
Customer relationships	(33)	-	-	-	-	-	(33)
Unrealised gains	(199)	(65)	-	(72)	(28)	(1)	(365)
IFRS transitional adjustments	(24)	5	-	9	-	-	(10)
Other	2	2	-	(3)	-	-	1
	(873)	(75)	(25)	(47)	(18)	2	(1,036)

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

Following the cancellation of the planned tax rate reduction from 19% to 17% announced in the March 2020 Budget, UK deferred tax assets and liabilities, where provided, are reflected at a rate of 19%.

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

Further details relating to the impact of the increase to the Corporation Tax Rate announced in the March 2021 Budget are detailed in Note I7.

	2020 £m	2019 £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward	52	30
Excess expenses and deferred acquisition costs	7	-
Intangibles	14	13
Deferred tax assets not recognised on capital losses¹	42	2

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

There are two technical matters which are currently being discussed with HMRC in relation to the insurance business transfer from Legal and General Assurance Society where discussions are not sufficiently progressed at this stage for recognition of any tax benefit arising but where discussions could progress positively over the next financial year.

There is an ongoing tax dispute with HMRC in relation to the tax treatment of an asset formerly held by Guardian Assurance Limited (before the business was transferred to ReAssure Limited). The current tax liability includes an accrual for the total tax under dispute on the basis that there is sufficient risk that the tax treatment will not be accepted.

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

In July 2018, the Supreme Court concluded in favour of the tax payer and a tax benefit of £13 million was recognised at the end of 2018 in relation to enhanced double tax relief claims which the Group is entitled to in accordance with the Court judgement. As a result of the insurance business transfer from Legal and General Assurance Society during the year, the tax refund for the benefit of the Group's with-profit and unit linked funds increased to £45 million (2019: £11 million) and £23 million (2019: £2 million) respectively. In the case of the with-profit funds there was an increase in unallocated surplus and for the unit linked funds there was a corresponding increase in investment contract liabilities as a result of the recognition of the tax asset.

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

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

G9. Payables Related to Direct Insurance Contracts

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

	2020 £m	2019 £m
Payables related to direct insurance contracts	1,669	890

Amount due for settlement after 12 months	-	-

G10. Lease Liabilities

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

	2020 £m	2019 £m
At 1 January	84	158
Acquisition of ReAssure businesses (see note H2.1)	5	-
Leases incepted during the year	10	-
Termination of leases following the disposal of associated investment properties	-	(47)
Interest expense	4	3
Lease payments	(18)	(15)
Remeasurement of leases	(1)	(15)
At 31 December	84	84

Amount due within 12 months	11	11
Amount due after 12 months	73	73

The Group has elected not to apply the measurement requirements of IFRS 16 to its low value leases and as such costs of these leases are recognised on a straight-line basis within administrative expenses. The expense for the year was £1 million (2019: £1 million).

G11. Accruals and Deferred Income

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

	2020 £m	2019 £m
Accruals	452	315
Deferred income	69	69
	521	384

Amount due for settlement after 12 months	12	9

G12. Other Payables

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

	2020 £m	2019 £m
Investment broker balances	746	616
Property related payables	37	35
Investment management fees	3	8
Amount due to SLA plc on deed of indemnity (see note G7)	68	64
Other payables	412	320
	1,266	1,043

Amount due for settlement after 12 months	1	42

H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES

H1. Subsidiaries

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

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

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

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

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

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

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

H1.1 Significant restrictions

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

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

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

• Pearl Life Holdings Limited ('PeLHL') is required to make payments of contributions into charged accounts on behalf of the Abbey Life Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2020, PeLHL held £50 million (2019: £49 million) within debt securities and £13 million (2019: £7 million) within cash and cash equivalents in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G1.3.

• ReAssure Midco Limited ('RML') is required to make payments of contributions into a ring-fenced account on behalf of the ReAssure Staff Pension Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2020, RML held £57 million within debt securities and £2 million within cash and cash equivalents in respect of this account. Further details of when these amounts may become payable to the pensions scheme are included in note G1.4.

The Pearl Pension Scheme funding agreement included certain covenants which restricted the transfer of funds within the Group. As detailed further in note G1.1, these covenants were terminated under the Commitment Agreement entered into with the Pearl Pension Scheme in November 2020.

H2. Acquisitions and Portfolio Transfers

H2.1 Acquisition of ReAssure businesses

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

The table below summarises the fair value of identifiable assets acquired and liabilities assumed as at the date of acquisition.

	Notes	Fair value m
Assets
Acquired in-force business	G2	1,831
Pension scheme asset	G1	23
Property, plant and equipment	G3	15
Investment property	G4	556
Financial assets		49,097
Reinsurers' share of insurance contract liabilities	F1	2,782
Other insurance assets		231
Current tax		27
Prepayments and accrued income		71
Other receivables		379
Cash and cash equivalents		286
Total assets		55,298

Liabilities
Pension scheme liabilities	G1	2
Liabilities under insurance contracts	F1	24,606
Investment contract liabilities		24,516
Unallocated surplus	F2	136
Borrowings	E5	1,093
Other financial liabilities		581
Provisions	G7	38
Deferred tax liabilities	G8	47
Reinsurance payables		132
Payables related to direct insurance contracts		409
Current tax		86
Lease liabilities	G10	5
Accruals and deferred income		76
Other payables		87
Total liabilities		51,814

Fair value of net assets acquired		3,484

Gain arising on acquisition		(372)

Purchase consideration transferred		3,112

Analysis of cash flows on acquisition:
Net cash acquired with the subsidiaries (included in cash flow from investing activities)		286
Cash paid		(1,265)
Net cash flow on acquisition		(979)

Acquired Value in-Force ('AVIF')

An asset of £1,831 million arises reflecting the present value of future profits associated with the acquired in-force business. The AVIF has been determined by reference to the fair value of insurance contract liabilities and investment contract rights acquired.

Under the Group's accounting policy (see note G2), AVIF arising on acquired insurance contracts and investment contracts with DPF is measured as the difference between the fair value of contracted rights acquired and obligations assumed and the liability measured in accordance with the Group's accounting policies for such contracts. AVIF relating to investment contracts without DPF is recognised at its fair value.

The valuation of the AVIF has been determined by reference to the assumptions expected to be applied by a market participant in an orderly transaction. The valuation approach uses present value techniques applied to the best estimate cash flows expected to arise from policies that were in-force at the acquisition date, adjusted to reflect the price of bearing the uncertainty inherent in those cash flows. This approach incorporates a number of judgments and assumptions which have impacted on the resultant valuation, the most significant of which include annuitant longevity, expected policy lapses and surrender costs, and the expenses associated with servicing the policies, together with economic assumptions such as future investment returns and the discount rate allowing for an appropriate illiquidity premium based on the assets existing at the balance sheet date. The determination of the majority of these assumptions is carried out on a consistent basis with that described in note F4.1 with appropriate adjustments to reflect a market participant's view. The risk adjustment for the uncertainty in the cashflows has been determined using a cost of capital approach.

Deferred acquisition costs of £483 million have been derecognised on acquisition and replaced as part of the AVIF balance.

Other receivables

The financial assets acquired include other receivables with a fair value of £379 million. The gross amount due under the contracts is £379 million, of which no balances are expected to be uncollectible.

Tax

The tax impact of the fair value adjustments recognised on acquisition has been reflected in the acquisition balance sheet.

Gain on acquisition

A gain on acquisition of £372 million has been recognised in the Group's consolidated income statement for the year ended 31 December 2020, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the ReAssure businesses.

The consideration for the acquisition was fixed and determined using a 'locked box' pricing mechanism as agreed on 6 December 2019, with the number of consideration shares issued being determined on the basis of the Company's share price leading up to that date. As the result of a decline in the Company's share price between 6 December 2019 and the completion date, the value of the consideration shares issued was lower than the 'locked box' position. Over the same period, the fair value of the net assets acquired increased. This principally reflected the positive impact associated with a decline in yields on fixed interest assets backing capital requirements, management actions undertaken including hedging and strategic asset allocation activity, together with favourable demographic experience.

Additionally, in accordance with IFRS 3 Business Combinations, the acquired defined benefit pension schemes have been measured on acquisition in accordance with the Group's accounting policies as set out in note G1, as opposed to a fair value basis.

Transaction costs

Transaction costs of £37 million have been expensed and are included in administrative expenses in the consolidated income statement. All of these costs were paid during the year.

Impact of the acquisition on results

From the date of acquisition, the ReAssure businesses contributed £182 million of total revenue, net of reinsurance payable, and £108 million of the profit after the tax attributable to owners of the parent. If the acquisition of the ReAssure group of companies had taken place at the beginning of the year, total revenue net of reinsurance payable, would have been £4,930 million and the profit after the tax attributable to owners of the parent would have been £1,316 million.

H2.2 L&G Part VII Transfer

The Group applies the requirements of IFRS 3 Business Combinations to the acquisition of a business. IFRS 3 does not apply in circumstances where such an acquisition does not constitute a business, and is instead a portfolio of assets and liabilities, including insurance liabilities. In such cases, the Group's policy is to recognise and measure the assets acquired and insurance and other liabilities assumed in accordance with the Group's accounting policies for those assets and liabilities. The difference between the consideration and the net assets or liabilities acquired is recognised in the consolidated income statement.

On 6 December 2017, ReAssure Limited, a subsidiary of ReAssure Group plc, entered into an agreement to acquire the mature savings business of Legal and General Assurance Society ('LGAS'). The mature savings book consists of a block of unit linked and with-profit business, predominantly comprising traditional insurance based pensions, savings and protection products which are closed and in run-off. On that date, ReAssure Limited entered into a risk transfer agreement ('RTA') under which it assumed the risk and rewards associated with the business for cash consideration of £650 million. The RTA was in-force as at the date of the Group's acquisition of the ReAssure businesses.

On 7 September 2020, the Group completed a Part VII transfer of the mature savings liabilities and associated assets with LGAS, which resulted in the cancellation of the RTA. No further consideration was payable in respect of the Part VII transfer. This transfer was not deemed to be an acquisition of a business and consequently the requirements of IFRS 3 have not been applied.

The Part VII transfer directly resulted in an increase in net assets of £85 million, which included £110 million associated with reduced expense assumptions used for insurance contract liabilities arising upon migration of the business to the Group's operating model partially offset by the recognition of net liabilities transferred of £25 million. The gain arising upon the transfer has been recognised in the consolidated income statement.

The following table summarises the net liabilities transferred to the Group.

	Notes	£m
Assets
Investment property	G4	1,221
Financial assets		25,329
Other insurance assets		104
Current tax		59
Prepayments and accrued income		96
Other receivables		146
Cash and cash equivalents		146
Total assets		27,101

Liabilities
Liabilities under insurance contracts	F1	9,668
Investment contract liabilities		16,818
Unallocated surplus	F2	261
Other financial liabilities		148
Provisions	G7	12
Deferred tax	G8	18
Payables related to direct insurance contracts		181
Other payables		20
Total liabilities		27,126

Net liabilities transferred		(25)

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

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

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

As at 31 December 2020, the Group held 44.6% (2019: 44.6%) of the issued share capital of UKCPT and the value of this investment, measured at fair value and included within financial assets, was £400 million (2019: £513 million). Management has concluded that the Group did not control UKCPT in either the current or comparative periods. The Group does not hold a unilateral power of veto in general meetings and voting is subject to certain restrictions in accordance with the terms of an existing relationship agreement it has with UKCPT.

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

	2020 £m	2019 £m
Non-current assets	1,183	1,309
Current assets	170	128
Non-current liabilities	(198)	(247)
Current liabilities	(28)	(23)
	1,127	1,167

Revenue	65	29
(Loss)/profit for the year after tax	(10)	2

H4. Structured Entities

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

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

• Unit trusts;

• OEICs;

• SICAVs;

• Private Equity Funds;

• Asset backed securities;

• Collateralised Debt Obligations ('CDOs');

• Other debt structures; and

• Phoenix Group EBT.

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

H4.1 Interests in consolidated structured entities

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

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

During the year, the Group granted further loans to the EBT of £7 million (2019: £4 million).

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

H4.2 Interests in unconsolidated structured entities

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

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

	2020 Carrying value of financial assets £m	2019 restated Carrying value of financial assets £m
Equities	467	528
Collective investment schemes	89,248	69,415
Debt securities¹	8,068	6,991
	97,783	76,934

1 Comparative figures have been restated to include £2,817 million asset backed securities and £199 million infrastructure loans that have been classified as interests in structured entities.

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

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

H5. Group Entities

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

	Registered address of incorporated entities	If unincorporated, address of principal place of business	Type of investment (including class of shares held)	% of shares / units held
Subsidiaries:
Phoenix Life Limited (life assurance company)	Wythall²		Ordinary Shares	100.00%
Phoenix Life Assurance Limited (life assurance company)	Wythall²		Ordinary Shares	100.00%
Standard Life Assurance Limited (life assurance company - directly owned by the Company)	Edinburgh²⁶		Ordinary Shares	100.00%
Standard Life International Designated Activity Company (life assurance company - directly owned by the Company)	Dublin⁶		Ordinary Shares	100.00%
Standard Life Pension Funds Limited (life assurance company)	Edinburgh²⁶		Limited by Guarantee	100.00%
ReAssure Limited (life assurance company)	Telford⁴¹		Ordinary Shares	100.00%
ReAssure Life Limited (life assurance company)	Telford⁴¹		Ordinary Shares	100.00%
Ark Life Assurance Company DAC (life assurance company)	Dublin⁵⁰		Ordinary Shares	100.00%
Pearl Group Management Services Limited (management services company)	Wythall²		Ordinary Shares	100.00%
Pearl Group Services Limited (management services company)	Wythall²		Ordinary Shares	100.00%
Standard Life Assets and Employee Services Limited (management services company)	Edinburgh²⁶		Ordinary Shares	100.00%
ReAssure Companies Services Limited (management services company)	Telford⁴¹		Ordinary Shares	100.00%
ReAssure UK Services Limited (management services company)	Telford⁴¹		Ordinary Shares	100.00%
ReAssure FSH UK Limited (holding company)	Telford⁴¹		Ordinary Shares	100.00%
Britannic Finance Limited (finance and insurance services company)¹	Wythall²		Ordinary Shares	100.00%
Pearl Customer Care Limited (financial services company)¹	Wythall²		Ordinary Shares	100.00%
Pearl Group Holdings (No. 1) Limited (finance company)	London³		Ordinary Shares	100.00%
Phoenix Customer Care Limited (financial services company)¹	Wythall²		Ordinary Shares	100.00%
Phoenix ER1 Limited (finance company)	Wythall²		Ordinary Shares	100.00%
Phoenix ER3 Limited (finance company)	Wythall²		Ordinary Shares	100.00%
Phoenix ER4 Limited (finance company)	Wythall²		Ordinary Shares	100.00%
Phoenix ER6 Limited (finance company)	Wythall²		Ordinary Shares	100.00%
PGH Capital plc (finance company - directly owned by the Company)	Dublin⁸		Ordinary Shares	100.00%
PGMS (Ireland) Limited (management services company)	Dublin⁷		Ordinary Shares	100.00%
Phoenix SL Direct Limited (non-trading company)¹	Wythall²		Ordinary Shares	100.00%
Phoenix Unit Trust Managers Limited (unit trust manager)	Wythall²		Ordinary Shares	100.00%
Phoenix Wealth Services Limited (financial services company)	Wythall²		Ordinary Shares	100.00%
Phoenix Wealth Trustee Services Limited (trustee company)	Wythall²		Ordinary Shares	100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company)	Edinburgh²⁶		Ordinary Shares	100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company)	Amsterdam¹⁰		Ordinary Shares	100.00%
Vebnet Limited (services company)	Wythall²		Ordinary Shares	100.00%
Axial Fundamental Strategies (US Investments) LLC (investment company)	Wilmington¹⁸		Limited Liability Company	100.00%
Britannic Money Investment Services Limited (investment advice company)¹	Wythall²		Ordinary Shares	100.00%
Pearl (WP) Investments LLC (investment company)	Wilmington¹⁸		Limited Liability Company	100.00%
Pearl Assurance Group Holdings Limited (investment company)	Wythall²		Ordinary Shares	100.00%
PGMS (Glasgow) Limited (investment company)¹	Edinburgh²⁶		Ordinary Shares	100.00%
PGS 2 Limited (investment company)	Wythall²		Ordinary Shares	100.00%
Phoenix SCP Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
Phoenix SPV1 Limited (investment company)¹	Wythall²		Ordinary Shares	100.00%
Phoenix SPV2 Limited (investment company)¹	Wythall²		Ordinary Shares	100.00%
Phoenix SPV3 Limited (investment company)¹	Wythall²		Ordinary Shares	100.00%
Phoenix SPV4 Limited (investment company)¹	Wythall²		Ordinary Shares	100.00%
Standard Life Private Equity Trust plc (investment company)	Edinburgh²⁵		Ordinary Shares	53.60%
CH Management Limited (investment company)	Delaware¹⁹		Ordinary Shares	100.00%
103 Wardour Street Retail Investment Company Limited (investment company)	Telford⁴¹		Ordinary Shares	100.00%
Abbey Life Assurance Company Limited (non-trading company)	Wythall²		Ordinary Shares	100.00%
Abbey Life Trust Securities Limited (pension trustee company)	Wythall²		Ordinary Shares	100.00%
Abbey Life Trustee Services Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
Alba LAS Pensions Management Limited (dormant company)	Glasgow¹¹		Ordinary Shares	100.00%
Alba Life Trustees Limited (non-trading company)	Edinburgh²⁶		Ordinary Shares	100.00%
BA (FURBS) Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
BL Telford Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
Britannic Group Services Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
Century Trustee Services Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
Cityfourinc (dormant company)	Wythall²		Unlimited with Shares	100.00%
Phoenix Advisers Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
G Assurance & Pensions Services Limited (non-trading company)	Telford⁴¹		Ordinary Shares	100.00%
G Life H Limited (holding company)	Telford⁴¹		Ordinary Shares	100.00%
G Financial Services Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
G Park Management Company Limited (property management company)	London¹⁷		Ordinary Shares	100.00%
G Trustees Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company)	London¹⁷		Ordinary Shares	100.00%
Gresham Life Assurance Society Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
Iceni Nominees (No. 2) Limited (dormant company)	London¹⁷		Ordinary Shares	100.00%
IH (Jersey) Limited (dormant company)	Jersey¹⁵		Ordinary Shares	100.00%
Impala Holdings Limited (holding company)	Wythall²		Ordinary Shares	100.00%
Impala Loan Company 1 Limited (dormant company)¹	Edinburgh²⁶		Ordinary Shares	100.00%
Inesia SA (investment company)	Luxembourg²⁰		Ordinary Shares	100.00%
Inhoco 3107 Limited (dormant company)	London¹⁷		Ordinary Shares	100.00%
London Life Limited (non-trading company)	Wythall²		Ordinary Shares	100.00%
London Life Trustees Limited (dormant company)	Wythall²		Ordinary Shares	100.00%
Namulas Pension Trustees Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
National Provident Institution (dormant company)	Wythall²		Unlimited without Shares	100.00%

National Provident Life Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
NM Life Trustees Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
NM Pensions Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
Northampton General Partner Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
NP Life Holdings Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
NPI (Printworks) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
NPI (Westgate) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PA (GI) Limited (non-trading company)	Wythall²	Ordinary Shares	100.00%
Pearl (Barwell 2) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Chiswick House) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Covent Garden) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Martineau Phase 1) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Martineau Phase 2) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Moor House 1) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Moor House 2) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Moor House) Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
Pearl (Printworks) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl (Stockley Park) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl AL Limited (dormant company)	Glasgow¹¹	Ordinary Shares	100.00%
Pearl Group Holdings (No. 2) Limited (holding company)	Wythall²	Ordinary Shares	100.00%
Pearl Group Secretariat Services Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl Life Holdings Limited (holding company)	Wythall²	Ordinary Shares	100.00%
Pearl MG Birmingham Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl MP Birmingham Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl RLG Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl Trustees Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Pearl ULA Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Phoenix Life Assurance Europe DAC (dormant company)	Dublin⁹	Ordinary Shares	100.00%
Phoenix Group Capital Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PG Dormant (No 4) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PG Dormant (No 5) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PG Dormant (No 6) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PG Dormant (No. 7) Limited (dormant company)	London³	Ordinary Shares	100.00%
PGH (LC1) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PGH (LC2) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PGH (LCA) Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
PGH (LCB) Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
PGH (MC1) Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
PGH (MC2) Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
PGH (TC1) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PGH (TC2) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company)	Dublin⁷	Unlimited with Shares	100.00%
Phoenix & London Assurance Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Phoenix AW Limited (dormant company)¹	Wythall²	Ordinary Shares	100.00%
Phoenix ER2 Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Phoenix ER5 Limited (finance company)	Wythall²	Ordinary Shares	100.00%
Phoenix Group Holdings (non-trading company)	Cayman Islands⁵	Private Company	100.00%

Phoenix Life Holdings Limited (holding company - directly owned by the Company)	Wythall²	Ordinary Shares	100.00%
Phoenix Pension Scheme (Trustees) Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Phoenix Pensions Trustee Services Limited (dormant company)	Wythall²	Ordinary Shares	100.00%
Phoenix SCP Pensions Trustees Limited (trustee company)	Wythall²	Ordinary Shares	100.00%
Phoenix SCP Trustees Limited (trustee company)	Edinburgh²⁶	Ordinary Shares	100.00%
Phoenix Wealth Holdings Limited (holding company)¹	Wythall²	Ordinary Shares	100.00%
Pilangen Logistik AB (investment company)	Stockholm²²	Ordinary Shares	100.00%
Pilangen Logistik I AB (investment company)	Stockholm²²	Ordinary Shares	100.00%
ReAssure FS Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Group plc (holding company − directly owned by the Company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Life Pension Trustees Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure LL Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Midco Limited (holding company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Nominees Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Pension Trustees Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure PM Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Trustees Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure Two Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
ReAssure UK Life Assurance Company Limited (dormant company)	Telford⁴¹	Ordinary Shares	100.00%
Scottish Mutual Assurance Limited (dormant company)¹	Edinburgh²⁶	Ordinary Shares	100.00%
Scottish Mutual Nominees Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company)	Edinburgh²⁶	Ordinary Shares	100.00%
SL (NEWCO) Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%
SL Liverpool plc (dormant company)	Wythall²	Public Limited Company	100.00%
SLA Belgium No.1 SA (investment company)	Belgium⁴	Ordinary Shares	100.00%
SLA Denmark No.1 ApS (investment company)	Denmark⁴³	Ordinary Shares	100.00%
SLA Denmark No.2 ApS (investment company)	Denmark⁴³	Ordinary Shares	100.00%
SLA Germany No.1 S.à.r.l. (investment company)	Luxembourg²⁴	Ordinary Shares	100.00%
SLA Germany No.2 S.à.r.l. (investment company)	Luxembourg²⁴	Ordinary Shares	100.00%
SLA Germany No.3 S.à.r.l. (investment company)	Luxembourg²⁴	Ordinary Shares	100.00%
SLA Ireland No.1 S.à.r.l. (investment company)	Luxembourg²⁴	Ordinary Shares	100.00%
SLA Netherlands No.1 B.V. (investment company)	Amsterdam¹⁰	Ordinary Shares	100.00%
SLACOM (No. 8) Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%
SLACOM (No. 9) Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%
SLACOM (No. 10) Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%
ERIP Limited Partnership (Limited Partnership)	Telford⁴¹	Limited Partnership	100.00%
ERIP General Partner Limited (General Partner to ERIP Limited Partnership)	Telford⁴¹	Ordinary Shares	80.00%
SLIF Property Investment GP Limited (General Partner to SLIF Property Investment)	Edinburgh²⁵	Ordinary Shares	100.00%
SLIF Property Investment LP	Edinburgh²⁵	Limited Partnership	100.00%
Standard Life Agency Services Limited (dormant company)	Edinburgh²⁶	Ordinary Shares	100.00%

Standard Life Assurance (HWPF) Luxembourg S.à.r.l. (investment company)	Luxembourg²⁴		Ordinary Shares	100.00%
Standard Life Investment Funds Limited (dormant company)	Edinburgh²⁶		Ordinary Shares	100.00%
Standard Life Master Trust Co. Ltd (dormant company)	Wythall²		Ordinary Shares	100.00%
Standard Life Property Company Limited (dormant company)	Edinburgh²⁶		Ordinary Shares	100.00%
Standard Life Trustee Company Limited (trustee company)	Edinburgh²⁶		Ordinary Shares	100.00%
SunLife Limited (financial services distribution company)	Wythall²		Ordinary Shares	100.00%
The Heritable Securities and Mortgage Investment Association Ltd (dormant company)	Edinburgh²⁶		Ordinary Shares	100.00%
The London Life Association Limited (dormant company)	Wythall²		Limited by Guarantee	100.00%
The Pathe Building Management Company Limited (dormant company)	Telford⁴¹		Ordinary Shares	100.00%
The Pearl Martineau Galleries Limited Partnership (dormant company)	Wythall²		Limited Partnership	100.00%
The Pearl Martineau Limited Partnership (dormant company)	Lynch Wood²¹		Limited Partnership	100.00%
The Phoenix Life SCP Institution (dormant company)	Edinburgh²⁶		Limited by Guarantee	100.00%
The Scottish Mutual Assurance Society (dormant company)	Glasgow¹¹		Limited by Guarantee	100.00%
Vebnet (Holdings) Limited (holding company)	Wythall²		Ordinary Shares	100.00%
Welbrent Property Investment Company Limited (dormant company)	London¹⁷		Ordinary Shares	100.00%
Pearl Private Equity LP	Edinburgh²⁵		Limited Partnership	100.00%
Pearl Strategic Credit LP	Edinburgh²⁵		Limited Partnership	100.00%
European Strategic Partners LP	Edinburgh²⁵		Limited Partnership	72.70%
Phoenix Group Employee Benefit Trust	Jersey¹⁶		Trust	100.00%
3 St Andrew Square Apartments Limited (property management company)	Edinburgh²⁵		Ordinary Shares	100.00%
330 Avenida de Aragon SL (property management company)	Madrid³⁴		Ordinary Shares	100.00%
Janus Henderson Institutional Short Duration Bond Fund		London²⁸	Unit Trust	100.00%
Janus Henderson Institutional Mainstream UK Equity Trust		London²⁸	Unit Trust	100.00%
Janus Henderson Institutional UK Equity Tracker Trust		London²⁸	Unit Trust	100.00%
Janus Henderson Institutional High Alpha UK Equity Fund		London²⁸	Unit Trust	85.09%
Janus Henderson Global Funds − Janus Henderson Institutional Overseas Bond Fund		London²⁸	OEIC, sub fund	98.92%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional North American Index Opportunities Fund		London²⁸	OEIC, sub fund	84.78%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Asia Pacific ex Japan Index Opportunities Fund		London²⁸	OEIC, sub fund	84.39%
Janus Henderson Diversified Growth Fund		London²⁸	OEIC, sub fund	72.64%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Japan Index Opportunities Fund		London²⁸	OEIC, sub fund	78.13%
PUTM European Unit Trust		Wythall²	Unit Trust	99.36%
PUTM Far Eastern Unit Trust		Wythall²	Unit Trust	99.67%
PUTM UK Stock Market Fund		Wythall²	Unit Trust	100.00%
PUTM UK Stock Market Fund (Series 3)		Wythall²	Unit Trust	100.00%
PUTM UK All-Share Index Unit Trust		Wythall²	Unit Trust	99.90%
PUTM UK Equity Unit Trust		Wythall²	Unit Trust	99.92%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund		Wythall²	Unit Trust	99.51%
PUTM Bothwell Europe Fund		Wythall²	Unit Trust	99.01%
PUTM Bothwell Emerging Market Debt Unconstrained Fund		Wythall²	Unit Trust	100.00%

	Registered address of incorporated entities	If unincorporated, address of principal place of business	Type of investment (including class of shares held)	% of shares / units held
PUTM Bothwell European Credit Fund		Wythall²	Unit Trust	80.97%
PUTM Bothwell Global Bond Fund		Wythall²	Unit Trust	99.97%
PUTM Bothwell Global Credit Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Floating Rate ABS Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Index-Linked Sterling Hedged Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Japan Tracker Fund		Wythall²	Unit Trust	99.57%
PUTM Bothwell Long Gilt Sterling Hedged Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Emerging Markets Equity Fund		Wythall²	Unit Trust	99.93%
PUTM Bothwell North America Fund		Wythall²	Unit Trust	99.39%
PUTM Bothwell Sterling Government Bond Fund		Wythall²	Unit Trust	99.57%
PUTM Bothwell Euro Sovereign Fund		Wythall²	Unit Trust	85.95%
PUTM Bothwell Sterling Credit Fund		Wythall²	Unit Trust	99.89%
PUTM Bothwell Tactical Asset Allocation Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Uk All Share Listed Equity Fund		Wythall²	Unit Trust	99.17%
PUTM ACS UK All Share Listed Equity Fund		Wythall²	Unit Trust	99.49%
PUTM Bothwell Uk Equity Income Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Sub-Sovereign A Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Short Duration Credit Fund		Wythall²	Unit Trust	100.00%
PUTM Bothwell Ultra Short Duration Fund		Wythall²	Unit Trust	100.00%
PUTM ACS Lothian North American Equity Fund		Wythall²	Unit Trust	100.00%
PUTM ACS Lothian European Ex UK Fund		Wythall²	Unit Trust	100.00%
PUTM ACS Lothian UK Listed Equity Fund		Wythall²	Unit Trust	100.00%
PUTM ACS European ex UK Fund		Wythall²	Unit Trust	100.00%
PUTM ACS Japan Equity Fund		Wythall²	Unit Trust	100.00%
PUTM ACS North American Fund		Wythall²	Unit Trust	100.00%
ASI (SLI) Strategic Bond Fund		Edinburgh²⁵	Unit Trust	87.38%
Standard Life Multi Asset Trust		Edinburgh²⁵	Unit Trust	100.00%
Standard Life European Trust II		Edinburgh²⁵	Unit Trust	99.98%
ASI Emerging Markets Income Equity Fund		Edinburgh²⁵	OEIC, sub fund	80.03%
ASI Emerging Markets Local Currency Bond Tracker Fund		London¹⁷	OEIC, sub fund	74.38%
ASI (SLI) Emerging Markets Equity Fund		Edinburgh²⁵	OEIC, sub fund	96.56%
ASI Japanese Growth Equity Fund		Edinburgh²⁵	OEIC, sub fund	95.36%
ASI Europe Europe ex UK Ethical Equity Fund		Edinburgh²⁵	OEIC, sub fund	79.22%
Standard Life European Trust		Edinburgh²⁵	Unit Trust	97.01%
Standard Life Japanese Trust		Edinburgh²⁵	Unit Trust	79.79%
Standard Life North American Trust		Edinburgh²⁵	Unit Trust	99.61%
Standard Life Pacific Trust		Edinburgh²⁵	Unit Trust	98.17%
Standard Life Standard Life Short Dated UK Government Bond Trust		Edinburgh²⁵	Unit Trust	99.96%
Standard Life Standard Life Global Equity Trust II		Edinburgh²⁵	Unit Trust	100.00%
Standard Life UK Government Bond Trust		Edinburgh²⁵	Unit Trust	100.00%
Standard Life UK Corporate Bond trust		Edinburgh²⁵	Unit Trust	100.00%
Standard Life Standard Life Active Plus Bond Trust		Edinburgh²⁵	Unit Trust	99.99%
Standard Life Standard Life International Trust		Edinburgh²⁵	Unit Trust	99.98%
Standard Life UK Equity General Trust		Edinburgh²⁵	Unit Trust	99.67%
ASI Short Dated Corporate Bond Fund		Edinburgh²⁵	OEIC, sub fund	76.92%
ASI MyFolio Managed I Fund		Edinburgh²⁵	OEIC, sub fund	73.75%

ASI MyFolio Managed II Fund		Edinburgh²⁵	OEIC, sub fund	71.94%
ASI MyFolio Managed III Fund		Edinburgh²⁵	OEIC, sub fund	80.43%
ASI MyFolio Managed V Fund		Edinburgh²⁵	OEIC, sub fund	72.96%
ASI Dynamic Multi Asset Growth		Edinburgh²⁵	OEIC, sub fund	97.76%
ASI American Income Equity Fund		Edinburgh²⁵	OEIC, sub fund	70.41%
Standard Life Investments Global SICAV II Global Short Duration Corporate Bond Fund		Luxembourg²⁹	SICAV, sub fund	97.49%
Standard Life Investments Global SICAV Absolute Return Global Bond Strategies Fund		Luxembourg²⁹	SICAV, sub fund	77.47%
Standard Life Investments Global SICAV Global Equities Fund		Luxembourg²⁹	SICAV, sub fund	73.13%
Standard Life Investments Global SICAV European Government All Stocks Fund		Luxembourg²⁹	SICAV, sub fund	99.99%
Standard Life Investments Global SICAV Japanese Equities Fund		Luxembourg²⁹	SICAV, sub fund	97.01%
Standard Life Investments Global SICAV Global Bond Fund		Luxembourg²⁹	SICAV, sub fund	93.53%
Standard Life Investments Global SICAV Global High Yield Bond Fund		Luxembourg ²⁹	SICAV, sub fund	86.09%
Standard Life Investments Global SICAV Global REIT Focus Fund		Luxembourg²⁹	SICAV, sub fund	86.52%
Standard Life Investments Global SICAV China Equities Fund		Luxembourg²⁹	SICAV, sub fund	76.48%
Standard Life Investments Global SICAV Global Emerging Markets Unconstrained Fund		Luxembourg²⁹	SICAV, sub fund	99.86%
Standard Life Investments Global SICAV Global Emerging Markets Local CCY Debt Fund		Luxembourg²⁹	SICAV, sub fund	89.62%
Standard Life Investments Global SICAV Emerging Market Debt Fund		Luxembourg²⁹	SICAV, sub fund	93.71%
Standard Life Investments Global SICAV II Enhanced-Diversification Multi Asset Fund		Luxembourg²⁹	SICAV, sub fund	79.41%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager II Fund		Luxembourg²⁹	SICAV, sub fund	72.54%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager III Fund		Luxembourg²⁹	SICAV, sub fund	55.87%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager IV Fund		Luxembourg²⁹	SICAV, sub fund	60.49%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager V Fund		Luxembourg²⁹	SICAV, sub fund	62.15%
Standard Life Investments Global SICAV − European Equities Fund		Luxembourg²⁹	SICAV, sub fund	99.15%
Standard Life Investments Global SICAV − European Equity Unconstrained Fund		Luxembourg²⁹	SICAV, sub fund	97.47%
Standard Life Managed Trust − American Equity Unconstrained		Edinburgh²⁵	Unit Trust	76.42%
Standard Life Managed Trust − Standard Life Japan Fund		Edinburgh²⁵	Unit Trust	79.20%
Standard Life Managed Trust − Standard Life Global REIT Fund		Edinburgh²⁵	Unit Trust	82.95%
Standard Life Managed Trust − Standard Life Sterling Intermediate Credit Fund		Edinburgh²⁵	Unit Trust	99.99%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Sterling Liquidity 3 Fund		Dublin²⁷	UCITS, sub fund	100.00%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Sterling Liquidity 2 Fund		Dublin²⁷	UCITS, sub fund	100.00%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Euro Liquidity 1 Fund		Dublin²⁷	UCITS, sub fund	100.00%
Ignis Private Equity Fund LP		Cayman Islands⁵	Limited Partnership	100.00%
Ignis Strategic Credit Fund LP		Cayman Islands⁵	Limited Partnership	100.00%
ASI Phoenix Fund Financing SCSp (PLFF)		Luxembourg³²	Special Limited Partnership	100.00%
North American Strategic Partners 2008 L.P.		Wilmington¹⁸	Limited Partnership	100.00%
North American Strategic Partners (Feeder) 2008 Limited Partnership		Wilmington¹⁸	Limited Partnership	100.00%
North American Strategic Partners (Feeder) 2006		Wilmington¹⁸	Limited Partnership	70.48%
North American Strategic Partners 2006 L.P.		Wilmington¹⁸	Limited Partnership	70.48%
Crawley Unit Trust		Jersey¹²	Unit Trust	100.00%
Ignis Strategic Solutions Funds plc - Fundamental Strategies Fund		Dublin⁹	OEIC, sub fund	100.00%
Ignis Strategic Solutions Funds plc − Systematic Strategies Fund		Dublin⁹	OEIC, sub fund	100.00%
ASI Financial Equity Fund A Inc		London¹⁷	OEIC, sub fund	80.74%
ASI Phoenix Global Private Equity III LP		Edinburgh²⁵	Limited Partnership	100.00%
Beresford Funds ICAV − Indexed Emerging Market Equity Fund		Dublin⁴⁸	ICAV, sub fund	100.00%
HSBC Investment Funds − Balanced Fund		London⁴⁶	OEIC, sub fund	76.68%
IFSL AMR Diversified Portfolio		Bolton⁴⁷	OEIC, sub fund	79.42%
iShares 350 UK Equity Index Fund UK		London³⁷	OEIC, sub fund	81.86%
Legal & General European Equity Income Fund		London⁴⁴	Unit Trust	85.36%
Legal & General European Trust		London⁴⁴	Unit Trust	72.62%
Legal & General Growth Trust		London⁴⁴	Unit Trust	86.43%
Legal & General Real Capital Builder Fund		London⁴⁴	Unit Trust	82.89%
Legal & General Real Income Builder Fund		London⁴⁴	Unit Trust	89.41%
Quilter Investors Diversified Portfolio		London⁴⁹	OEIC, sub fund	91.74%
Quilter Investors High Yield Bond Fund		London⁴⁹	OEIC, sub fund	89.74%
Quilter Investors UK Equity Large-Cap Value Fund		London⁴⁹	OEIC, sub fund	95.94%
Associates:
UK Commercial Property Estates Limited (property investment company)	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property GP Limited	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property Holdings Limited (property investment company)	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property Nominee Limited (property investment company)	Guernsey¹³		Ordinary Shares	44.59%
Moor House General Partner Limited	London¹⁴		Limited Partnership	33.30%
UK Commercial Property REIT Limited	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property Estates Holdings Limited (property investment company)	Guernsey¹³		Ordinary Shares	44.59%
UKCPT Limited Partnership	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property Finance Holdings Limited	Guernsey¹³		Ordinary Shares	44.59%
UK Commercial Property Estates (Reading) Limited	London¹⁷		Ordinary Shares	44.59%
Brixton Radlett Property Limited	London¹⁷		Ordinary Shares	44.59%
Significant holdings:
Janus Henderson Institutional Global Responsible Managed Fund		London²⁸	OEIC, sub fund	45.78%

Janus Henderson Institutional UK Index Opportunities Fund	London²⁸	OEIC, sub fund	58.78%
Standard Life Capital Infrastructure I LP	Edinburgh²⁵	Limited Partnership	26.30%
ASI (SLI) Corporate Bond Fund	Edinburgh²⁵	OEIC, sub fund	41.70%
ASI Dynamic Distribution Fund	Edinburgh²⁵	Unit Trust	57.50%
Standard Life Investments UK Real Estate Accumulation Feeder Fund	Edinburgh²⁵	Unit Trust	60.47%
Standard Life UK Investments Real Estate Income Feeder Fund	London¹⁷	Unit Trust	46.04%
ASI UK High Income Equity Fund	Edinburgh²⁵	OEIC, sub fund	52.78%
ASI Global Unconstrained Equity Fund	Edinburgh²⁵	OEIC, sub fund	47.92%
ASI High Yield Bond Fund	Edinburgh²⁵	OEIC, sub fund	39.65%
ASI UK Opportunities Equity Fund	Edinburgh²⁵	OEIC, sub fund	54.79%
ASI Investment Grade Corporate Bond Fund	Edinburgh²⁵	OEIC, sub fund	31.89%
ASI UK Smaller Companies Fund	Edinburgh²⁵	OEIC, sub fund	32.23%
ASI Europe ex UK Growth Equity Fund	Edinburgh²⁵	OEIC, sub fund	26.67%
ASI Short Duration Global Inflation-Linked Bond Fund	Edinburgh²⁵	OEIC, sub fund	46.83%
ASI UK Unconstrained Equity Fund	Edinburgh²⁵	OEIC, sub fund	54.28%
ASI Ethical Corporate Bond Fund	Edinburgh²⁵	OEIC, sub fund	62.89%
ASI Global Real Estate Share Fund	Edinburgh²⁵	OEIC, sub fund	38.01%
ASI Global Real Estate Fund	Edinburgh²⁵	Unit Trust	45.70%
ASI MyFolio Market I Fund	Edinburgh²⁵	OEIC, sub fund	44.78%
ASI MyFolio Market II Fund	Edinburgh²⁵	OEIC, sub fund	43.91%
ASI MyFolio Market III Fund	Edinburgh²⁵	OEIC, sub fund	55.18%
ASI MyFolio Market IV Fund	Edinburgh²⁵	OEIC, sub fund	54.07%
ASI MyFolio Market V Fund	Edinburgh²⁵	OEIC, sub fund	61.41%
ASI MyFolio Multi-Manager I Fund	Edinburgh²⁵	OEIC, sub fund	52.31%
ASI MyFolio Multi-Manager II Fund	Edinburgh²⁵	OEIC, sub fund	53.28%
ASI MyFolio Multi-Manager III Fund	Edinburgh²⁵	OEIC, sub fund	62.45%
ASI MyFolio Multi-Manager IV Fund	Edinburgh²⁵	OEIC, sub fund	57.75%
ASI MyFolio Multi-Manager V Fund	Edinburgh²⁵	OEIC, sub fund	59.69%
ASI MyFolio Managed IV Fund	Edinburgh²⁵	OEIC, sub fund	66.13%
Standard Life Investments Global SICAV Euro Smaller Companies Fund	Luxembourg²⁹	SICAV, sub fund	25.49%
Standard Life Investments Global SICAV European Corporate Bond Fund	Luxembourg²⁹	SICAV, sub fund	31.52%
Standard Life Investments Global SICAV Global Absolute Return Strategies Fund	Luxembourg²⁹	SICAV, sub fund	43.36%
Standard Life Investments Global SICAV Global Corporate Bond Fund	Luxembourg²⁹	SICAV, sub fund	73.16%
Aberdeen Standard Liquidity Fund (Lux) Euro Fund	Luxembourg³³	UCITS, sub fund	43.54%
ASI Global Absolute Return Strategies Retail Acc	Edinburgh²⁵	OEIC, sub fund	66.76%
ASI Europe ex UK Income Equity Fund	Edinburgh²⁵	OEIC, sub fund	23.28%
ASI UK Income Unconstrained Equity Fund	Edinburgh²⁵	OEIC, sub fund	47.52%
Brent Cross Partnership	London¹⁴	Limited Partnership	24.16%
Castlepoint LP	Birmingham³⁶	Ordinary Shares	34.81%
Gallions Reach Shopping Park Unit Trust	Jersey¹²	Unit Trust	78.30%
Standard Life Investments UK Retail Park Trust	Jersey³⁵	Unit Trust	56.60%
Standard Life Investments UK Shopping Centre Trust	Jersey³⁵	Unit Trust	40.67%
Gallions Reach Shopping Park Limited Partnership	London¹⁷	Unit Trust	78.30%
Standard Life Investments Brent Cross LP	Edinburgh²⁵	Limited Partnership	40.67%

AXA Fixed Interest Investment ICVC − Sterling Strategic Bond Fund	London³⁰	UCITS, sub fund	51.35%
AB SICAV I − Diversified Yield Plus Portfolio	Luxembourg²⁹	SICAV, sub fund	38.65%
MI Somerset Global Emerging Markets	Essex³¹	OEIC, sub fund	43.66%
BlackRock Market Advantage X	London³⁷	UCITS, sub fund	49.35%
ASI Emerging Markets Equity Enhanced Index Fund	London¹⁷	OEIC, sub fund	20.35%
iShares Bloomberg Roll Select Commodity Swap UCITS ETF GBP (Acc)	Dublin³⁸	UCITS, sub fund	31.16%
Amundi UCITS Funds − Amundi Global Multi-Factor Equity Fund C Cap	Luxembourg³⁹	UCITS, sub fund	59.73%
AQR UCITS Funds - AQR Global Risk Parity C5 GBP (Acc)	USA²³	UCITS, sub fund	45.63%
AB SICAV I − Emerging Markets Low Volatility Equity Portfolio	Luxembourg²⁹	SICAV, sub fund	71.54%
Aberdeen Standard SICAV I − GDP Weighted Global Government Bond Fund	Luxembourg³³	SICAV, sub fund	81.29%
Aberdeen Standard SICAV I − Global Bond Fund	Luxembourg³³	SICAV, sub fund	93.46%
Aberdeen Standard SICAV I − Global Government Bond Fund	Luxembourg³³	SICAV, sub fund	22.71%
Aviva Investors UK Property Feeder Inc Fund 1	London⁴²	OEIC, sub fund	35.12%
AXA Framlington FinTech Fund	London³⁰	Unit Trust	21.38%
AXA Sterling Index Linked Bond Fund	London³⁰	OEIC, sub fund	20.31%
Beresford Funds − Indexed Euro Large Cap Corporate Bond Fund	Dublin⁴⁸	ICAV, sub fund	82.89%
Fidelity Multi Asset Open Adventurous Fund	Surrey⁴⁵	OEIC, sub fund	64.53%
Goldman Sachs SICAV − Emerging Markets Total Return Bond Portfolio	Luxembourg³²	SICAV, sub fund	94.48%
HSBC FTSE EPRA NAREIT Developed UCITS ETF	London⁴⁶	UCITS, sub fund	48.88%
Invesco US Equity Fund	Luxembourg²⁹	SICAV, sub fund	25.16%
L&G Absolute Return Bond Plus Fund	Luxembourg⁵¹	SICAV, sub fund	69.95%
L&G Emerging Markets Bond Fund	Luxembourg⁵¹	SICAV, sub fund	53.50%
L&G Emerging Markets Short Duration Bond Fund	Luxembourg⁵¹	SICAV, sub fund	22.88%
L&G Multi-Asset Target Return Fund	Luxembourg⁵¹	SICAV, sub fund	28.22%
Legal & General Authorised Contractual Scheme − L&G Real Income Builder Fund	London⁴⁴	UCITS, sub fund	50.35%
Legal & General Asian Income Trust	London⁴⁴	Unit Trust	40.32%
Legal & General Dynamic Bond Fund	London⁴⁴	Unit Trust	53.98%
Legal & General Emerging Markets Government Bond (Local Currency) Index Fund	London⁴⁴	Unit Trust	25.63%
Legal & General Emerging Markets Government Bond USD Index Fund	London⁴⁴	Unit Trust	29.81%
Legal & General Ethical Trust	London⁴⁴	Unit Trust	23.59%
Legal & General European Index Trust	London⁴⁴	Unit Trust	23.76%
Legal & General Global Real Estate Dividend Index Fund	London⁴⁴	Unit Trust	30.57%
Legal & General High Income Trust	London⁴⁴	Unit Trust	45.31%
L&G Euro High Alpha Corporate Bond Fund	Luxembourg⁵¹	SICAV, sub fund	51.99%
Legal & General UK Equity Income Fund	London⁴⁴	Unit Trust	25.50%
Legal & General UK Smaller Companies Trust	London⁴⁴	Unit Trust	28.98%
Legal & General UK Special Situations Trust	London⁴⁴	Unit Trust	47.97%
LGIM Sterling Liquidity Plus Fund	London⁴⁴	OEIC, sub fund	51.87%
Marks and Spencer Worldwide Managed Fund	London⁴⁶	Unit Trust	40.45%
Quilter Investors Bond 2 Fund	London⁴⁹	OEIC, sub fund	27.26%
Quilter Investors China Equity Fund	London⁴⁹	OEIC, sub fund	23.82%
Quilter Investors Cirilium Moderate Blend Portfolio	London⁴⁹	OEIC, sub fund	50.35%
Quilter Investors Ethical Equity Fund	London⁴⁹	Unit Trust	49.72%
Quilter Investors Global Equity Growth Fund	London⁴⁹	OEIC, sub fund	39.84%
Quilter Investors Global Equity Index Fund	London⁴⁹	Unit Trust	22.59%
Quilter Investors Monthly Income and Growth Portfolio Fund	London⁴⁹	OEIC, sub fund	26.72%
Quilter Investors Sterling Corporate Bond Fund	London⁴⁹	OEIC, sub fund	31.54%
Quilter Investors UK Equity Index Fund	London⁴⁹	OEIC, sub fund	35.78%
ASI UK Responsible Equity Fund	Edinburgh²⁵	OEIC, sub fund	36.24%
Central Saint Giles Unit Trust	Jersey⁵²	Unit Trust	25.02%
Merian Global Equity Income Fund (IRL)	Dublin⁴⁰	UCITS, sub fund	22.18%
Performance Retail Unit Trust	Jersey⁵³	Unit Trust	43.63%

1 Under s479a of the Companies Act 2006 these subsidiaries have been granted audit exemption by parental guarantee.

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

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

4 Avenue Louise 326, bte 33 1050 Brussels, Belgium

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

27 70 Sir Rogerson's Quay, Dublin 2, Republic of Ireland

28 201 Bishopsgate, London, EC2M 3AE, United Kingdom

29 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg

30 155 Bishopsgate, London, EX2M 3JX, United Kingdom

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

32 49, Avenue J.F. Kennedy, L-1855 Luxembourg

33 35a Avenue J.F. Kennedy, L-1855, Luxembourg

34 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 - Madrid, Spain

35 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey

36 2 Snowhill, Birmingham, B4 6WR, United Kingdom

37 12 Throgmorton Avenue, London EC2N 2DL

38 1st Floor, 2 Ballsbridge Park, Ballsbridge, Dublin, D04 YW83, Ireland

39 5, Allée Scheffer, 2520 Luxembourg, Luxembourg

40 33 Sir John Rogerson's Quay, Dublin 2, Ireland

41 Windsor House, Telford Centre, Telford, Shropshire, TF3 4NB

42 St Helen's, 1 Undershaft, London EC3P 3DQ 8EJ

43 c/o Citco (Denmark) ApS, Holbergsgade 14, 2 .tv, 1057 København K Denmark

44 One Coleman Street, London, EC2R 5AA

45 Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, England, KT20 6RP

46 8 Canada Square, London, E14 5HQ

47 Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP

48 Beresford Court, Beresford Place, Dublin 1, Ireland

49 Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4V 4AJ

50 3rd Floor, College Park House, Nassau Street, Dublin 2 Nassau Street, Ireland

51 6, rue Lou Hemmer, L-1748 Senningerberg, Grand Duchy of Luxembourg

52 Grove House, Green Street, St Helier, Jersey JE1 2ST

53 44-47 Esplanade, St Helier, Jersey. JE4 9WG

The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution:

• Phoenix Life Pension Trust Limited;

• Hundred S.à r.l.; and

• 28 Ribera del Loira SA.

The following subsidiaries were either fully disposed of or holdings became insignificant to the Group. The subsidiaries were deconsolidated from either the date of disposal or from the date when the holdings became insignificant:

• Lake Meadows Management Company Limited;

• Mutual Securitisation plc;

• AB SICAV I − ESG Responsible Global Factor Portfolio SF1 GBP (Acc);

• BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged) UCITS ETF;

• PUTM Cautious Unit Trust;

• PUTM Growth Unit Trust;

• PUTM Opportunity Unit Trust;

• PUTM International Growth Unit Trust;

• PUTM Bothwell Institutional Credit Fund;

• Standard Life Trust Management Pan European Trust; and

• Standard Life Investment Company II Corporate Debt Fund.

The following associate was dissolved during the period. The investment in associate was derecognised from the date of dissolution:

• The Moor House Limited Partnership.

The Group no longer has significant holdings in the following undertakings:

• AXA Global High Income Fund;

• Nomura Funds Ireland American Century Concentrated Global Growth Equity Fund (Acc );

• Amundi Index Solutions SICAV Funds − AIS Amundi Index Msci World SRI I14 HG Cap;

• Standard Life Investment Company UK Equity High Alpha Fund;

• Standard Life Investment Company Short Duration Credit Fund;

• Standard Life Investment Company UK Equity Recovery Fund;

• Standard Life Investment Company UK Equity Growth Fund;

• Aberdeen Liquidity Fund (Lux) Sterling Fund;

• Aberdeen Liquid (Lux) Ultra Short Duration Sterling Fund;

• Standard Life Investments Global SICAV Indian Equity Midcap Opportunities Fund; and

• Standard Life Investment Company III MyFolio Multi-Manager Inc III Fund.

I. OTHER NOTES

I1. Share-Based Payment

Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Further details regarding the determination of the fair value of equity-settled share-based transactions are set out below.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.

I1.1 Share-based payment expense

The expense recognised for employee services receivable during the year is as follows:

	2020 £m	2019 £m
Expense arising from equity-settled share-based payment transactions	13	11

I1.2 Share-based payment expense

Long-Term Incentive Plan ('LTIP')

The Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares.

Assuming no good leavers or other events which would trigger early vesting rights, the 2018 and 2019 LTIP awards are subject to performance conditions tied to the Company's performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and Total Shareholder Return ('TSR'). The 2020 LTIP awards are subject to performance conditions tied to the Company's performance in respect of net operating cash receipts, return on shareholder value, persistency and TSR.

For all LTIP awards, a holding period applies so that any LTIP awards to Executive Committee members for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.

2020 LTIP awards were granted on 13 March 2020 and are expected to vest on 13 March 2023. The 2017 LTIP awards vested on 24 March 2020. The 2018 awards will vest on 21 March 2021 and the 2019 awards will vest on 11 March 2022. The number of shares for all outstanding LTIP awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.

The fair value of these awards is estimated at the average share price in the three days preceding the date of grant, taking into account the terms and conditions upon which the instruments were granted. The fair value of the 2018, 2019 and 2020 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a 'market condition'. The fair value of the 2018, 2019 and 2020 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below:

	2020 TSR performance condition	2019 TSR performance condition	2018 TSR performance condition
Share price (p)	586.3	694.0	709.5
Expected term (years)	3.0	3.0	3.0
Expected volatility (%)	20	20	20
Risk-free interest rate (%)	0.28	0.74	0.96
Expected dividend yield (%)	Dividends are received by holders of the awards therefore no adjustment to fair value is required

LTIP Buy Out awards were granted to the Group Chief Executive Officer in 2019, and finalised in 2020, following forfeiture of a proportion of his long-term incentive awards held with Aviva plc that had been awarded in March 2017 and May 2018. The Aviva March 2017 LTIP vested on 27 March 2020 with a performance outturn of 50%. The Aviva May 2018 LTIP is due to vest on 26 March 2021.

On 14 August 2020, LTIP awards were granted to certain senior management employees. The vesting periods and performance conditions for these awards are linked to the core 2018, 2019 and 2020 LTIP awards.

On 21 December 2018 LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. There are discreet vesting periods for these awards and the second tranche of awards vested on 27 March 2020. The remaining awards vest on 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.

Each year, the Group issues a Chairman's share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 13 March 2020, awards were granted and are expected to vest on 13 March 2023. The 2017 awards vested on 24 March 2020. The 2018 and 2019 awards are expected to vest on 21 March 2021 and 11 March 2022 respectively. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving an established minimum performance grading. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting.

Deferred Bonus Share Scheme ('DBSS')

Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. The grant of these shares is conditional on the employee remaining in employment with the Group for a period of three years from the date of grant. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting. Dividends will accrue for DBSS awards over the three year deferral period. The number of shares for all outstanding DBSS awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.

The 2020 DBSS was granted on 13 March 2020 and is expected to vest on 13 March 2023. The 2017 DBSS awards vested during the year. The 2018 awards are expected to vest on 15 March 2021 and the 2019 awards are expected to vest on 11 March 2022.

The fair value of these awards is estimated at the average share price in the three days preceding the date of the grant, taking into account the terms and conditions upon which the options were granted.

Sharesave scheme

The sharesave scheme allows participating employees to save up to £500 each month for the UK scheme and up to €500 per month for the Irish scheme over a period of either three or five years. The 2020 sharesave options were granted on 8 April 2020.

Under the sharesave arrangement, participants remaining in the Group's employment at the end of the three or five year saving period are entitled to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for certain reasons are able to use their savings to purchase shares if they leave prior to the end of their three or five year period.

Following the scheme of arrangement, participants in the Old PGH sharesave plan exchanged their options over Old PGH shares for equivalent options over PGH plc ordinary shares. All sharesave options were increased in November 2016 and again in July 2018 following the Group's rights issues and the exercise price of these awards was also amended as a result of these issues.

The fair value of the options has been determined using a
Black-Scholes valuation model. Key assumptions within this valuation model include expected share price volatility and expected dividend yield.

The following information was relevant in the determination of the fair value of the 2016 to 2020 UK sharesave options:

	2020 sharesave	2019 sharesave	2018 sharesave	2017 sharesave	2016 sharesave
Share price (£)	5.664	6.800	7.685	7.470	8.890
Exercise price (£) (Revised)	4.970	5.610	5.629	5.674	5.746
Expected life (years)	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25
Risk-free rate (%) - based on UK government gilts commensurate with the expected term of the award	0.5 (for 3.25 year scheme) and 0.5 (for 5.25 year scheme)	1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme)	1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme)	0.2 (for 3.25 year scheme) and 0.4 (for 5.25 year scheme)	0.6 (for 3.25 year scheme) and 1.0 (for 5.25 year scheme)
Expected volatility (%) based on the Company's share price volatility to date	30.0	30.0	30.0	30.0	30.0
Dividend yield (%)	8.2	6.8	6.5	6.3	6.0

The information for determining the fair value of the 2020 Irish sharesave options differed from that included in the table above as follows:

• Share price (€): 6.462

• Exercise price (€) 5.650

• Risk-free rate (%): 0.3 (for 3.25 year scheme) and 0.2 (for 5.25 year scheme).

Share Incentive Plan

The Group operates two Share Incentive Plan ('SIP') open to UK and Irish employees which allows participating employees to purchase 'Partnership shares' in the Company through monthly contributions. In respect of the UK SIP, the contributions are limited to the lower of £150 per month and 10% gross monthly salary. In 2019 the matching element of the UK SIP was amended to give the employee one 'Matching share' for each 'Partnership share' purchased limited to £50. Contributions above £50 are not matched. The Irish SIP, was launched in 2019, gives the employee 1.4 'Matching shares' for each 'Partnership share' purchased. For this plan monthly contributions are limited to the lower of €40 per month and 7.5% of gross monthly salary.

The fair value of the Matching shares granted is estimated as the share price at date of grant, taking into account terms and conditions upon which the instruments were granted. At 31 December 2020, 287,547 matching shares (including unrestricted shares) were conditionally awarded to employees (2019: 146,769).

I1.3 Movements in the year

The following tables illustrate the number of, and movements in, LTIP, Sharesave and DBSS share options during the year:

	Number of share options 2020
	LTIP	Sharesave	DBSS
Outstanding at the beginning of the year	4,637,555	2,542,764	905,867
Granted during the year	2,634,386	2,233,597	588,925
Forfeited/cancelled during the year	(1,030,017)	(767,140)	-
Exercised during the year	(752,929)	(440,062)	(226,940)
Outstanding at the end of the year	5,488,995	3,569,159	1,267,852

	Number of share options 2019
	LTIP	Sharesave	DBSS
Outstanding at the beginning of the year	3,794,061	1,375,620	771,040
Granted during the year	1,657,107	1,669,701	356,872
Forfeited/cancelled during the year	(588,747)	(186,878)	-
Exercised during the year	(224,866)	(315,679)	(222,045)
Outstanding at the end of the year	4,637,555	2,542,764	905,867

The weighted average fair value of options granted during the year was £3.88 (2019: £4.10).

The weighted average share price at the date of exercise for the rewards exercised is £6.74 (2019: £6.81).

The weighted average remaining contractual life for the rewards outstanding as at 31 December 2020 is 5.6 years (2019: 5.0 years).

I2. Cash Flows From Operating Activities

The following analysis gives further detail behind the 'cash generated/ (utilised) by operations' figure in the statement of consolidated cash flows.

	2020 £m	2019 £m
Profit for the year before tax	1,270	351
Non-cash movements in profit for the period before tax
Gain on acquisition	(372)	-
Gain on Part VII portfolio transfer	(85)	-
Fair value losses/(gains) on:
Investment property	52	55
Financial assets and derivative liabilities	(10,806)	(18,784)
Change in fair value of borrowings	(39)	(47)
Amortisation of intangible assets	487	402
Change in present value of future profits	-	(70)
Change in unallocated surplus	113	(84)
Share-based payment charge	13	11
Finance costs	234	162
Net interest expense on Group defined benefit liability/asset	29	29
Pension past service costs	2	-
Other costs of pension schemes	5	4
Decrease in investment assets	8,254	6,131
Decrease/(increase) in reinsurance assets	708	(295)
Increase in insurance contract and investment contract liabilities	6,261	11,792
Decrease in deposits received from reinsurers	(236)	(236)
Increase in obligation for repayment of collateral received	1,146	1,026
Net decrease/(increase) in working capital	211	(128)
Other items:
Contributions to defined benefit pension schemes	(77)	(46)
Cash transferred under Part VII portfolio transfer	146	-
Cash generated by operations	7,316	273

I3. Capital Management

The Group's capital management is based on the Solvency II framework. This involves a valuation in line with Solvency II principles of the Group's Own Funds and risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). This note sets out the Group's approach to managing capital and provides an analysis of Own Funds and SCR.

Risk and capital management objectives

The risk management objectives and policies of the Group are based on the requirement to protect the Group's regulatory capital position, thereby safeguarding policyholders' guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.

In pursuing these objectives, the Group deploys financial and other assets and incurs insurance contract liabilities and financial and other liabilities. Financial and other assets principally comprise investments in equity securities, debt securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities principally comprise investment contracts, borrowings for financing purposes, derivative liabilities and net asset value attributable to unit holders.

The Group's risk management framework is described in the risk management commentary on pages 79 to 89 of the Annual Report and Accounts and the risk universe component of this framework summarises the comprehensive set of risks to which the Group is exposed. These major risks ('Level 1' risks) that the Group's businesses are exposed to and the Group's approach to managing those risks are outlined in the following notes:

• Note E6: Credit risk, market risk, financial soundness risk, strategic risk, customer risk and operational risk; and

• Note F4: Insurance risk.

The section on risk and capital management objectives is included below.

Capital Management Framework

The Group's Capital Management Framework is designed to achieve the following objectives:

• to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital;

• to ensure sufficient liquidity to meet obligations to policyholders and other creditors;

• to optimise the Fitch Ratings financial leverage to maintain an investment grade credit rating; and

• to maintain a stable and sustainable dividend policy.

The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.

Group capital

Group capital is managed on a Solvency II basis. Under the Solvency II framework, the primary sources of capital managed by the Group comprises the Group's Own Funds as measured under the Solvency II principles adjusted to exclude surplus funds attributable to the Group's unsupported with-profit funds and unsupported pension schemes.

A Solvency II capital assessment involves valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). Solvency II surplus is the excess of Own Funds over the SCR.

The Group aims to maintain a Solvency II surplus at least equal to its Board-approved capital policy, which reflects Board risk appetite for meeting prevailing solvency requirements.

The capital policy of each Life Company is set and monitored by each Life Company Board. These policies ensure there is sufficient capital within each Life Company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each Life Company varies according to the risk profile and financial strength of the company.

The capital policy of each Group Holding Company is designed to ensure that there is sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group's operating companies.

Own Funds and SCR

Basic Own Funds represents the excess of assets over liabilities from the Solvency II balance sheet adjusted to add back any relevant subordinated liabilities that meet the criteria to be treated as capital items.

The Basic Own Funds are classified into three Tiers based on permanency and loss absorbency (Tier 1 being the highest quality and Tier 3 the lowest). The Group's Own Funds are assessed for their eligibility to cover the Group SCR with reference to both the quality of capital and its availability and transferability. Surplus funds in with-profit funds of the Life companies and in the pension schemes are restricted and can only be included in Eligible Own Funds up to the value of the SCR they are used to support.

Eligible Own Funds to cover the SCR are obtained after applying the prescribed Tiering limits and availability restrictions to the Basic Own Funds.

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

In 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. The Irish life entity, Standard Life International Designated Activity Company, determines its capital requirements in accordance with the Standard Formula.

The ReAssure businesses, acquired during 2020, also apply the Standard Formula to determine capital requirements.

In accordance with the approvals received from the PRA, the Enlarged Group currently operates a partial Internal Model to calculate Group SCR, aggregating outputs from the existing Phoenix Internal Model, the Standard Life Internal Model and the Standard Formula with no further diversification. A harmonisation programme to combine the two models into a single Internal Model is expected to be completed during 2021.

Group capital resources − unaudited

The Group capital resources are based on the Group's Eligible Own Funds adjusted to remove amounts pertaining to unsupported with-profit funds and Group pension schemes:

Unaudited	2020 £bn	2019 £bn
PGH plc Eligible Own Funds	16.8	10.8
Remove Own Funds pertaining to unsupported with-profit funds and pension schemes	(3.2)	(2.5)
Group capital resources	13.6	8.3

Solvency II surplus - unaudited

An analysis of the PGH plc Solvency II surplus as at 31 December 2020 is provided in the business review section on page 52 to 54. The Group has complied with all externally imposed capital requirements during the year.

Additional information on the PGH plc Own Funds, SCR and MCR is included in the additional capital disclosures on pages 307 and 308.

I4. Related Party Transactions

In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 Related party disclosures.

I4.1 Related party transactions

During the year, the Group entered into the following transactions with related parties. Following the acquisition of the Standard Life Assurance businesses in 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. As at 31 December 2020 the SLA plc holding is 14.42%. SLA plc is considered to have a significant influence over the Group due to their equity stake, representation on the Board of Directors and the existence of a strategic partnership between the two parties.

	Transactions 2020 £m	Balances outstanding 2020 £m	Transactions 2019 £m	Balances outstanding 2019 £m
Pearl Group Staff Pension Scheme
Payment of administrative expenses	(3)	-	(3)	-
UK Commercial Property Trust Limited
Dividend income	13	-	21	-
Reduction in investment	-	-	(17)	-
SLA plc
Investment management fees	(125)	(54)	(133)	(55)
Fees under Transitional Services Arrangement and material outsource agreements	(6)	(2)	(6)	(4)
Receipts under Transitional Services Arrangement	64	19	75	10
Net receipts under Client Service Proposition Agreement	16	36	18	23
Net payments under deed of indemnity	6	(68)	(33)	(64)
Dividend paid	(67)	-	(67)	-

I4.2 Transactions with key management personnel

The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows:

	2020 £m	2019 £m
Salary and other short-term benefits	5	5
Equity compensation plans	5	2

Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 124 to 158.

During the year to 31 December 2020 key management personnel and their close family members contributed £9,100 (2019: £16,395) to Pensions and Savings products sold by the Group. At 31 December 2020, the total value of key management personnel's investments in Group Pensions and Savings products was £2,842,300 (2019: £2,590,240).

I5. Commitments

This note analyses the Group's other commitments.

	2020 £m	2019 £m
To subscribe to private equity funds and other unlisted assets	565	396
To purchase, construct or develop investment property and income strips	89	161
For repairs, maintenance or enhancements of investment property	26	6

I6. Contingent Liabilities

Where the Group has a possible future obligation as a result of a past event, or a present legal or constructive obligation but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.

Agreements with Standard Life Aberdeen

In 2019, the Group noted that it was engaged in ongoing discussions with members of the Standard Life Aberdeen group in respect of disagreements over the operation of certain aspects of the SLA Share Purchase Agreement relating to services and expenses, and the scope and cost of services provided pursuant to the Transitional Services agreement ('TSA'), the Client Service and Proposition Agreement ('CSPA'), and certain other agreements between the Group and members of the Standard Life Aberdeen group. On 23 February 2021, the Group announced that it had entered into a new agreement with SLA which simplifies the arrangements of their Strategic Partnership and resolves the legacy issues outlined above. For further details of the new agreement see note I7.

Legal proceedings

In the normal course of business, the Group is exposed to certain legal issues, which can involve litigation and arbitration. At the period end, the Group has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material, with the exception of the Standard Life Aberdeen agreements matters detailed above.

I7. Events After the Reporting Period

The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.

On 23 February 2021, the Group announced that it had entered into a new agreement with SLA which simplifies the arrangements of their Strategic Partnership, enabling the Group to control its own distribution, marketing and brands, and focusing the Strategic Partnership on using SLA's asset management services in support of Phoenix's growth strategy. Under the terms of the transaction, the Group will sell its UK investment and platform-related products, comprising Wrap Self Invested Personal Pension ('Wrap SIPP'), Onshore Bond and UK Trustee Investment Plan ('TIP') to SLA, and acquire ownership of the Standard Life brand. As part of the acquisition of the brand, the relevant marketing, distribution and data team members will transfer to the Group. As a result, the Client Service and Proposition Agreement ('CSPA') entered into between the two groups following the acquisition of the Standard Life businesses in 2018, will be dissolved. In addition, Phoenix and SLA resolved all legacy issues in relation to the Transitional Service Agreement ('TSA') entered into at the time of the acquisition of the Standard Life businesses and the CSPA.

The sale of the Wrap SIPP, Onshore Bond and TIP business currently within Standard Life Assurance Limited, will be effected through a Part VII transfer targeted for completion in late 2022. The economic risk and rewards for this business will transfer to SLA effective from 1 January 2021 via a profit transfer arrangement. As at 31 December 2020, the Group held investment contracts liabilities, assets backing the liabilities, acquired in-force intangible assets, a CSPA intangible asset and related tax balances in its statement of consolidated financial position in relation to this business.

The Group will receive cash consideration for the overall transaction of £115 million, the majority of which has already been received. When taking into account all aspects of the transaction the IFRS financial impact in profit or loss and to net assets is not expected to be material.

On 3 March 2021, an increase from the current 19% UK corporation tax rate to 25%, effective from 1 April 2023, was announced in the Budget. As a result of the rate increase, the net deferred tax liability in existence at the end of 2020 is expected to increase in value by approximately £162 million to £1,198 million.

On 5 March 2021, the Board recommended a final dividend of 24.1p per share (2019: 23.4p per share) for the year ended 31 December 2020. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2020 and will be charged to the statement of changes in equity in 2021.

N LYONS

A BRIGGS

R THAKRAR

A BARBOUR

K GREEN

H IIOKA

W MAYALL

C MINTER

J POLLOCK

B RICHARDS

N SHOTT

K SORENSON

M TUMILITY

7 March 2021

PARENT COMPANY
FINANCIAL STATEMENTS
Statement of financial position

As at 31 December 2020

	Notes	2020 £m	2019 £m
ASSETS
Investments in Group entities	9	10,090	6,928
Financial assets
Equities	11	-	2
Loans and deposits	10	2,119	1,227
Derivatives	6	-	5
Debt securities	11	1	43
Collective investment schemes	11	194	200
Deferred tax	12	16	15
Other amounts due from Group entities	18	295	198
Cash and cash equivalents	13	4	45
Total assets		12,719	8,663

EQUITY AND LIABILITIES
Equity attributable to ordinary shareholders
Share capital	3	100	72
Share premium	3	4	2
Merger reserve		1,819	-
Other reserve		(4)	(4)
Retained earnings		5,211	5,368
Total equity attributable to ordinary shareholders		7,130	5,438
Tier 1 Notes	4	411	411
Total equity		7,541	5,849

Liabilities
Financial liabilities
Borrowings	5	4,521	2,020
Derivatives	6	-	31
Other amounts due to Group entities	18	448	533
Provisions	7	122	172
Accruals and deferred income	8	87	58
Total liabilities		5,178	2,814
Total equity and liabilities		12,719	8,663

The notes identified numerically on pages 293 to 302 are an integral part of these separate financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 184 to 289.

Statement of changes in equity

For the year ended 31 December 2020

	Share capital (note 3) m	Share premium (note 3) m	Merger reserve (note 3) £m	Other reserve (note 9) £m	Retained earnings £m	Total £m	Tier 1 Notes (note 4) £m	Total equity £m
At 1 January 2020	72	2	-	(4)	5,368	5,438	411	5,849
						-
Total comprehensive income for the year attributable to owners	-	-	-	-	256	256	-	256
Issue of ordinary share capital, net of associated commissions and expenses	28	2	1,819	-	-	1,849	-	1,849
Dividends paid on ordinary shares (note B4)	-	-	-	-	(403)	(403)	-	(403)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	(23)	(23)	-	(23)
Credit to equity for equity-settled share-based payments (note I1)	-	-	-	-	13	13	-	13
At 31 December 2020	100	4	1,819	(4)	5,211	7,130	411	7,541

For the year ended 31 December 2019

	Share capital (note 3) m	Share premium (note 3) m	Other reserve (note 9) £m	Retained earnings £m	Total £m	Tier 1 Notes (note 4) £m	Total equity £m
At 1 January 2019	72	-	(4)	4,075	4,143	411	4,554

Total comprehensive income for the year attributable to owners	-	-	-	1,643	1,643	-	1,643
Issue of ordinary share capital, net of associated commissions and expenses	-	2	-	-	2	-	2
Dividends paid on ordinary shares (note B4)	-	-	-	(338)	(338)	-	(338)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	(23)	(23)	-	(23)
Credit to equity for equity-settled share-based payments (note I1)	-	-	-	11	11	-	11
At 31 December 2019	72	2	(4)	5,368	5,438	411	5,849

Statement of cash flows

For the year ended 31 December 2020

	Notes	2020 £m	2019 £m
Cash flows from operating activities
Cash (utilised)/generated by operations	14	(71)	411
Net cash flows from operating activities		(71)	411

Cash flows from investing activities
Acquisition of ReAssure subsidiaries		(1,265)	-
Investment income		5	2
Interest received from Group entities		74	77
Capital contribution to Group entity		(50)	-
Repayment of amounts due from Group entities		400	-
Net cash flows from investing activities		(836)	79


Cash flows from financing activities
Proceeds from issuing ordinary shares	3	2	2
Proceeds from new shareholder borrowings, net of associated expenses	5	1,445	100
Repayment of shareholder borrowings	5	-	(100)
Ordinary share dividends paid		(403)	(338)
Interest paid on borrowings		(149)	(81)
Coupon paid on Tier 1 Notes		(29)	(29)
Net cash flows from financing activities		866	(446)

Net (decrease)/increase in cash and cash equivalents		(41)	44
Cash and cash equivalents at the beginning of the year		45	1
Cash and cash equivalents at the end of the year		4	45

Notes to the parent company financial statements

1. ACCOUNTING POLICIES

(a) Basis of preparation

The financial statements have been prepared on a going concern and on an historical cost basis except for those financial assets and financial liabilities that have been measured at fair value.

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. Profit attributable to owners for the year ended 31 December 2020 was £256 million (2019: £1,643 million).

Statement of Compliance

The Company's financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 as applied in accordance with section 408 of the Companies Act 2006.

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

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

(b) Accounting policies

Where applicable, the accounting policies in the separate financial statements are the same as those presented in the consolidated financial statements on pages 177 to 289, with the exception of the two policies detailed below.

The Company's accounting policy for financial assets is in accordance with the requirements of IFRS 9 Financial Instruments. As the Group has applied the temporary exemption from IFRS 9 available for entities whose activities are predominantly connected with insurance contracts, a different accounting policy has been adopted in the preparation of the consolidated financial statements. In addition, the Company has not adopted the Group's policy of hedge accounting.

Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note. Each note within the Company financial statements makes reference to the note to the consolidated financial statements containing the applicable accounting policy. The accounting policy in relation to foreign currency transactions is included within note A2.1 to the consolidated financial statements.

Investments in Group entities

Investments in Group entities are carried in the statement of financial position at cost less impairment.

The Company assesses at each reporting date whether an investment is impaired by assessing whether any indicators of impairment exist. If objective evidence of impairment exists, the Company calculates the amount of impairment as the difference between the recoverable amount of the Group entity and its carrying value and recognises the amount as an expense in the income statement.

The recoverable amount is determined based on the cash flow projections of the underlying entities.

Financial assets

Classification of Financial assets

Financial assets are measured at amortised cost where they have:

• contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and

• are held within a business model whose objective is achieved by holding to collect contractual cash flows.

These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the financial asset. All transaction costs directly attributable to the acquisition are also included in the cost of the financial asset. Subsequent to initial recognition, these financial assets are carried at amortised cost, using the effective interest method.

Financial assets measured at amortised cost are included in notes 10 and 13.

Equities, debt securities, collective investment schemes and derivatives are measured at FVTPL as they are managed on a fair value basis.

Impairment of financial assets

The Company assesses the expected credit losses associated with its loans and deposits, other amounts due from Group entities and cash carried at amortised cost. The measurement of credit impairment is based on an Expected Credit Loss ('ECL') model and depends upon whether there has been a significant increase in credit risk.

For those credit exposures for which credit risk has not increased significantly since initial recognition, the Company measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date ('12-month ECL'). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the Company measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default ('Lifetime ECL'). If the financial asset becomes
'credit-impaired' (following significant financial difficulty of issuer/borrower, or a default/breach of a covenant), the Company will recognise a Lifetime ECL. ECLs are derived from unbiased and probability-weighted estimates of expected loss.

See note 15 for detail of how the Company assesses whether the credit risk of a financial asset has increased since initial recognition and the approach to estimating ECLs.

The loss allowance reduces the carrying value of the financial asset and is reassessed at each reporting date. ECLs and subsequent remeasurements of the ECL, are recognised in the income statement. For other receivables, the ECL rate is recalculated each reporting period with reference to the counterparties of each balance.

(c) Impacts of COVID-19 during the year

2. FINANCIAL INFORMATION

New accounting pronouncements not yet effective

Details of the standards, interpretations and amendments to be adopted in future periods are detailed in note A5 to the consolidated financial statements, none of which are expected to have a significant impact on the Company's financial statements.

Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2023 as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, such an exemption is not applicable to the Company given it is not an insurer. Therefore IFRS 9 has been adopted by the Company and the relevant disclosures are included in these financial statements.

3. SHARE CAPITAL, SHARE PREMIUM AND MERGER RESERVE

On 22 July 2020, the Group acquired ReAssure Group plc and as part consideration for the acquisition issued 277,277,138 new ordinary shares to Swiss Re Group, 144,877,304 shares of which were subsequently transferred to MS&AD Insurance Group Holdings ('MS&AD'). The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.

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

During 2020, the Company issued 440,062 shares (2019: 315,730 shares) at a premium of £2 million (2019: £2 million) in order to satisfy its obligations to employees under the Group's sharesave schemes.

	2020 £m	2019 £m
Issued and fully paid:
999.2 million ordinary shares of £0.10 each (2019: 721.5 million)	100	72

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

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

4. TIER 1 NOTES

The accounting policy for the Tier 1 Notes is included in note D4 to the consolidated financial statements.

	2020 £m	2019 £m
Tier 1 notes	411	411

On 12 December 2018 the Company was substituted in place of Old PGH as issuer of the Tier 1 Notes and these were recognised at the £411 million fair value of an intragroup loan that was received as consideration. Details of the terms of the Tier 1 Notes can be found in note D4 to the consolidated financial statements.

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

5. BORROWINGS

The accounting policy for borrowings is included in note E5 to the consolidated financial statements.

	Carrying value		Fair value
	2020 £m	2019 £m	2020 £m	2019 £m
£428 million subordinated loans (note a)	436	437	517	503
£450 million Tier 3 subordinated notes (note b)	449	448	470	473
US $500 million Tier 2 bonds (note c)	329	334	416	396
€500 million Tier 2 notes (note d)	410	385	516	473
£300 million senior unsecured bond (note e)	123	128	125	130
Loan due to Standard Life Assurance Limited (note f)	294	288	294	288
US $750 million Contingent Convertible Tier 1 notes (note g)	545	-	585	-
£500 million Tier 2 notes (note h)	484	-	622	-
US $500 million Fixed Rate Reset Tier 2 notes (note i)	364	-	395	-
£500 million 5.867% Tier 2 subordinated notes (note j)	556	-	620	-
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note k)	272	-	280	-
£250 million 4.016% Tier 3 subordinated notes (note l)	259	-	266	-
Total borrowings	4,521	2,020	5,106	2,263
Amount due for settlement after 12 months	4,398	2,020

a. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £428 million subordinated notes due 2025 at a coupon of 6.625%, which were initially recognised at fair value of £439 million.

b. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £450 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%, which were initially recognised at fair value of £447 million.

c. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%, which were initially recognised at fair value of £349 million.

d. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the €500 million Tier 2 notes due 2029 with a coupon of 4.375%, which were initially recognised at fair value of £407 million.

e. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond due 2021 at an annual coupon of 5.75% with principal outstanding of £122 million, which was initially recognised at fair value of £131 million.

f. On 22 February 2019, the Company recognised a loan to Standard Life Assurance Limited ('SLAL') for £162 million, as consideration for Standard Life International Designated Activity Company ('SLIDAC') due 2024. On 28 March 2019 the purchase price was adjusted by £120 million, which resulted in an increase in the loan principal. Interest accrues at LIBOR plus 1.66% and during the year £6 million (2019: £6 million) of interest was capitalised.

g. On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the 'contingent convertible Tier 1 Notes') which are unsecured and subordinated. The contingent convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The contingent convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury ('CMT') rate (based on the prevailing five year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the contingent convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter. Refer to note E5(j) to the consolidated financial statements for further details.

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

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

j. On 22 July 2020, the Company was substituted in place of ReAssure Group plc as issuer of the £500 million 5.867% Tier 2 Subordinated Notes. These notes have a maturity date of 13 June 2029 and were initially recognised at their fair value of 559 million.

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

l. On 22 July 2020, the Company was substituted in place of ReAssure Group plc as issuer of the £250 million 4.016% Tier 3 subordinated notes. The notes have a maturity date of 13 June 2026 and were initially recognised at their fair value of 259 million. The fair value adjustment is being amortised over the remaining life of the notes.

m. The Company has in place a £1.25 billion unsecured revolving credit facility, maturing in June 2025. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayment obligations and voluntary prepayments are permissible. The facility accrues interest at a margin over LIBOR that is based on credit rating. The facility remains undrawn as at 31 December 2020.

Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings.

For the purposes of the additional fair value disclosures for liabilities recognised at amortised cost, all borrowings have been categorised as Level 2 financial instruments.

Reconciliation of liabilities arising from financing activities

The table below details changes in the Company's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company's statement of cash flows as cash flows from financing activities.

	Cash		Non-Cashflow
	At 1 January 2020 £m	New borrowings, net of costs £m	Loan issued via subsitution1 £m	Movement in foreign exchange £m	Amortisation £m	Capitalised interest £m	At 31 December 2020 £m
£428 million subordinated notes	437	-	-	-	(1)	-	436
£450 million Tier 3 subordinated notes	448	-	-	-	1	-	449
US $500 million Tier 2 bonds	334	-	-	(10)	5	-	329
€500 million Tier 2 notes	385	-	-	22	3	-	410
£300 million senior unsecured bond	128	-	-	-	(5)	-	123
Loan due to Standard Life Assurance Limited	288	-	-	-	-	6	294
US $750 million Contingent Convertible Tier 1 notes	-	566	-	(23)	2	-	545
£500 million Tier 2 notes	-	483	-	-	1	-	484
US $500 million Fixed Rate Reset Tier 2 notes	-	396	-	(32)	-	-	364
£500 million 5.867% Tier 2 subordinated notes	-	-	559	-	(3)	-	556
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes	-	-	275	-	(3)	-	272
£250 million 4.016% Tier 3 subordinated notes	-	-	259	-	-	-	259
	2,020	1,445	1,093	(43)	-	6	4,521

1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).

	Cash		Non-Cashflow
	At 1 January 2019 £m	New borrowings, net of costs £m	Repayments £m	Loan issued via subsitution1 £m	New borrowings net of issue costs2 £m	Movement in foreign exchange £m	Amortisation £m	Capitalised interest £m	At 31 December 2019 £m
£428 million subordinated notes	439	-	-	-	-	-	(2)	-	437
£450 million Tier 3 subordinated notes	447	-	-	-	-	-	1	-	448
US $500 million Tier 2 bonds	343	-	-	-	-	(13)	4	-	334
€500 million Tier 2 notes	405	-	-	-	-	(24)	4	-	385
£300 million senior unsecured bond	-	-	-	131	-	-	(3)	-	128
£1.25 billion revolving credit facility	-	100	(100)	-	-	-	-	-	-
Loan due to Standard Life Assurance Limited	-	-	-	-	282	-	-	6	288
	1,634	100	(100)	131	282	(37)	4	6	2,020

1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).

2 Loan issued to SLAL, a subsidiary undertaking, was in consideration for the transfer to the Company of its investment in SLIDAC.

6. DERIVATIVES

The Company entered into a cross currency swap with another group company in 2018 to hedge against adverse currency movements in respect of the €500 million Tier 2 notes.

In 2019, the Company entered into a forward currency swap with another group company to hedge against adverse currency movements in respect of the €287 million capital injection into SLIDAC.

The Company also entered into a forward currency swap in 2019 to hedge against adverse currency movements in respect of the equity and debt holding in a property investment structure which was transferred to the Company.

During 2020, the Company terminated the derivative instruments that were entered into in 2018 and 2019 and as a result the Company no longer hedges its currency risk exposure arising on foreign denominated investments and borrowings.

The fair value of the derivative financial instruments are as follows:

	Asset		Liability
	2020 £m	2019 £m	2020 £m	2019 £m
Cross currency swap	-	-	-	31
Forward currency swap	-	5	-	-
	-	5	-	31

Derivative Collateral Arrangements

The accounting policy for collateral arrangements is included in note E4 to the consolidated financial statements.

Assets Accepted

The maximum exposure to credit risk in respect of OTC derivative assets is £nil (2019: £5 million) of which credit risk of £nil (2019: £3 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed by the counterparty).

Assets Pledged

The Company pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2020 in respect of OTC derivative liabilities of £nil (2019: £34 million) amounted to £nil (2019: £3 million).

7. PROVISIONS

During 2019 the Company recognised two new provisions, a Standard Life transition restructuring provision of £159 million and 13 million in relation to amounts payable to SLA plc under the terms of the Purchase Price Adjustment. During the year £19 million of the restructuring provision was utilised and a further £31 million was released resulting in a provision as at 31 December 2020 of £109 million. Details are included in note G7 to the consolidated financial statements.

8. ACCRUALS AND DEFERRED INCOME

The accounting policy for accruals and deferred income is included in note G11 to the consolidated financial statements.

	2020 £m	2019 £m
Accruals and deferred income	87	58

Amount due for settlement after 12 months	-	-

9. INVESTMENTS IN GROUP ENTITIES

	2020 £m	2019 £m
Cost
At 1 January	11,074	4,146
Additions	3,162	6,928
At 31 December	14,236	11,074

Impairment
At 1 January	(4,146)	-
Charge for the year	-	(4,146)
At 31 December	(4,146)	(4,146)

Carrying amount
At 31 December	10,090	6,928

On 22 July 2020, the Company acquired ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for a total consideration of £3,112 million. The consideration consisted of £1,265 million cash and the issue of 277,277,138 shares to Swiss Re Group on 23 July 2020, 144,877,304 shares of which were subsequently transferred to MS&AD Insurance Group Holdings ('MS&AD'). The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.

During the year a £50 million capital contribution was paid into SLIDAC which was provided in order to strengthen its capital position following adverse market conditions experienced during the year.

On 21 February 2019, the Company acquired SLIDAC from its subsidiary SLAL, for an initial consideration of £162 million settled in the form of a loan (see note 5) such that its interest in SLIDAC is now directly held. On acquisition, the Company subscribed for an additional share in SLIDAC for a consideration of £250 million. Following the completion of a Part VII transfer of the European branch business from SLAL to SLIDAC, the purchase price for the acquisition of SLIDAC was increased by £120 million, again settled in form of a loan, which increased the carrying value of the Company's investment in SLIDAC to £532 million.

On 18 June 2019, the Company acquired Phoenix Life Holdings Limited from its subsidiaries PGH (LCA) Limited and PGH (LCB) Limited, for a consideration of £3,356 million and also acquired SLAL from Old PGH for a consideration of £2,994 million. The consideration for the acquisition of SLAL was increased by 46 million comprising of £33 million due to Standard Life Aberdeen plc under the deed of indemnity and £13 million under the terms of the Purchase Price Adjustment mechanism included in the Sale and Purchase Agreement agreed as part of the acquisition of the Standard Life Assurance businesses (see note G7 of the consolidated financial statement).

On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in Old PGH, reflected in the table above, was determined as the carrying amount of the Company's share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of £4 million has been recognised as an Other reserve, and is shown as a separate component of equity.

As at 31 December 2020, the market capitalisation of the Company was lower than the net asset value, which was considered to be an indicator that the Company's investments in its subsidiaries may have been impaired as at that date. Where such indicators are identified, an impairment test is performed. In 2020, the recoverable amount of the investments in subsidiaries was determined to be greater than carrying value. In 2019, impairments of £4,146 million were recognised to align the carrying value of certain investments to their recoverable amount.

The value in use has been used as the recoverable amount and this has been determined using the present value of the future cash flows of the Company's subsidiaries including the in-force long-term business and the service companies. The cash flows used in this calculation are consistent with those adopted by management in the operating plan and, beyond the period of this plan, reflect the anticipated run-off of the in-force life insurance business. Future cash flows have been valued using discount rates which reflect the risks inherent to each cash flow. For the other subsidiaries, the value in use has been determined using net assets values.

For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entities directly held by the Company are separately identified.

10. LOANS AND DEPOSITS

	Carrying value		Fair value
	2020 £m	2019 £m	2020 £m	2019 £m
Loans due from PLHL (note a)	1,214	1,220	1,403	1,363
Loans due from Phoenix Group Employee Benefit Trust (note b)	6	7	6	7
Loan due from ReAssure Group plc (note c)	704	-	710	-
Loans and deposits due from Group entities	1,924	1,227	2,119	1,370
Fixed term deposits (note d)	195	-	195	-
Total loans and deposits	2,119	1,227	2,314	1,370
Amounts due after 12 months	1,924	1,227

All loans and deposit balances are due from Group entities and are measured at amortised cost using the effective interest method. The fair value of these loans and deposits are also disclosed.

a) On 12 December 2018, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited ('PLHL'). The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. This loan was initially recognised at fair value of £439 million and is accreted to par over the period to 2025. At 31 December 2020, the carrying value of the loan was £437 million (2019: £438 million).

On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. This loan was initially recognised at fair value of £447 million and is accreted to par over the period to 2022. At 31 December 2020, the carrying value of the loan was £449 million (2019: £448 million).

On 12 December 2018, the Company was assigned a US $500 million loan by PLHL due 2027 with a coupon of 5.375%. This loan was initially recognised at fair value of £349 million and is accreted to par over the period to 2027. Movement in foreign exchange during the period decreased the carrying value by £10 million (2019: £13 million). At 31 December 2020, the carrying value of the loan was £328 million (2019: £334 million).

b) On 18 June 2019, the Company was assigned an interest free facility arrangement with Phoenix Group Employee Benefit Trust ('EBT'). As at 31 December 2020, the carrying value of the loan was £6 million (2019: £7 million). In 2020, an additional £7million (2018: £4 million) was drawn down against this facility. The loan is fully recoverable until the point the awards held in the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2020 £8million (2019: £3 million) of the loan has been written off.

c) On 22 July 2020, the Company entered into a £1,099 million loan agreement with ReAssure Group Plc, a Group subsidiary as consideration for the transfer of subordinated loans notes into the Company. The loan accrues interest at a rate of 6 month LIBOR plus 1.30% and matures on 31 December 2025. During the year, the Company received a partial repayment of £400 million. As at 31 December 2020, the carrying value of the loan was £704 million, and also includes £5 million of interest that has been capitalised.

d) Fixed term deposits include holdings in bank deposits with an initial maturity of more than 3 months at the date the deposit was made.

None of the loans are considered to be past due.

For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and deposits are categorised as Level 3 financial instruments. The fair value of loans and deposits with no external market is determined by internally developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.

Details of the factors considered in determination of fair value are included in note E2 to the consolidated financial statements.

11. FINANCIAL ASSETS

	2020 £m	2019 £m
Financial assets at fair value through profit or loss
Derivatives	-	5
Equities	-	2
Debt securities	1	43
Collective investment schemes	194	200
	195	250

Amounts due after 12 months	1	43

Determination of fair value and fair value hierarchy of financial assets

Details of the factors considered in determination of the fair value are included in note E2 to the consolidated financial statements.

Year ended 31 December 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets at fair value through profit or loss:
Debt securities	-	-	1	1
Collective investment schemes	194	-	-	194
	194	-	1	195

Year ended 31 December 2019	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets at fair value through profit or loss
Derivatives	-	5	-	5
Equities	-	-	2	2
Debt securities	-	-	43	43
Collective investment schemes	200	-	-	200
	200	5	45	250

There were no transfers between levels in both 2020 and 2019.

Level 3 financial instrument sensitivities

The investment in equity and debt securities is in respect of equity and debt holdings in a property investment structure which was transferred to the Company via an in-specie dividend received from Old PGH during 2019. The holding was disposed of during the year however a balance of £1 million remains in respect of a potential repayment of cash reserves that may be due to the Company. The amount recognised has taken account of both the uncertain nature of the value of the proceeds and when they will be received.

The structure was valued as a whole on a discounted cash flow basis and allocated to the debt and equity components in order of priority. The valuation is sensitive to the discount rate applied. In 2019, a decrease in the discount rate of 175bps would increase the value by 9 million) whilst an increase of 200bps would decrease the value by £6 million).

12. DEFERRED TAX

The accounting policy for tax assets and liabilities is included in note G8 to the consolidated financial statements.

Movement in Deferred Tax Asset

1 January 2020

£m

Credit for the year

31 December 2020

£m

Provisions and other
temporary differences

1 January 2019

£m

Credit for the year

31 December 2019

£m

Provisions and other
temporary differences

The standard rate of UK corporation tax for the accounting period is 19% (2019: 19%).

Following the cancellation of the planned tax rate reduction from 19% to 17% announced in the March 2020 Budget, deferred tax assets, where provided, are reflected at the rate of 19%.

13. CASH AND CASH EQUIVALENTS

The accounting policy for cash and cash equivalents is included in note G6 to the consolidated financial statements.

	2020 £m	2019 £m
Bank and cash balances	4	45

14. CASH FLOWS FROM OPERATING ACTIVITIES

	2020 £m	2019 £m
Profit for the year before tax	222	1,598
Non-cash movements in profit for the year before tax:
Dividend income from other Group entities	-	(5,640)
Impairment of investment in subsidiary	-	4,146
Impairment of loan due from subsidiary	8	3
Investment income	(78)	(79)
Finance costs	189	103
Fair value (gains)/losses on financial assets	(45)	19
Foreign exchange movement on borrowings at amortised cost	(43)	(37)
Share-based payment charge	13	11
Increase in investment assets	(116)	(236)
Net (increase)/decrease in working capital	(221)	523
Cash (utilised)/generated by operations	(71)	411

15. CAPITAL AND RISK MANAGEMENT

The Company's capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with IFRSs, as set out in the statement of changes in equity. Under English company law, dividends must be paid from distributable profits. As the ultimate parent undertaking of the Group, the Company manages its capital to ensure that it has sufficient distributable profits to pay dividends in accordance with its dividend policy.

At 31 December 2020, total capital was £7,541 million (2019: £5,849 million). The movement in capital in the period comprises the total comprehensive income for the period attributable to owners of £256million (2019: £1,643 million income), dividends paid of £403 million (2019: £338 million), coupon paid on Tier 1 Notes, net of tax relief of £23 million (2019: £23 million), credit to equity for equity-settled share-based payments of £13 million (2019: £11 million), and issue of ordinary share capital of £1,849 million (2019: £2 million).

In addition, the Group also manages its capital on a regulatory basis as described in note I3 to the consolidated financial statements.

The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. During the year, the Company terminated the hedges that were entered into in 2018 and 2019. As a result, the Company no longer hedges its currency risk exposure arising on foreign currency hybrid debt.

Details of the Group's financial risk management policies are outlined in note E6 to the consolidated financial statements. Credit risk management practices

The Company's current credit risk grading framework comprises the following categories:

Category	Description	Basis for recognising ECL
Performing	The counterparty has a low risk of default and does not have any past-due amounts	12 month ECL
Doubtful	There has been a significant increase in credit risk since initial recognition	Lifetime ECL - not credit impaired
In default	There is evidence indicating the asset is credit-impaired	Lifetime ECL - credit impaired
Write-off	There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery	Amount is written off

The table below details the credit quality of the Company's financial assets, as well as the Company's maximum exposure to credit risk by credit risk rating grades:

2020	External credit rating	Internal credit rating	12 month or lifetime ECL	Gross carrying amount £m	Loss allowance £m	Net carrying amount £m
Loans and deposits (note 10)	N/A	Performing	12 month ECL	2,119	−	2,119
Other amounts due from Group entities (note 18)	N/A	Performing	12 month ECL	295	−	295
Cash and cash equivalents (note 13)	A	N/A	12 month ECL	4	−	4

2019	External credit rating	Internal credit rating	12 month or lifetime ECL	Gross carrying amount £m	Loss allowance £m	Net carrying amount £m
Loans and deposits (note 10)	N/A	Performing	12 month ECL	1,227	−	1,227
Other amounts due from Group entities (note 18)	N/A	Performing	12 month ECL	198	−	198
Cash and cash equivalents (note 13)	A	N/A	12 month ECL	45	−	45

The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also, forward-looking analysis.

Loans and deposits − The Company is exposed to credit risk relating to loans and deposits from other Group companies, which are considered low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing whether there have been any historic defaults, by reviewing the going concern assessment of the borrower and the ability of the Group to prevent a default by providing a capital or cash injection. Specific considerations for the loan to the EBT are discussed in note 10.

Amounts due from other Group entities - The credit risk from activities undertaken in the normal course of business is considered to be extremely low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing past credit impairments, history of defaults and the long term stability of the Group.

Cash and cash equivalents − The Company's cash and cash equivalents are held with bank and financial institution counterparties, which have investment grade 'A' credit ratings. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and there being no history of default, and therefore the impact to the net carrying amount shown in the table above is not material.

The Company writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed into liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Company's recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

16. SHARE-BASED PAYMENTS

For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I1 in the consolidated financial statements.

17. DIRECTORS' REMUNERATION

Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in the appendix to the Directors' Remuneration Report on pages 124 to 158 of the Annual Report and Accounts.

18. RELATED PARTY TRANSACTIONS

The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are included in note I4 to the consolidated financial statements.

On 31 August 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. As at 31 December 2020 the SLA plc holding is 14.42%. SLA plc is considered to have a significant influence over the Group due to their equity stake, representation on the Board of Directors and the existence of a strategic partnership between the two parties.

During the year ended 31 December 2020 the Company entered into the following transactions with Group entities and SLA plc:

	2020 £m	2019 £m
Dividend income from other Group entities	400	5,989
Interest income from other Group entities	73	77
	473	6,066

Impairment of investment in subsidiary	−	4,146
Impairment of loan due from subsidiary	8	3
Unrealised loss on internal cross currency swap	−	27
Expense to other Group entities	119	235
Interest expense to other Group entities	7	12
	134	4,423

Dividends paid to SLA plc	67	67

Amounts due from related parties at the end of the year:

	2020 £m	2019 £m
Loans due from Group entities	1,924	1,227
Forward currency swap	−	3
Other amounts due from Group entities	295	198
	2,219	1,428

Amount due for settlement after 12 months	1,924	1,227

Amounts due to related parties at the end of the year:

	2020 £m	2019 £m
Loans due to Group entities	294	288
Cross currency swap	−	31
Other amounts due to Group entities	448	533
	742	852

Amount due for settlement after 12 months	294	288

19. AUDITOR'S REMUNERATION

Details of auditor's remuneration, for Phoenix Group Holdings plc and its subsidiaries, is included in note C4 to the consolidated financial statements.

20. EVENTS AFTER THE REPORTING PERIOD

Details of events after the reporting date are included in note I7 to the consolidated financial statements.

N LYONS

A BRIGGS

R THAKRAR

A BARBOUR

K GREEN

H IIOKA

W MAYALL

C MINTER

J POLLOCK

B RICHARDS

N SHOTT

K SORENSON

M TUMILITY

7 March 2021

ADDITIONAL LIFE COMPANY ASSET DISCLOSURES

The analysis of the asset portfolio provided below comprises the assets held by the Group's life companies, and it is stated net of derivative liabilities. It excludes other Group assets such as cash held in the holding and management service companies and the assets held by the non-controlling interests in consolidated collective investment schemes.

The following table provides an overview of the exposure by asset category of the Group's life companies' shareholder and policyholder funds:

31 December 2020

Carrying value	Shareholder and non-profit funds1 £m	Participating supported1 £m	Participating non- supported2 £m	Unit-linked2 £m	Total3 £m
Cash and cash equivalents	5,908	1,854	8,336	10,246	26,344
Debt securities − gilts and foreign government bonds	6,999	386	22,295	14,458	44,138
Debt securities − other government and supranational	2,257	294	2,220	7,815	12,586
Debt securities − infrastructure loans	1,564	−	−	−	1,564
Debt securities − UK local authority loans⁴	696	−	−	−	696
Debt securities − private placements⁵	3,330	1	262	51	3,644
Debt securities − other bonds	20,371	1,587	18,322	24,412	64,692
	35,217	2,268	43,099	46,736	127,320
Equity securities	113	45	19,621	106,120	125,899
Property investments	81	30	2,054	6,409	8,574
Equity release mortgages	3,484	−	−	−	3,484
Commercial real estate loans	1,075	−	−	−	1,075
Income strips	−	−	−	692	692
Other investments⁶	923	711	4,916	10,009	16,559
At 31 December 2020	46,801	4,908	78,026	180,212	309,947
Cash and cash equivalents in Group holding companies					1,055
Cash and financial assets in other Group companies					776
Financial assets held by the non-controlling interest in consolidated collective investment schemes					4,170
Total Group consolidated assets					315,948
Comprised of:
Investment property					7,128
Financial assets					298,823
Cash and cash equivalents					10,998
Derivative liabilities					(1,001)
					315,948

1 Includes assets where shareholders of the life companies bear the investment risk.

2 Includes assets where policyholders bear most of the investment risk.

3 This information is presented on a look through basis to underlying funds where available.

4 Total UK local authority loans of £696 million include £646 million classified as Level 3 debt securities in the fair value hierarchy.

5 Total private placements of £3,644 million include £2,351 million classified as Level 3 debt securities in the fair value hierarchy.

6 Includes policy loans of £10 million, other loans of £344 million, net derivative assets of £6,083 million, reinsurers' share of investment contracts of £9,559 million and other investments of £563 million.

31 December 2019

Carrying value	Shareholder and non-profit funds1 £m	Participating supported1 £m	Participating non- supported2 £m	Unit-linked2 £m	Total3 £m
Cash and cash equivalents	3,486	2,009	4,788	6,391	16,674
Debt securities − gilts and foreign government bonds	3,911	342	20,644	9,095	33,992
Debt securities − other government and supranational	1,280	297	3,252	4,512	9,341
Debt securities − infrastructure loans	341	−	−	−	341
Debt securities − UK local authority loans	262	−	−	−	262
Debt securities − private placements⁴	1,370	−	131	20	1,521
Debt securities − other bonds	10,485	1,582	14,314	21,485	47,866
	17,649	2,221	38,341	35,112	93,323
Equity securities	145	48	15,962	72,959	89,114
Property investments	92	37	1,890	5,335	7,354
Equity release mortgages	2,781	−	−	−	2,781
Commercial real estate loans	388	−	−	−	388
Income strips	−	−	−	690	690
Other investments⁵	339	386	3,738	9,207	13,670
At 31 December 2019	24,880	4,701	64,719	129,694	223,994
Cash and cash equivalents in Group holding companies					275
Cash and financial assets in other Group companies					616
Financial assets held by the non-controlling interest in consolidated collective investment schemes					3,661
Total Group consolidated assets					228,546
Comprised of:
Investment property					5,943
Financial assets					218,871
Cash and cash equivalents					4,466
Derivative liabilities					(734)
					228,546

1 Includes assets where shareholders of the life companies bear the investment risk.

2 Includes assets where policyholders bear most of the investment risk.

3 This information is presented on a look through basis to underlying funds where available.

4 Total private placements of £1,521 million include £1,147 million classified as Level 3 debt securities in the fair value hierarchy.

5 Includes policy loans of £10 million, other loans of £284 million, net derivative assets of £3,976 million, reinsurers' share of investment contracts of £8,881 million and other investments of £519 million.

The following table provides a reconciliation of the total life company assets to the Assets under Administration ('AUA') as at 31 December 2020 detailed in the Business Review on page 50:

	2020 £bn	2019 £bn
Total Life Company assets	309.9	224.0
Off-balance sheet AUA¹	37.5	35.1
Less: Standard Life Trustee Investment Plan assets²	(9.7)	(10.8)
Assets Under Administration	337.7	248.3

1 Off-balance sheet AUA represents assets held in respect of certain Group Self-Invested Personal Pension products where the beneficial ownership interest resides with the customer (and which are therefore not recognised in the statement of consolidated financial position) but on which the Group earns fee revenue.

2 Assets held within the Standard Life Trustee Investment Plan product are excluded from AUA as materially all profits accrue to third party investment managers.

All of the life companies' debt securities are held at fair value through profit or loss in accordance with IAS 39 Financial Instruments: recognition and Measurement, and therefore already reflect any reduction in value between the date of purchase and the reporting date.

The life companies have in place a comprehensive database that consolidates credit exposures across counterparties, geographies and business lines. This database is used for credit monitoring, stress testing and scenario planning. The life companies continue to manage their balance sheets prudently and have taken extra measures to ensure their market exposures remain within risk appetite.

For each of the life companies' significant financial institution counterparties, industry and other data has been used to assess the exposure of the individual counterparties. As part of the Group's risk appetite framework and analysis of shareholder exposure to a potential worsening of the economic situation, this assessment has been used to identify counterparties considered to be most at risk from defaults. The financial impact on these counterparties, and the contagion impact on the rest of the shareholder portfolio, is assessed under various scenarios and assumptions. This analysis is regularly reviewed to reflect the latest economic outlook, economic data and changes to asset portfolios. The results are used to inform the Group's views on whether any management actions are required.

The table below shows the Group's market exposure analysed by credit rating for the debt securities held in the shareholder and non-profit funds.

Sector analysis of shareholder bond portfolio	AAA £m	AA £m	A £m	BBB £m	BB & below £m	Total £m
Industrials	−	81	306	978	47	1,412
Basic materials	−	−	201	40	−	241
Consumer, cyclical	12	484	388	238	82	1,204
Technology and telecoms	175	288	719	782	−	1,964
Consumer, non-cyclical	270	309	1,239	549	−	2,367
Structured finance	−	−	56	−	−	56
Banks¹	857	805	3,328	695	66	5,751
Financial services	92	279	350	246	2	969
Diversified	−	7	31	−	−	38
Utilities	28	130	2,153	1,660	−	3,971
Sovereign, sub-sovereign and supranational²	1,421	8,149	483	85	11	10,149
Real estate	37	171	2,856	321	104	3,489
Investment companies	33	193	−	4	−	230
Insurance	−	573	463	84	12	1,132
Oil and gas	−	212	350	83	−	645
Collateralised debt obligations	−	8	−	−	−	8
Private equity loans	−	−	22	5	−	27
Infrastructure	−	25	388	1,004	147	1,564
At 31 December 2020	2,925	11,714	13,333	6,774	471	35,217

1 The £5,751 million total shareholder exposure to bank debt comprised £4,316 million senior debt and £1,435 million subordinated debt.

2 Includes £696 million reported as UK local authority loans and £197 million reported as private placements in the summary table on page 303.

Sector analysis of shareholder bond portfolio	AAA £m	AA £m	A £m	BBB £m	BB & below £m	Total £m
Industrials	−	141	352	273	18	784
Basic materials	−	−	22	59	8	89
Consumer, cyclical	−	206	156	140	35	537
Technology and telecoms	38	111	249	352	37	787
Consumer, non-cyclical	59	174	407	257	42	939
Structured finance	−	−	56	−	−	56
Banks	367	477	1,349	424	13	2,630
Financial services	147	415	469	101	12	1,144
Diversified	−	7	17	−	5	29
Utilities	26	−	1,207	540	70	1,843
Sovereign, sub-sovereign and supranational¹	811	4,383	210	21	28	5,453
Real estate	44	109	1,663	244	57	2,117
Investment companies	10	80	27	4	−	121
Insurance	−	269	139	43	22	473
Oil and gas	−	110	115	56	16	297
Collateralised debt obligations	−	9	−	−	−	9
Infrastructure	−	−	60	281	−	341
At 31 December 2019	1,502	6,491	6,498	2,795	363	17,649

1 Includes £262 million reported as UK local authority loans in the summary table on page 304.

The following table sets out the debt security exposure by country of the shareholder and non-profit funds of the life companies:

Analysis of shareholder debt security exposure by country	Sovereign, sub-sovereign and supranational 2020 £m	Corporate and other 2020 £m	Total 2020 £m	Sovereign, sub- sovereign and supranational 2019 £m	Corporate and other 2019 £m	Total 2019 £m
UK	8,077	13,018	21,095	4,452	6,320	10,772
Supranationals	660	−	660	544	−	544
USA	217	5,614	5,831	−	1,674	1,674
Germany	188	962	1,150	155	562	717
France	339	1,440	1,779	59	783	842
Netherlands	182	728	910	23	503	526
Italy	−	213	213	−	143	143
Ireland	−	155	155	−	37	37
Spain	−	183	183	−	148	148
Luxembourg	86	1	87	−	−	−
Belgium	31	152	183	5	127	132
Australia	−	577	577	1	336	337
Canada	65	275	340	−	169	169
Mexico	6	219	225	2	190	192
Other - non-Eurozone	189	1,238	1,427	180	1,093	1,273
Other - Eurozone	109	293	402	32	111	143
Total shareholder debt securities	10,149	25,068	35,217	5,453	12,196	17,649

ADDITIONAL capital DISCLOSURES

PGH PLC SOLVENCY II SURPLUS

The PGH plc surplus at 31 December 2020 is £5.3 billion (2019: 3.1 billion).

	31 December 2020 Estimated £bn	31 December 2019 £bn
Own Funds	16.8	10.8
SCR	(11.5)	(7.7)
Surplus	5.3	3.1

The Eligible Own Funds reflects a dynamic recalculation of TMTP. Had this not been performed, the surplus would have been £0.1 billion lower.

Calculation of Group Solvency

The Solvency II regulations set out two methods for calculating Group solvency, 'Method 1' (being the default accounting based consolidation method) and 'Method 2' (the deduction and aggregation method).

Under Method 2, the solo Own Funds are aggregated rather than consolidated on a line by line basis. The SCR is also aggregated, with no allowance for diversification. Method 2 is used for all entities within the Standard Life Assurance businesses acquired in 2018 and Method 1 is used for all other entities of the Group (including the ReAssure entities acquired in 2020). The Group has approval to use a combination of Methods 1 and 2 for consolidating its Group solvency results.

Composition of Own Funds

Own Funds items are classified into different Tiers based on the features of the specific items and the extent to which they possess the following characteristics, with Tier 1 being the highest quality:

• availability to be called up on demand to fully absorb losses on a going-concern basis, as well as in the case of winding-up ('permanent availability'); and

• in the case of winding-up, the total amount that is available to absorb losses before repayment to the holder until all obligations to policyholders and other beneficiaries have been met ('subordination').

PGH plc's total Own Funds are analysed by Tier as follows:

	31 December 2020 Estimated £bn	31 December 2019 £bn
Tier 1 − Unrestricted	11.7	8.3
Tier 1 − Restricted	1.1	0.5
Tier 2	3.2	1.5
Tier 3	0.8	0.5
Total Own Funds	16.8	10.8

PGH plc's unrestricted Tier 1 capital accounts for 70% (2019: 77%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.

Restricted Tier 1 capital comprises the contingent convertible Tier 1 Notes issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of which enable the instruments to qualify as restricted Tier 1 capital for regulatory reporting purposes.

Tier 2 capital is comprised of subordinated notes whose terms enable them to qualify as Tier 2 capital for regulatory reporting purposes.

Tier 3 items include the Tier 3 subordinated notes of £0.7 billion (2019: £0.4 billion) and the deferred tax asset of £0.1 billion (2019: 0.1 billion).

Breakdown of SCR

The Group operates two PRA approved Internal Models, a Phoenix Internal Model covering all the pre-acquisition Phoenix entities and a Standard Life Internal Model which covers the acquired Standard Life Assurance entities, with the exception of the Irish entity, Standard Life International Designated Activity Company ('SLIDAC'). SLIDAC and the acquired ReAssure businesses calculate their capital requirements in accordance with the Standard Formula. An analysis of the pre-diversified SCR of PGH plc is presented below:

	31 December 2020 Estimated			31 December 2019
	Phoenix Internal Model %	Standard Life Internal Model %	ReAssure and SLIDAC Standard Formula %	Phoenix Internal Model %	Standard Life Internal Model %	SLIDAC Standard Formula %
Longevity	27	18	21	26	16	4
Credit	23	12	24	19	12	23
Persistency	12	25	20	12	28	25
Interest rates	7	6	10	8	5	1
Operational	4	8	4	6	9	12
Swap spreads	3	1	-	2	1	-
Property	10	1	-	12	1	-
Other market risks	3	16	10	5	15	30
Other non-market risks	11	13	11	10	13	5
Total pre-diversified SCR	100	100	100	100	100	100

The principal risks of the Group are described in detail in note E6 and F4 in the IFRS consolidated financial statements.

MINIMUM CAPITAL REQUIREMENTS

Under the Solvency II regulations, the Minimum Capital Requirement ('MCR') is the minimum amount of capital an insurer is required to hold below which policyholders and beneficiaries would become exposed to an unacceptable level of risk if an insurer was allowed to continue its operations. For Groups this is referred to as the Minimum Consolidated Group SCR ('MGSCR').

The MCR is calculated according to a formula prescribed by the Solvency II regulations and is subject to a floor of 25% of the SCR or 3.7 million, whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on factors applied to technical provisions and capital at risk.

The MGSCR represents the sum of the underlying insurance companies' MCRs in respect of the Method 1 part of the Group.

The Eligible Own Funds to cover the MGSCR is subject to quantitative limits as shown below:

• the Eligible amounts of Tier 1 items should be at least 80% of the MGSCR; and

• the Eligible amounts of Tier 2 items shall not exceed 20% of the MGSCR.

• PGH plc's MGSCR at 31 December 2020 is £1.9 billion (2019: £1.1 billion).

PGH plc's Method 1 Eligible Own Funds to cover MGSCR is £8.3 billion (2019: £4.3 billion) leaving an excess of Eligible Own Funds over MGSCR of £6.4 billion (2019: £3.2 billion), which translates to an MGSCR coverage ratio of 431% (2019: 386%).

The MCR for the Method 2 part of the Group is £1.4 billion (2019: 1.2 billion), with Eligible Own Funds of £4.9 billion (2019: £4.9 billion), leaving an excess of Eligible Own Funds over MCR of £3.5 billion (2019: £3.7 billion), which translates to an MCR coverage ratio of 359% (2019: 394%).

Additional performance measures

The Group assesses its financial performance based on a number of measures. Some measures are management derived measures of historic or future financial performance, position or cash flows of the Group; which are not defined or specified in accordance with relevant financial reporting frameworks such as International Financial Reporting Standards ('IFRS') or Solvency II.

These measures are known as Alternative Performance Measures ('APMS').

APMs are disclosed to provide stakeholders with further helpful information on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the measures determined according to IFRS and Solvency II requirements. Accordingly, these APMs may not be comparable with similarly titled measures and disclosures by other companies.

A list of the APMs used in our results as well as their definitions, why they are used and, if applicable, how they can be reconciled to the nearest equivalent GAAP measure is provided below. Further discussion of these measures can be found in the business review from page 46 and the definitions of all APMs are included in the glossary on pages 313 to 316 of the Annual Report and Accounts.

APM	Definition	Why is this measure used	Reconciliation to financial statements
Assets under administration	The Group's Assets under Administration ('AUA') represents assets administered by or on behalf of the Group, covering both policyholder fund and shareholder assets. It includes assets recognised in the Group's IFRS consolidated statement of financial position together with certain assets administered by the Group for which beneficial ownership resides with customers.	AUA indicates the potential earnings capability of the Group arising from its insurance and investment business. AUA flows provide a measure of the Group's ability to deliver new business growth.	A reconciliation from the Group's IFRS consolidated statement of financial position to the Group's AUA is provided on page 305 of the Annual Report and Accounts.
Financial leverage ratio	Financial leverage is calculated by Phoenix (using Fitch Ratings' stated methodology) as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent, the unallocated surplus and the Tier 1 Notes.	The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions.	The debt and equity figures are directly sourced from the Group's IFRS consolidated statement of financial position on pages 179 and 1980 of the Annual Report and Accounts and the analysis of borrowings note on page 216 of the Annual Report and Accounts.
Incremental long-term cash generation	Incremental long-term cash generation represents the operating companies' cash generation that is expected to arise in future years as a result of new business transacted in the current period within our UK Open and Europe segments, and from the writing of bulk purchase annuities within our Heritage segment. It excludes any costs associated with the acquisition of the new business.	This measure provides an indication of the Group's performance in delivering new business growth to offset the impact of run-off of the Group's Heritage business and to bring sustainability to future cash generation.	Incremental long-term cash generation is not directly reconcilable to the financial statements as it relates to cash generation expected to arise in the future.
Life Company Free Surplus	The Solvency II surplus of the Life Companies that is in excess of their Board approved capital management policies.	This figure provides a view of the level of surplus capital in the Life Companies that is available for distribution to the holding companies, and the generation of Free Surplus underpins future operating cash generation.	Please see business review section page 54 of the Annual Report and Accounts for further analysis of the solvency positions of the Life Companies.
Long-term Free Cash ('LTFC')	Long-term Free Cash ('LTFC') is comprised of long-term cash to emerge from in-force business, plus holding company cash, less an allowance for costs associated with in-flight mergers and acquisitions and the related transition activities, and a deduction for shareholder debt outstanding.	LTFC provides a measure of the Group's total long-term cash available for operating costs, interest, growth and shareholder returns. Increases in LTFC will be driven by sources of long-term cash i.e. new business and over-delivery of management actions. Decreases in LTFC will reflects the uses of cash at holding company level, including expenses, interest, investment in BPA and dividends.	The individual components of LTFC are disclosed in the Business review, page 49 of the Annual Report and Accounts. The metric is not directly reconcilable to the financial statements as it includes a significant component relating to cash that is expected to emerge in the future. Holding company cash included within LTFC is consistent with the holding company cash and cash equivalents as disclosed in the cash section of the business review. Shareholder debt outstanding reflects the face value of the shareholder borrowings disclosed in note E5 of the IFRS financial statements.
New business contribution	Represents the increase in Solvency II shareholder Own funds arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions in respect of contract boundaries and stated on a net of tax basis.	This measure provides an assessment of the day one value arising on the writing of new business in the UK Open and Europe segments, and is stated after applicable taxation and acquisition costs.	New business contribution is not directly reconcilable to the Group's Solvency II metrics as it represents an in-year movement. Further analysis is provided on page 51 of the Annual Report and Accounts.
Operating companies' cash generation	Cash remitted by the Group's operating companies to the Group's holding companies.	The statement of consolidated cash flows prepared in accordance with IFRS combines cash flows relating to shareholders with cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. The Group therefore focuses on the cash flows of the holding companies which relate only to shareholders. Such cash flows are considered more representative of the cash generation that could potentially be distributed as dividends or used for debt repayment and servicing, Group expenses and pension contributions. Operating companies' cash generation is a key performance indicator used by management for planning, reporting and executive remuneration.	Operating companies' cash generation is not directly reconcilable to an equivalent GAAP measure (IFRS statement of consolidated cash flows) as it includes amounts that eliminate on consolidation. Further details of holding companies' cash flows are included within the business review on pages 47 to 58 of the Annual Report and Accounts, and a breakdown of the Group's cash position by type of entity is provided in the additional life company asset disclosures section on page 303 of the Annual Report and Accounts
Operating profit	i Operating profit is a financial performance measure based on expected long-term investment returns. It is stated before tax and non-operating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director's view should be excluded by their nature or incidence to enable a full understanding of financial performance. Further details of the components of this measure and the assumptions inherent in the calculation of the long-term investment return are included in note B1.2 to the IFRS consolidated financial statements.	This measure provides a more representative view of the Group's performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax. It helps give stakeholders a better understanding of the underlying performance of the Group by identifying and analysing non-operating items.	A reconciliation of operating profit to the IFRS result before tax attributable to owners is included in the business review on page 55 and in the notes to the financial statements.
Shareholder Capital CoverageRatio	Represents total Eligible Own Funds divided by the Solvency Capital Requirements ('SCR'), adjusted to a shareholder view through the exclusion of amounts relating to those ring-fenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR.	The unsupported with-profit funds and Group pension funds do not contribute to the Group Solvency II surplus. However, the inclusion of related Own Funds and SCR amounts dampens the implied Solvency II capital ratio. The Group therefore focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group.	Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 54 of the Annual Report and Accounts.

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