Phoenix Group Holdings PLC 2018 Full Year Results (8542R)

TIDMPHNX

RNS Number : 8542R

Phoenix Group Holdings PLC

05 March 2019

Phoenix Group announces strong results after a transformational year. New cash generation targets set and synergy target increased by GBP500 million to GBP1.2 billion

Phoenix Group, Europe's largest life and pensions consolidator(1) , today announces a strong set of results for the year ended 31 December 2018.

2018 Highlights

-- GBP664 million of cash generation(2) in 2018 (2017: GBP653 million). The Group has delivered GBP1.3 billion cash generation in 2017 and 2018, exceeding the upper end of its cash generation target range of GBP1.0 billion - GBP1.2 billion for this period.

-- Solvency II surplus of GBP3.2 billion(3) as at 31 December 2018 (GBP2.5 billion pro-forma as at 31 December 2017).

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

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

-- Group operating profit of GBP708 million (2017: GBP368 million).

-- Assets under administration of GBP226 billion as at 31 December 2018 (31 December 2017 pro-forma: GBP240 billion). Net business inflows of GBP3.9 billion on UK Open and European businesses.

-- New business contribution(5) of GBP154 million (2018 pro-forma) demonstrates value accretive nature of Open new business in the UK and Europe.

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

New cash generation targets

-- 2019 cash generation target of GBP600 - GBP700 million(8) .

-- Long-term cash generation target for 2019 - 2023 of GBP3.8 billion.

Acquisition of the Standard Life Assurance businesses

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

-- Total synergy target (net of GBP150 million transition costs) increased by GBP500 million from GBP720 million to GBP1,220 million:

- Capital synergies new target of GBP720 million (increased from GBP440 million); with GBP500 million delivered to date; and

- Capitalised cost synergies new target of GBP650 million (increased from GBP415 million); reflecting an increase from GBP50 million to GBP75 million per annum.

Delivering on strategic priorities

-- Successfully entered bulk purchase annuity market contracting GBP0.8 billion of liabilities in 2018.

-- AXA and Abbey Life integrations completed ahead of plan and targets, delivering cost synergy benefits of GBP27 million per annum and cumulative cash generation of GBP968 million.

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

-- Brexit preparations complete.

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

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

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

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

The transition of the Standard Life Assurance businesses continues to progress well and today we increase the total cost and capital synergy target by 70% from GBP720 million to GBP1.2 billion. Our end state operating model will incorporate the best of both legacy businesses and our management bench strength and strategic options as a combined Group have increased significantly.

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

Presentation

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

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

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

Participants may also dial in as follows:

 
Dial-in number:             +44 20 3059 5868 
Title of call:              Phoenix Full Year Results 
Please dial in 10 minutes prior to the beginning of the conference 
 call in order to register.

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

Dividend

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

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

Enquiries

Investors/analysts:

Claire Hawkins, Head of Investor Relations, Phoenix Group

+44 (0)20 3735 0575

Media:

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

Shellie Wells, Head of Corporate Communications, Phoenix Group

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

Notes

1. Phoenix Group is the largest life and pensions consolidator in Europe with 10.0 million policies and GBP226 billion of assets under administration.

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

3. The Solvency II capital position is an estimated position and includes the impact of a regulator approved recalculation of transitionals for Standard Life Assurance Limited only. Had a dynamic recalculation of transitionals been assumed for the Phoenix Life companies, the Solvency II Surplus and the Shareholder Capital Coverage ratio would increase by GBP0.1 billion and 3% respectively.

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

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

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

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

8. 2019 cash generation target is net of the GBP250 million cost of capitalising Standard Life International Designated Activity Company for Brexit.

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

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

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

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

Cash resilience growth

A sustainable phoenix

Annual report and accounts 2018

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

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

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

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

More information online at www.thephoenixgroup.com

PHOENIX GROUP AT A GLANCE

OUR VISION

Become Europe's Leading Life Consolidator.

OUR PURPOSE

Inspire confidence in the future.

OUR MISSION

Improve outcomes for customers and deliver value for shareholders.

WHAT WE DO

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

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

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

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

Read more on

P48

Our Suppliers

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

Read more on

P50

Our COLLEAGUES

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

Read more on

P51

Our Community Partners

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

Read more on

P54

Our Environment

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

Read more on

P56

Our investors

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

Read more on

P58

Go online for the full Corporate

and Social Responsibility Report

www.thephoenixgroup.com/CRreport2018

OUR CUSTOMERS

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

The Phoenix Life website can be accessed at

www.phoenixlife.co.uk

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

P18 and 20

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

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

david woollett

Customer director, phoenix life

Listening to customers

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

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

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

DIGITAL PROPOSITION

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

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

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

Customer complaints

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

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

PROTECTING CUSTOMERS FROM PENSION SCAMS

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

REUNITING CUSTOMERS WITH LOST POLICIES

Phoenix Life reunited 2,380 unclaimed policies with their rightful owner or next of kin following an extensive tracing exercise. The work commenced in September 2016 and to date has reunited policies amounting GBP12.7 million.

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

LONG-TERM SAVINGS COMMITTEE APPOINTMENT

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

2,380

UNCLAIMED POLICIES REUNITED WITH RIGHTFUL OWNERS FOLLOWING EXTENSIVE TRACING EXERCISES

GBP12.7m

REUNITED POLICIES VALUE

CUSTOMERS IN VULNERABLE CIRCUMSTANCES

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

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

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

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

OUR SUPPLIERS

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

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

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

www.thephoenixgroup.com/mss

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

www.thephoenixgroup.com/abs

SUPPLY CHAIN MANAGEMENT

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

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

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

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

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

PROMPT PAYMENT CODE

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

MODERN SLAVERY

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

Financial crime prevention

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

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

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

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

No instances or breaches were recorded during the year.

c. 1,000

SUPPLIERS

Note:

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

OUR COLLEAGUES

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

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

P26

Read more about diversity and inclusion on our website at

www.thephoenixgroup.com/diversity

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

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

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

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

EMPLOYEE CONSULTATION

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

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

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

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

Learning and development

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

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

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

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

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

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

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

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

CULTURAL SURVEY

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

DIVERSITY AND INCLUSION

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

EMPLOYEE NETWORKS

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

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

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

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

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

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

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

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

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

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

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

REWARD

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

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

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

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

95%

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

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

STEPHEN JEFFORD

GROUP HR DIRECTOR

EMPLOYEE WELLBEING

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

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

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

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

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

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

HUMAN RIGHTS

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

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

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

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

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

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

HEALTH AND SAFETY

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

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

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

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

WELLBEING ACCOLADE

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

OUR COMMUNITY PARTNERS

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

PHOENIX GROUP'S CHARITY PARTNERS OF THE YEAR

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

The Group has donated in excess of GBP770,000 between these two air ambulance charities since 2014. A festive fundraising 'Reindeer Run' through the streets of London, raised over GBP21,000 (including matching) for the combined charities.

For 2019, the Group will enter into two further corporate charity partnerships, helping to unite the Enlarged Group with fundraising for a common cause. Colleagues in Scotland will be supporting Scotland's Charity Air Ambulance and colleagues in Basingstoke will support Hampshire and Isle of Wight Air Ambulance. A donation of over GBP31,000 was presented to Scotland's Charity Air Ambulance in recognition for colleague participation in onsite lottery, Give as you Earn and a raffle for the period September to December 2018.

SunLife commenced a two-year partnership at the start of the year with Alive Activities Limited, enriching the lives of older people in care and providing training resources for carers. Colleagues at the Bristol office exceeded their fundraising target for the year by raising over GBP6,000 for the charity.

Further afield the German charity partner for 2018 was Hilfe für krebskranke Kinder Frankfurt e.V who received a donation of EUR13,486.30 to aid children with cancer and the Austrian charity partner was Oesterreichische Krebshilfe Wien who received EUR6,000, to support individuals living with cancer.

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

OTHER CHARITABLE DONATIONS

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

Over GBP17,000 was donated across the year through onsite fundraising, primarily benefiting causes in the local area. Beneficiaries included: Macmillan Cancer Support, Alzheimer's Society, Street Support Network Limited, St Michael's Hospice in Basingstoke and the City's Lord Mayor's Appeal.

To welcome Standard Life Assurance colleagues to the Phoenix family, a charity vote was held onsite in September 2018. St Columba's Hospice in Edinburgh received the most votes and was awarded a community donation of GBP10,000, and runner-up donations of GBP6,000 and GBP4,000 was awarded to Scotland's Charity Air Ambulance and Streetwork in Edinburgh. In addition, for Dublin colleagues EUR4,000 were donated to The Peter McVerry Trust, to help reduce homelessness and the harm caused by substance misuse and social disadvantage.

Through the staff-matched fundraising scheme, individuals are able to participate in charitable activity in their own time, and request matching of the amount raised. This also includes an element of 'payment in lieu of volunteering' whereby colleagues may regularly support UK-registered charities outside of business hours. Over GBP52,000 was donated across the year.

COMMUNITY WELLBEING

The Group extended its focus on wellbeing to members of the Wythall community, where Phoenix is considered one of the largest employers in the area. A unique initiative named 'Wythall Walking Friends' was launched in conjunction with

Living Streets charity to help tackle social isolation in individuals aged over 65, through the delivery of regular community led-walks. Volunteers were trained to lead the walks, helping to reduce loneliness, encourage new friendship groups and increase the exercise potential within the group, thus helping to reduce the risk of depression and dementia.

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

COMMUNITY INVESTMENT

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

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

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

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

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

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

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

VOLUNTEERING

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

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

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

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

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

SCHOOL PARTNERSHIPS

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

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

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

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

ROGER PUNTON

PRINCIPAL AT ARK KINGS ACADEMY

OUR ENVIRONMENT

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

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

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

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

INTERNAL PRINT RESOURCE

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

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

WASTE MANAGEMENT

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

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

RESPONSIBLE INVESTMENT

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

The first was a GBP27 million investment in renewable energy at the Walney Extension Project, assisting with the construction and operation of the enlarged offshore wind farm, situated 45 miles north of Liverpool. This project now provides clean energy to a large number of UK homes. Phoenix participated in providing debt-financing for the acquisition of a 50% share in the project.

A further investment was GBP50 million in Anglian Water's green projects. The proceeds are to be used to help finance projects that will mitigate climate change impacts and the conservation of water resources.

CLIMATE CHANGE

Phoenix's vision is to be Europe's leading life consolidator and although it continues to be a predominantly Heritage business, it now also has a substantial Open business element. As the Group is a consolidator of life insurance funds, rather than general insurance, it does not currently consider climate risk as a principal risk. Climate change is one of the risks considered in the Group's horizon scanning activity and the Group continues to focus on the potential impacts of this risk, for example:

-- The Group uses external managers for the vast majority of its assets who consider a broad range of environmental, social and governance ('ESG') factors in their selection and management of our investments. With the view that ESG and social impact investing can deliver better risk adjusted returns, Phoenix is developing its own ESG policy in support of this. Over 2018, Phoenix has invested in a number of ESG-related opportunities, including renewable energy and green initiatives.

-- Expanding the Group's programme of qualitative and quantitative scenario analysis to take account of the potential impact of climate change scenarios; and to ensure this is appropriately reflected in the Group's risk management framework.

-- Continuing to engage with our regulators on the impact on the Group of near term physical and transition risks associated with climate change.

-- Continue to consider the requirements of consultations associated with the risks of climate change and engage with industry bodies on the Group's response where appropriate.

CONSERVATION

Working with Bromsgrove District and Redditch Borough Councils, colleagues have donated 750 volunteering hours to improving the various parklands within the Midlands area. Their efforts have assisted with creating a bark path, building dead hedging and a wildlife hibernaculum, thinning woodland, painting benches, planting floral displays and removing the invasive Himalayan balsam from the waterways.

The Group continues to partner with the Heart of England Forest, planting in excess of 6,000 broadleaf trees since 2013. Pupils from partner school Ark Kings Academy were invited to the education centre at the Forest, to spend a day exploring the greater outdoors. The SunLife operation in Bristol is also a member of the Woodland Trust.

There has been a shift in 2018, with colleagues wishing to support more outdoor environmental-based volunteering projects. The Group has also supported the Canal and River Trust, Warwickshire Wildlife Trust and National Trust across the year.

This volunteering encouraged healthy exercise whilst taking part in environmentally-focused activities which will benefit future generations. At one of the Edinburgh sites the roof space is home to a colony of bees. Colleagues are able to meet the beekeeper and attend awareness sessions.

ENVIRONMENTAL REPORTING

This section includes an update on the Group's annual greenhouse gas emissions. Emissions disclosed relate to facilities and activities where the Group has operational control within the UK.

As of September 2018, the vast majority of Standard Life business (part of Standard Life Aberdeen Plc) was sold to Phoenix Group. As a result, two operational properties were acquired - Standard Life House and Standard Life Data Centre. These two properties have therefore been included in the Group's carbon footprint (absolute GHG emissions) for the 2018 calendar year. However, as these two properties were not owned for the whole two-year period that is used for intensity measurement calculations, they have been excluded from these metrics to avoid skewed intensity results.

The emissions reported are based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition). Data was gathered at meter level to compile the carbon footprint. The Government's 2018 Conversion Factors for GHG Company Reporting have been used to convert energy data into carbon dioxide equivalent (CO2e) emissions.

The Group reports Scope 2 emissions using the GHG Protocol dual-reporting methodology, stating two figures to reflect the GHG emissions from purchased electricity, using both:

-- A location-based method that reflects the average emissions intensity of the UK electricity grids from which consumption is drawn; and

-- A market-based method that reflects emissions from electricity specific to each supply/contract. Currently, the Group has used residual mix factors in the absence of contractual instruments.

In 2018 absolute emissions have increased by 11% due to the inclusion of the two ex-Standard Life acquired properties. This increase has outweighed the reduction in the emission factor for consumption of purchased electricity (Scope 2) and the reduced consumption of energy at a number of properties throughout 2018.

Approximately 14% of 2018 emissions are estimated as full-year data is not available for all facilities. A sample of emissions from fuel use for company-owned transport, backup generation and fugitive emissions from refrigerants were calculated in previous years and were determined to be non-material to the overall footprint, so have not been included.

The Group's chosen intensity metrics detail carbon emissions per floor area and per full-time equivalent employees (FTE). The intensity by floor area has decreased slightly as a larger number of properties have been included within the analysis this year and these properties have largely reduced their energy use in 2018 compared to 2017. The intensity by FTE shows a slight increase from 2017 to 2018 as the number of people employed has reduced.

GREENHOUSE GAS EMISSIONS

Absolute GHG emissions data in tonnes of CO(2) e

 
                                                                             2018              2017 
-----------------------------------------------  ----------------  --------------  ---------------- 
Emissions, tonnes of CO(2) e from:               (location-based)  (market-based)  (location-based) 
-----------------------------------------------  ----------------  --------------  ---------------- 
Combustion of fuel and operation of facilities 
 (Scope 1)                                                  1,402           1,402             1,203 
-----------------------------------------------  ----------------  --------------  ---------------- 
Electricity, heat, steam and cooling purchased 
 for own use (Scope 2)                                      2,990           3,042             2,754 
-----------------------------------------------  ----------------  --------------  ---------------- 
Total Carbon Footprint (Scopes 1+2)                         4,392           4,444             3,957 
-----------------------------------------------  ----------------  --------------  ----------------

Phoenix Group's chosen intensity measurement(1)

 
                                                                                          2018                    2017 
--------------------------------------------------------------------------  ------------------  ---------------------- 
                                                                              (location-based)        (location-based) 
--------------------------------------------------------------------------  ------------------  ---------------------- 
Emissions reported above on a per floor area intensity                      63 kg CO(2) e/m(2)      64 kg CO(2) e/m(2) 
--------------------------------------------------------------------------  ------------------  ---------------------- 
Emissions reported above on a per full-time equivalent employee (FTE)               3.8 tonnes 
intensity                                                                          CO(2) e/FTE  3.5 tonnes CO(2) e/FTE 
--------------------------------------------------------------------------  ------------------  ----------------------

1 Our intensity measurement calculations exclude former Standard Life Assurance Limited properties to avoid skewed intensity results over the two-year period.

The Group's full Corporate and Social Responsibility Report is available at

www.thephoenixgroup.com/CRreport2018

The Group's complete Economic, Social and Governance measures are available to download at

www.thephoenixgroup.com/esg

GBP27m

INVESTMENT IN RENEWABLE ENERGY AT THE WALNEY EXTENSION PROJECT

GBP50m

INVESTMENT IN ANGLIAN WATER'S GREEN PROJECTS

"These investments mark an important first step for the Group in renewable energy and is particularly suited to our ambitions. We hope to see further projects of this nature in the future."

SCOTT ROBERTSON

HEAD OF FINANCIAL management group, PHOENIX GROUP

OUR Investors

We value an active dialogue with the Group's financial audiences including institutional investors, private investors, buy and sell-side analysts and prospective investors. Phoenix therefore conducts a comprehensive investor relations programme.

MEETINGS WITH INSTITUTIONAL EQUITY INVESTORS

Throughout the year members of the Executive Committee and the Investor Relations department held meetings with investors to provide updates on the Group's strategy and operations. This involved 20 shareholder roadshow days and a total of 246 meetings with existing and prospective equity investors.

The Chairman and Non-Executive Directors are available for investor meetings to discuss subjects such as strategy, corporate governance and Director's remuneration as required.

RESULTS PRESENTATIONS AND Capital markets DAYS

Full year and interim results were presented to analysts and investors by the Group. The presentations were webcast live on Phoenix's website and presentation materials were also made available.

Phoenix held a Capital Markets Day on 29 November 2018 in London which was attended by 120 investors and analysts and provided an update on the Standard Life Assurance acquisition. The event also provided attendees with the opportunity to meet with management.

Investor presentations are generally filmed and the videos as well as the presentation materials and transcript are made available on the Group's website.

CONFERENCES

Conferences enable the Group to meet with a significant number of investors and at the same time are important platforms for presenting on Phoenix's investment proposition. This year, Phoenix attended nine conferences in the UK, including conferences organised by ABN AMRO, Bank of America Merrill Lynch, Deutsche Bank, J.P. Morgan Cazenove, Investec, Lloyds, Morgan Stanley and Natixis.

ANALYSTS AND EQUITY SALES FORCES

Phoenix maintains an active dialogue with its equity and debt research analysts who, in addition to results presentations, are invited to attend investor events such as the Capital Markets Day. The Executive Directors also held nine presentations to the sales teams at major investment banks to promote the Phoenix investment case.

DEBT INVESTORS

The Debt Investor Relations programme is managed by the Group Treasury department and supported by the Investor Relations department.

Senior management conducted 13 deal and non-deal related debt investor roadshow days in the UK, Continental Europe and Asia, meeting 168 debt investors overall.

CREDIT RATINGS AGENCIES AND BANKS

Phoenix's life companies and outstanding bonds have credit ratings by Fitch Ratings. The Group meets with the rating agency at least once per year for the annual ratings review. The Group Treasury Team and management last provided Fitch with an update in June 2018. The Group Treasury department and senior management also keep a constant dialogue with the Group's relationship banks.

PRIVATE SHAREHOLDERS

Private shareholders are encouraged to engage with the Group through the Investor Relations department and Company Secretariat.

ANNUAL GENERAL MEETING ('AGM')

The Group uses its AGM as an opportunity to communicate with shareholders. Business to be discussed at the meeting is notified to shareholders in advance through the Notice of Meeting and comprises topics such as the annual election of Directors, the appointment of the Auditor and the dividend declaration.

414

TOTAL NUMBER OF debt and equity investors met in 2018

Total NUMBER OF debt and equity investor roadshows

CORPORATE GOVERNANCE

IN THIS SECTION

 
Chairman's Introduction                     60 
Board Structure                             61 
Board of Directors                          62 
Executive Management Team                   64 
Corporate Governance Report                 65 
Directors' Remuneration Report              76 
Directors' Report                          106 
Statement of Directors' Responsibilities   110

CHAIRMAN'S INTRODUCTION

Shareholders

I would like to start my introduction to this Governance section by expressing my pleasure and gratitude for the tremendous support from our shareholders in 2018, both through the 96% take-up in July 2018 of our GBP1bn rights issue to finance the acquisition of Standard Life Assurance and through their strong support of all proposals at the three shareholder meetings we held in 2018 as follows:

-- May 2018 Annual General Meeting - All 21 resolutions passed with a majority of at least 93% of votes cast.

-- June 2018 General Meeting to approve the acquisition of Standard Life Assurance businesses, the associated GBP1bn rights issue and the issue of shares to Standard Life Aberdeen plc ('SLA') as part consideration for the acquisition - All 7 resolutions passed with a majority of at least 91% of votes cast (including 99% for the resolution approving the acquisition).

-- November 2018 General Meeting to approve the Scheme of Arrangement and associated capital reduction in connection with the establishment of the Group's new UK-registered and listed holding company, Phoenix Group Holdings plc - All 8 resolutions passed with a majority of at least 99% of votes cast.

Our three general meetings in 2018 were held in London. Following the acquisition of Standard Life Assurance, our 2019 Annual General Meeting will be held on 2 May 2019 in Edinburgh, which is now our largest operational centre.

The UK listing of Phoenix Group Holdings plc as a UK-registered company in place of our former Cayman Islands registration was the final stage of regularising our legacy residency and incorporation status and followed the movement of central management and control for Phoenix Group Holdings from Jersey to the UK in January 2018.

BOARD OF DIRECTORS

Our Board has been through a period of renewal over the past three years and our Board Evaluation Review, undertaken in November 2018, concluded that we should now aim for a period of Board stability, following the appointment of eight new non-executive directors out of a total of ten since September 2016.

The relatively high amount of recent Board recruitment has enabled us to focus on the skills required for a growing business and the Group's M&A agenda, which in 2018 delivered the successful acquisition of Standard Life Assurance. Apart from my own appointment in 2018, the new appointees to the Board in 2018 were nominees from SLA, our strategic partner, exercising their rights in line with their c20% shareholding to appoint two directors to our Board. The November 2018 Board evaluation concluded that the Board had a strong and appropriate skillset which had been enhanced by our two new appointees from SLA, Campbell Fleming, who brings asset management skills and expertise, and Barry O'Dwyer, who brings experience as a CEO of a large open life assurance business and the associated customer-focused skills.

I am pleased that several members of our Board have current or recent FTSE 100 financial services Board experience - Alastair Barbour (our Senior Independent Director and Audit Committee Chair), John Pollock (our Risk Committee Chair), Barry O'Dwyer, Karen Green and Belinda Richards as well as myself.

I am also pleased that our Board complies with the target of the Hampton-Alexander Review for the Board to be at least 33% female.

UK Corporate Governance Code

As detailed in the Corporate Governance Report on pages 65 to 75, we complied in 2018 with all the principles and provisions of the UK Corporate Governance Code ('the Code'), such that in the last six years we have had only one matter of non-compliance with the Code.

We have been considering the new requirements of the Code effective from 2019. We have been taking steps to comply with the new provisions and will, as required, report on our compliance with those provisions in our 2019 Annual Report.

However, I am very pleased to report now that, in respect of the provision to enhance the Board's engagement with the workforce, the Board has appointed Karen Green as our nominated non-executive director who will liaise with the workforce through a Workers' Advisory Council.

The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices as follows:

-- Board and Committee Structure

-- Board of Directors

-- Executive Management Team

-- Corporate Governance Report

-- Directors' Remuneration Report

-- Directors' Report.

"Since joining the Phoenix Board as Chairman, I have been impressed by the attention from the Board and management on robust governance, with the aims of both protecting our shareholders and customers and enhancing our performance."

Nicholas Lyons

CHAIRMAN

BOARD STRUCTURE

Phoenix Group Holdings Board and Committees

The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from Board committees. The chart below sets out the composition and main activities of the Phoenix Group Holdings Board and its committees. More detailed operational and customer-focused matters are addressed at the subsidiary board and committee level.

Phoenix Group Holdings Board

Audit Committee

Alastair Barbour (Chair)

Karen Green

John Pollock

Belinda Richards

Financial Reporting

Internal Controls

External Audit

Internal Audit

Risk Committee

John Pollock (Chair)

Alastair Barbour

Wendy Mayall

Belinda Richards

Risk Appetite and high-level Risk Matters

The Group's Risk Management Framework

Nicholas Lyons (Chair)

Alastair Barbour - SID

Clive Bannister

James McConville

Campbell Fleming

Karen Green

Wendy Mayall

Barry O'Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Group Strategy

Major Transactions

Group Budget

Group Risk Appetite

Performance Monitoring

External/Shareholder Reporting

External Debt

Nomination Committee

Nicholas Lyons (Chair)

Alastair Barbour

Nicholas Shott

Kory Sorenson

Board Appointments

Senior Executive Appointments

Diversity and Inclusion

Board and Senior Executive Succession Planning

Remuneration Committee

Kory Sorenson (Chair)

Karen Green

Nicholas Shott

Group Remuneration Framework

Executive Director Remuneration

Employee Share Schemes

Further details regarding the Board are contained on

P62-63

BOARD OF DIRECTORS

THE GROUP IS GOVERNED BY OUR BOARD OF DIRECTORS. BIOGRAPHICAL DETAILS ARE SHOWN BELOW.

NICHOLAS LYONS

Chairman

Committee membership

Nomination Committee (Chairman)

Appointed to the Board

31 October 2018

Experience

Nicholas Lyons was appointed Chairman of the board of directors of Phoenix Group Holdings and Chairman of the Nomination Committee of Phoenix Group Holdings with effect from 31 October 2018. Nicholas Lyons joined JP Morgan in 1982, where he worked for 12 years in debt and equity capital markets and mergers and acquisitions. He spent eight years at Lehman Brothers, as a Managing Director in their European financial institutions group, ending his executive career in 2003 as Global Co-Head of Recruitment. Mr Lyons has held a number of positions on the boards of other financial institutions including the Pension Insurance Corporation, where he was the Senior Independent Director from 2016 until July 2018. He also held positions on the boards of the Temple Bar Investment Trust, Catlin Group Limited, Friends Life Group Limited and Friends Life Holdings plc. Mr Lyons has recently joined the Board of the British United Provident Association Limited (BUPA) and is also Chairman of Clipstone Industrial REIT plc. He is an Alderman in the City of London Corporation.

CLIVE BANNISTER

Group Chief Executive Officer

Appointed to the Board

28 March 2011

Experience

Clive Bannister joined the Group in February 2011 as Group Chief Executive Of cer. Prior to this, Mr Bannister was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc. He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to nancial institutions including leading insurance companies, banks and investment banks. Mr Bannister is also Chairman of the Museum of London.

JAMES MCCONVILLE

Group Finance Director and group director, scotland

Appointed to the Board

28 June 2012

Experience

Between April 2010 and December 2011, Mr McConville was Chief Finance Of cer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior nance and strategy related roles, latterly as Finance Director of Scottish Widows Group and Director of Finance for the Insurance and Investments Division. During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK. In 2014, Mr McConville joined the board of Tesco Personal Finance plc as a Non-Executive Director. Mr McConville quali ed as a Chartered Accountant whilst at Coopers and Lybrand.

WY MAYALL

Independent Non-Executive Director

Committee membership

Risk Committee

Appointed to the Board

1 September 2016

Experience

Wendy Mayall has over 30 years of asset management experience, including as Group Chief Investment Officer and later consultant at Liverpool Victoria from 2012 to 2015, having previously been Chief Investment Officer for Unilever's UK pension fund from 1996 to 2011 and holding management responsibility for Unilever's pension funds globally. From 2006 to 2009, Ms Mayall was the Chair of the Investment Committee of the Mineworkers Pension Scheme, a British government appointment to one of the largest government backed pension schemes in the UK. Ms Mayall is a Non-Executive Director of Old Mutual Wealth Oversight Council. She is also the Senior Independent Director and Audit Committee Chair of Fidelity Investments Life Insurance Company and Chair of the Funding Committee for TPT Retirement Solutions.

BARRY O'DWYER

NON-EXECUTIVE DIRECTOR

Appointed to the Board

31 August 2018

Experience

Barry O'Dwyer is the Head of UK for Standard Life Aberdeen. Prior to the sale of Standard Life Assurance to Phoenix, he was the CEO of Standard Life Aberdeen's Pensions & Savings businesses. Mr O'Dwyer initially worked at Standard Life between 1988 and 2008 and held several senior roles at Standard Life after re-joining the company in 2013. A Fellow of the Institute of Actuaries, Mr O'Dwyer has 30 years of experience in the insurance industry, in a career which has also included senior roles at Prudential and HBOS.

JOHN POLLOCK

Independent Non-Executive Director

Committee membership

Risk Committee (Chairman), Audit Committee

Appointed to the Board

1 September 2016

Experience

John Pollock had a career in life assurance at the Legal & General Group from 1980 to 2015, including as an Executive Director of Legal & General Group plc from 2003 to 2015. Mr Pollock held numerous senior roles, gaining wide strategic and technical experience, finally as Chief Executive Officer of LGAS (L&G Assurance Society), one of Legal and Generals' three primary business units. Prior to Mr Pollock's retirement from Legal and General in 2015, he held positions as Deputy Chair of the FCA Practitioner Panel, Chairman of investment platform Cofunds, and as a Non-Executive Director of the Cala Homes Group.

ALASTAIR BARBOUR

SENIOR INDEPENT DIRECTOR

Committee membership

Audit Committee (Chairman), Nomination Committee, Risk Committee

Appointed to the Board

1 October 2013

Experience

Alastair Barbour has over 30 years audit experience with KPMG where he worked across the full spectrum of nancial services clients from large general insurers and reinsurers to the life insurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a Non-Executive career. He is a Director and Audit Committee Chairman of RSA Insurance Group plc and Liontrust Asset Management plc (both London Stock Exchange listed companies). He is also a Director and Audit Committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the Specialist Funds Segment of the London Stock Exchange and of The Bank of N. T. Butter eld & Son Limited, a group listed on the New York Stock Exchange and in Bermuda. Mr Barbour was appointed Senior Non-Executive Independent Director on 2 May 2018.

CAMPBELL FLEMING

NON-EXECUTIVE DIRECTOR

Appointed to the Board

31 August 2018

Experience

Campbell Fleming is the Global Head of Distribution at Aberdeen Standard Investments, the asset management business of Standard Life Aberdeen. He joined Aberdeen Asset Management in August 2016 from Columbia Threadneedle Investments where he was the Chief Executive - EMEA and Global COO for four years. Mr Fleming is the Chair of the Investment Association Trade Committee and previously held senior positions at JP Morgan Asset Management.

KAREN GREEN

Independent Non-Executive Director

Committee membership

Audit Committee, Remuneration Committee

Appointed to the Board

1 July 2017

Experience

Karen Green is the former Chief Executive of Aspen UK, which comprised the UK insurance companies of the global US-listed insurer and reinsurer, Aspen Insurance Holdings and was a member of the Aspen Group Executive Committee for 12 years. She also held a number of other senior positions including as Group Head of Corporate Development, Strategy, and Office of the Group CEO. Prior to that, she held various senior private equity and corporate finance roles from 1997 to 2005 at GE Capital and then MMC Capital, gaining substantial M&A experience, having worked previously at Baring Brothers and Schroders. Ms Green is Non-Executive Director of Admiral Group plc and is a Council Member of Lloyd's of London. She is Deputy Chair and Acting Chair of Aspen Managing Agency Limited and is also a Vice President of the Insurance Institute of London.

BELINDA RICHARDS

Independent Non-Executive Director

Committee membership

Risk Committee, Audit Committee

Appointed to the Board

1 October 2017

Experience

Belinda Richards has held senior executive positions at KPMG, EY, and latterly Deloitte from 2000 to 2010 where she was a senior corporate finance Partner and the Global Head of Merger Integration and Separation Advisory Services. She is an experienced Non-Executive Director, currently on the Boards of WM Morrison Supermarkets plc, Avast plc, The Monks Investment Trust plc and Schroder Japan Growth Fund plc. Previously, she has also been on the Boards of Aviva UK Life & Pensions, Grainger plc and Balfour Beatty plc.

NICHOLAS SHOTT

Independent Non-Executive Director

Committee membership

Nomination Committee, Remuneration Committee

Appointed to the Board

1 September 2016

Experience

Nicholas Shott is an investment banker, who has been European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009. Mr Shott joined Lazard in 1991 and became a partner in 1997. He is also a Non-Executive Director on the Board of the Home Office.

KORY SORENSON

Independent Non-Executive Director

Committee membership

Remuneration Committee (Chair), Nomination Committee

Appointed to the Board

1 July 2014

Experience

Kory Sorenson is currently a Non-Executive Director and Chairman of the Audit Committee of SCOR SE, a Non-Executive Director of Pernod Ricard SA, a Non-Executive Director of Prometic Life Sciences Inc, a member of the Supervisory Board of Uniqa Insurance Group AG, and a member of the Supervisory Board of the privately-owned Bank Gutmann AG. Ms Sorenson is currently on the Supervisory Board of Uniqa Insurance Group AG, although will not be seeking renewal of her mandate in May 2019. She has been nominated to join the Board of SGS SA in March 2019. Ms Sorenson has over 25 years of experience in the financial services sector, most of which has been focused on insurance and banking. She was a Non-Executive Director of Aviva Insurance Limited, Managing Director, Head of Insurance Capital Markets of Barclays Capital and also held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley. She began her career in the finance department of Total SA.

EXECUTIVE MANAGEMENT TEAM

Executive management of the Group is led by the Group Chief Executive Officer, Clive Bannister, who is supported by the Executive Committee ('ExCo').

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

ROLES AND RESPONSIBILITIES

-- Leads the development of the Group's strategy for agreement by the Board;

-- Leads and directs the Group's businesses in delivery of the Group's strategy and business plan;

-- Leads the Group to safeguard returns for policyholders and grow shareholder value;

-- Embeds a risk-conscious Group culture which recognises policyholder obligations in terms of service and security; and

-- Manages the Group's key external stakeholders.

STEPHEN JEFFORD

GROUP HUMAN RESOURCES DIRECTOR

ROLES AND RESPONSIBILITIES

-- Leads the implementation of the Group's employee strategy in order to recruit, retain, motivate and develop high quality employees;

-- Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and the Group Board and Remuneration Committee; and

-- Delivers HR services to the Group.

TONY KASSIMIOTIS

GROUP CHIEF OPERATING OFFICER

ROLES AND RESPONSIBILITIES

-- Leads development and delivery of the Group's operating platforms in line with regulatory requirements, the Risk Universe and strategy;

-- Ensures the delivery of the Group's information technology strategy;

-- Leads the management of the Group's long-term outsourcing arrangements; and

-- Ensures that the Group's procurement activities and shared services are efficient and effective.

JAMES MCCONVILLE

GROUP FINANCE DIRECTOR And Group Director, Scotland

ROLES AND RESPONSIBILITIES

-- Develops and delivers the Group's financial business plan in line with strategy;

-- Ensures the Group's finances and capital are managed and controlled;

-- Develops and delivers the Group's debt capital strategy and other treasury matters;

-- Ensures the Group has effective processes in place to enable all reporting obligations to be met;

-- Supports the Group Chief Executive Officer in managing the Group's key external stakeholders; and

-- Enhances shareholder value through clear, rigorous assessment of business opportunities.

SUSAN MCINNES

Chief Executive, Standard Life assurance Limited, AND GROUP DIRECTOR, OPEN BUSINESS

ROLES AND RESPONSIBILITIES

-- Leads development and delivery of the Standard Life business strategy including ensuring;

-- Customer proposition is evolved to ensure it continues to meet the market need;

-- Focusses on a business model which ensures good outcomes for customers, shareholders and all other stakeholders; and

-- Ensures that Standard Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the Risk Universe and strategy.

JOHN MCGUIGAN

GROUP HEAD OF CUSTOMER

ROLES AND RESPONSIBILITIES

-- Leads the Group's Customer Function to drive operational and experience delivery for the Group's customer base;

-- Sets standards and policies for customer management and interaction; and

-- Provides customer oversight, complaint handling and remediation activity.

ANDY MOSS

CHIEF EXECUTIVE, PHOENIX LIFE AND GROUP DIRECTOR, HERITAGE BUSINESS

ROLES AND RESPONSIBILITIES

-- Leads the development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses;

-- Leads the Phoenix Life business to optimise outcomes for customers in terms of both value and security; and

-- Ensures Phoenix Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the Risk Universe and strategy.

JONATHAN PEARS

CHIEF RISK OFFICER

ROLES AND RESPONSIBILITIES

-- Leads the Group's risk management function, embracing changes in best practice and regulation including Solvency II;

-- Oversees and manages the Group's relationship with the FCA and PRA; and

-- Supports the Group Board Risk Committee in the oversight of the Group's risk framework, in line with risk strategy and appetite.

RAKESH THAKRAR

DEPUTY GROUP FINANCE DIRECTOR

ROLES AND RESPONSIBILITIES

-- Leads on the Group's Annual Report and Accounts, ORSA and Pillar 3 reporting;

-- Manages the Group's financial plans and management information in line with strategy;

-- Contributes to the effective management of the Group's balance sheet and financial plan (including M&A); and

-- Leads on all financial aspects of any M&A.

SIMON TRUE

GROUP CORPORATE DEVELOPMENT DIRECTOR AND GROUP CHIEF ACTUARY

ROLES AND RESPONSIBILITIES

-- Supports the Group Chief Executive Officer in the formulation of the strategy for the Group;

-- Leads implementation of the Group's strategy as regards any potential acquisition or disposal;

-- Ensures capital is managed efficiently across the Group;

-- Manages the Group's solvency position;

-- Leads the development of the Group's investment strategy; and

-- Identifies and delivers opportunities to enhance shareholder value across the Group.

QUENTIN ZENTNER

GENERAL COUNSEL

ROLES AND RESPONSIBILITIES

-- Leads provision of legal advice to the Group Board, other Group company Boards, ExCo and senior management;

-- Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group;

-- Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations; and

-- Designs and implements a whistleblowing framework within the Group.

Corporate governance report

The Board is committed to high standards of corporate governance and the Group's Corporate Governance policy is aligned to compliance with the UK Corporate Governance Code ('the Code') which sets standards of good practice for UK listed companies. It is the Board's view that the Company has been fully compliant during 2018 with the Principles and provisions set down in the Code.

THE BOARD

The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director, two SLA nominated Directors and seven independent Non-Executive Directors. Biographical details of all Directors are provided on pages 62 to 63.

The Board considers that the following Directors are independent: Alastair Barbour, Karen Green, Wendy Mayall, John Pollock, Belinda Richards, Nicholas Shott and Kory Sorenson. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors.

THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENT DIRECTOR

Nicholas Lyons is Chairman of the Board of Directors of the Company, having joined the Board as Chairman on 31 October 2018. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group.

The Chairman's other commitments are set out in his biographical details on page 62. The Chairman was appointed on the basis of committing two days per week to Phoenix.

The Senior Independent Director, appointed by the Board, is Alastair Barbour. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman's performance by the Non-Executive Directors.

BOARD SUCCESSION PLANNING

The Board undertakes regular reviews of executive and non-executive succession planning, as it did in 2018, to ensure that robust plans are in place. Succession planning for executive directors and other senior management takes consideration of both external and internal markets. The Board concluded in its November 2018 Board Evaluation Review that a period of Board stability would now be desirable, following the successful succession planning programme resulting in regular changes in the Board's composition over the last three years, during which eight non-executive directors were appointed.

BOARD EFFECTIVENESS

In accordance with the Code, an evaluation of the performance of the Board and that of its Committees and individual Directors was undertaken in the latter part of 2018. The process was led by the Chairman and internally facilitated by the Company Secretary. The process involved completion by Directors of a questionnaire covering various aspects of Board, Committee and Director effectiveness followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed by the Board in November 2018.

A strong theme from the review was the desire to continue to focus on strategy and the Group's future as a heritage and open business. Various process-focused recommendations to support the Board in successfully driving forward the Group's strategy are being actioned.

BOARD COMPOSITION

GROUP BOARD (%)

 
DECEMBER 2018 
------------------------------------  --- 
Chairman                               8% 
------------------------------------  --- 
Executive Directors                   17% 
------------------------------------  --- 
Independent Non-Executive Directors   58% 
------------------------------------  --- 
SLA nominated Directors               17% 
------------------------------------  ---

BOARD GER DIVERSITY (%)

 
Female   33% 
-------  --- 
Male     67% 
-------  ---

Key statistics

 
                                           December    December 
                                               2018        2017 
---------------------------------------  ----------  ---------- 
Market Cap                                GBP4.45bn   GBP3.18bn 
---------------------------------------  ----------  ---------- 
FTSE position                                    97         137 
---------------------------------------  ----------  ---------- 
                                                May         May 
                                               2018        2017 
AGM votes in favour of all resolutions          93%         95% 
---------------------------------------  ----------  ---------- 
                                              Fully       Fully 
                                          compliant   compliant 
UK Corporate Governance Code                in 2018     in 2017 
---------------------------------------  ----------  ----------

To ensure that the Directors maintain up-to-date skills and knowledge of the Group, all Directors receive regular presentations on different aspects of the Group's business and on financial, legal and regulatory issues. All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. In 2018 the new Chairman, Nicholas Lyons and SLA nominated Directors, Campbell Fleming and Barry O'Dwyer, undertook a comprehensive induction, including detailed strategic and operational briefings and information, before and following their appointments. Comments on their induction process are shown below.

OPERATION OF THE BOARD

The Board is responsible to the shareholders for the overall performance of the Group. The Board's role is to provide entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles.

These matters include:

-- Group strategy and business plans;

-- Major acquisitions, investments and capital expenditure;

-- Financial reporting and controls;

-- Dividend policy;

-- Capital structure;

-- The constitution of Board committees;

-- Appointments to the Board and Board committees;

-- Senior executive appointments; and

-- Key Group policies.

The schedule of matters reserved for the Board is available from the Company Secretary. Matters which are not reserved for the Board and also its committees under their terms of reference (which are available on the Group website), or for shareholders in general meetings, are delegated to the executive management under a schedule of delegated authorities approved by the Board.

The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings and to devote appropriate preparation time ahead of each meeting. In February 2019, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison with other FTSE 250 companies.

The Nomination Committee has confirmed its absolute satisfaction with the time and overall commitment given to Phoenix by all Directors. During 2018, several unscheduled meetings called at short notice impacted directors' attendance.

INDUCTION INSIGHTS

Two new Directors, who joined the Board in 2018, share their insights on their induction.

 
                         CAMPBELL FLEMING              BARRY O'DWYER 
                          NON-EXECUTIVE DIRECTOR        NON-EXECUTIVE DIRECTOR 
-----------------------  ----------------------------  ----------------------------- 
What did your induction  I spent several days          Prior to the acquisition 
 involve?                 with senior executives        of Standard Life Assurance, 
                          in London and Edinburgh       I was the CEO of that 
                          on a full and very detailed   company and so I am very 
                          programme covering all        familiar with the newest 
                          aspects of the businesses     part of the Phoenix Group. 
                          from Solvency models          My induction hence focused 
                          to client service. The        on helping me to understand 
                          sessions all involved         the wider Group and the 
                          excellent presentations       Phoenix Life company 
                          and full, as well as          in Wythall. My meetings 
                          open, discussions with        involved discussing the 
                          the team. I also spent        Group's strategy andits 
                          some time with the client     risk management framework, 
                          service teams and learned     as well as seeing how 
                          about the strategy to         the business operates 
                          better serve clients          day-to-day. 
                          in future. I am yet to 
                          visit the life company 
                          operations in Wythall 
                          but hope to do so as 
                          soon as possible. 
-----------------------  ----------------------------  ----------------------------- 
WHAT WERE YOUR OVERALL   The induction process         I was very impressed 
 IMPRESSIONS?             was very well structured      by the way in which the 
                          and thorough. I experienced   Group approached the 
                          an open culture and a         induction process - it 
                          general willingness to        was extremely well organised 
                          arrange follow up sessions    and everyone I met was 
                          where I wanted to explore     very open and helpful 
                          aspects of the business       in answering questions. 
                          further. This is reflective   As a Director, it felt 
                          of the culture of the         very well-designed to 
                          Group as a whole.             get me up to speed quickly 
                                                        with ongoing events, 
                                                        allowing me to contribute 
                                                        immediately to Board 
                                                        discussions. 
-----------------------  ----------------------------  -----------------------------

This included Alastair Barbour and Belinda Richards, who each missed three of twelve Board meetings in 2018. All three meetings missed by Mr Barbour were ad-hoc meetings called at short notice. His Board attendance record in the prior year (2017) was 100%. Two of the three meetings missed by Belinda Richards in 2018 were ad-hoc meetings called at short notice.

Since her appointment in 2017, she has attended all other Board meetings, so has attended twelve out of fifteen to date.

The remuneration of the Directors is shown in the Directors' Remuneration Report on pages 88 to 105. The terms and conditions of appointment of Non-Executive Directors are on the Group's website. In accordance with the provisions of the Articles and the Code, all Directors will submit themselves for election at the Company's AGM on 2 May 2019.

The Board met twelve times during 2018 and is scheduled to meet seven times in 2019 including for a two-day strategy setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman, without the Executive Directors being present, as they did on several occasions in 2018.

BOARD and COMMITTEE ATTANCE 2018

 
                          Board meetings        Audit         Risk    Nomination    Remuneration 
----------------------  ----------------  -----------  -----------  ------------  -------------- 
                          Max     Actual  Max  Actual  Max  Actual   Max  Actual   Max    Actual 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Chairman 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Henry Staunton(1)           9          9                               4       4 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Nicholas Lyons(2)           3          3                               1       1 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Executive Directors 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Clive Bannister 
 (Group CEO)               12         12 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
James McConville 
 (Group FD)                12         12 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Non-Executive 
 Directors 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Alastair Barbour(6)        12          9    7       7    7       7     5       5 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Ian Cormack(3)              5          5                               3       2 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Campbell Fleming(4)         3          3 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Karen Green(5)             12         12    7       7                  -       -     6         6 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Wendy Mayall(5)            12         12                 7       7     -       - 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Barry O'Dwyer(4)            3          3 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
John Pollock(5)            12         11    7       7    7       7     -       - 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Belinda Richards(5,6)      12          9    3       2    7       5     -       - 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  -------- 
Nicholas Shott             12         12                               5       5     6         6 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  --------

Kory Sorenson(5)           12         11    4       4                  2       2     6         6 
----------------------  -----  ---------  ---  ------  ---  ------  ----  ------  ----  --------

Notes:

1 Henry Staunton resigned from the Board on 31 October 2018.

2 Nicholas Lyons was appointed to the Board on 31 October 2018.

3 Ian Cormack resigned from the Board on 2 May 2018.

4 Campbell Fleming and Barry O'Dwyer were appointed to the Board on 31 August 2018.

5 In addition, the following attended meetings of the specially constituted Chair Selection Committee: Kory Sorenson (Chair) - 3 meetings; Karen Green - 3 meetings; Wendy Mayall - 3 meetings; John Pollock - 2 meetings; Belinda Richards - 2 meetings.

6 All three Board meetings missed by Alastair Barbour were ad-hoc meetings called at short notice. His Board attendance record in the prior year (2017) was 100%.

Two of the three Board meetings missed by Belinda Richards were ad-hoc meetings called at short notice. Since her appointment in 2017, she has attended all

other Board meetings, so has attended twelve out of fifteen to date.

BOARD ALLOCATION OF AGA TIME (%)

 
CEO report                                                                    30% 
----------------------------------------------------------------------------  --- 
Strategy, performance, governance and regulatory review 
----------------------------------------------------------------------------  --- 
Strategy and planning                                                         30% 
----------------------------------------------------------------------------  --- 
Strategic and operational planning, consideration of corporate transactions 
----------------------------------------------------------------------------  --- 
CFO/MI report                                                                 15% 
----------------------------------------------------------------------------  --- 
Monitoring performance against objectives 
----------------------------------------------------------------------------  --- 
Financial reporting                                                           10% 
----------------------------------------------------------------------------  --- 
External reporting 
----------------------------------------------------------------------------  --- 
Reports from Chairs of Committees                                              5% 
----------------------------------------------------------------------------  --- 
Audit, Nomination, Remuneration and Risk Committee activity 
----------------------------------------------------------------------------  --- 
Board changes and performance                                                  5% 
----------------------------------------------------------------------------  --- 
Appointments, succession and performance 
----------------------------------------------------------------------------  --- 
Other matters                                                                  5% 
----------------------------------------------------------------------------  ---

BOARD COMMITTEES

The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees can be found on the Company's website.

AUDIT COMMITTEE

The composition of the Audit Committee is in accordance with the requirements of the Code and also with DTR 7.1.1AR in that all four members are independent Non-Executive Directors, that at least one member of the Committee has recent and relevant financial experience and the members of the Committee as a whole have competence relevant to the sector in which the Company is operating.

The Audit Committee met seven times during 2018. Its meetings are attended by the Chair of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Board Chair and the Group Chief Executive Officer. The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors, without management present.

AUDIT COMMITTEE'S ROLE

-- Receiving and reviewing the Annual Report and Accounts and other financial results, statements and disclosures, although the ultimate responsibility for these matters remains with the Board.

-- Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group's internal controls.

-- Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

-- Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement including approval of external auditor fees and non-audit services and for reviewing the performance, objectivity and independence of the external auditors.

-- Considering and approving the remit of the Internal Audit function and reviewing its effectiveness.

-- Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairs of the Audit Committee and subsidiary audit committees, and the Audit Committee Chair's attendance at the Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit Committee (and from 1 September 2018, the Standard Life Audit Committee papers). This oversight has been enhanced further through the attendance at the Audit Committee, on at least an annual basis, by the Chair of the Phoenix Life and Standard Life Audit Committee.

 
Members: 
---------------------------------- 
Chair: Alastair Barbour 
---------------------------------- 
Karen Green 
---------------------------------- 
John Pollock 
---------------------------------- 
Kory Sorenson (until 2 May 2018) 
---------------------------------- 
Belinda Richards (from 2 May 2018) 
----------------------------------

AUDIT COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

External reporting and controls

-- Reviewed the Company's 2017 Annual Report and Accounts and 2018 Interim Financial Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors.

-- Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements for 2017 (annual), 2018 (interim) and 2018 (annual) as summarised in the table on page 71. These matters were considered by the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with regard to the significant risks assessed by the Group's external auditors as set out in their audit opinion on pages 112 to 120.

-- Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern, the Group's ongoing viability and in support of dividend payments.

-- Reviewed the Line 1 risk and controls report from management, the Line 2 internal control assessment from Group Risk, and the annual Line 3 internal control environment opinion report (and the half year update) prior to its consideration by the Board and received reports regarding consequential actions; and received a dedicated briefing on acquisition accounting and continued consideration of the future impact of IFRS17.

-- Considered various financial disclosures included within the transaction documents pertaining to the acquisition of Standard Life Assurance.

-- Reviewed reports from Internal Audit on the control environment in the Group's outsource service providers and on the effectiveness of the internal audit work undertaken within the outsource service providers, noting that this was addressed in more detail at the Phoenix Life Audit Committee.

External audit

-- Undertook a review of the effectiveness, engagement and remuneration of the current external auditors. This culminated in the re-appointment of Erns & Young ('EY'), which was approved by the Board and subsequently approved by shareholders at the May 2018 AGM - see 'Assessment of the effectiveness of the external audit process' and 'Auditor's Appointment' on page 70.

-- Reviewed and monitored the independence of the external auditors including their provision of non-audit services and fees and their appointment as external auditors to the Standard Life Assurance entities - see Auditor's Independence and External Auditor Policy on page 70.

Internal audit

-- Assessed the effectiveness of Internal Audit, noting the positive responses received from Management.

-- Approved the annual update of the Group Internal Audit Charter and the Group Internal Audit Plan (including its link to the Risk Management Framework), receiving regular reports to monitor progress against the plan.

-- Reviewed the internal audit control environment opinion which included Internal Audit's view of the risk management framework across the Group.

Audit committee's performance

-- The Committee's performance was reviewed by the Board in November 2018 as part of its overall Board Evaluation Review.

General

-- Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in confidence, about any possible improprieties; and approved an updated whistleblowing policy which complied with the FCA and PRA's whistleblowing rules and the appointment of the Phoenix Life Audit Committee Chair as Whistleblowing Champion under the Senior Insurance Managers Regime.

-- Reviewed and approved updates to the Group Tax Policy, Group External Auditor Policy and the Group Liquidity & Funding Policy.

"THE ACQUISITION OF STANDARD LIFE IN 2018 WAS SIGNIFICANT FOR THE GROUP, AND FOR THE AUDIT COMMITTEE THERE WILL BE ADDITIONAL FOCUS ON ENSURING THAT ROBUST CONTROLS ARE IN PLACE AND ARE APPLIED ACROSS THE WHOLE ENLARGED GROUP."

ALASTAIR BARBOUR

CHAIR OF AUDIT COMMITTEE

AUDITOR'S APPOINTMENT

In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to be in the best interests of its shareholders in light of the length of association with the current auditors.

The tender process in 2016 was overseen by the Audit Committee. The Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the external auditor of the Group from 2017 and supported the recommendation for the re-appointment of the external auditor for the 2018 statutory audit.

The Committee also reviewed the appointment of EY as auditor to Standard Life Assurance Limited and its subsidiaries in 2018 following the acquisition of those entities by the Group.

Following completion of the onshoring of the Group, a new UK-registered holding company, PGH plc was put in place in December 2018. Effective from December 2018, EY has been appointed as auditor of the Group by the Directors of PGH plc.

EY has been appointed as auditor of the Group by the Directors of PGH plc. EY has indicated its willingness to continue in office and shareholders' approval will be sought at the AGM on 2 May 2019.

The current audit partner is Ed Jervis, who has held that role from the 2014 statutory audit and will rotate off after completion of the 2018 statutory audit responsibilities.

ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS

The effectiveness of the external audit process was assessed through the completion of a questionnaire by the key divisions and Group functions within Phoenix Group covering EY's performance during the 2017 financial reporting cycle.

AUDITOR'S INDEPENCE AND EXTERNAL AUDITOR POLICY

The Company has an external auditor policy which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement partner.

The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. Furthermore, the Group's external auditor policy prescribes a limit for fees associated with non-audit services of 70% of the average statutory audit fee for the three preceding years. This aligns with requirements introduced by the EU Audit Directive and Regulations in 2016.

In 2018, total fees of GBP12.2 million were paid to EY. Of this amount GBP7.2 million related to statutory audit fees of the parent and its subsidiaries, with a further GBP0.9 million incurred in relation to services provided pursuant to legal or regulatory requirements.

The remaining fees of GBP4.1 million are classified as non-audit services under the EU Directive and Regulations, and give rise to a non-audit to audit fee ratio of 66% in 2018 within the limits prescribed in the Group's policy.

The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. GBP1.6 million of the non-audit fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition of Standard Life Assurance. The Audit Committee considers that the engagement of the external auditors in the performance of such diligence procedures provides synergies with audit work post-completion of the transaction and enhanced insight as to the quality of the control environment operated in the target company by comparison to Group standards. Of the remaining balance, a further GBP2.0 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents relating to the acquisition and debt issuances undertaken in the year. The engagement of the Group's independent external auditor for the provision of such services is consistent with market practice in transactions of this nature.

In relation to their appointment as auditors of the Standard Life Assurance entities, the Committee reviewed the independence of EY in accordance with the requirements of the Financial Reporting Committee's Ethical Standards on independence ("the Ethical Standards"). This included ensuring that any material business relationships between EY and the acquired entities and any prohibited professional services provided by EY to those entities, were terminated within a period of three months from completion of the acquisition as permitted under the Ethical Standards.

The Audit Committee is satisfied that the non-audit services performed during 2018 have not impaired the independence of EY in its role as external auditor. Further information on non-audit fees is provided in Auditor's Remuneration in Notes to the IFRS Consolidated Financial Statements on page 139.

SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS

 
Significant matters 
 in relation to 
 the 2018 IFRS           How these issues 
 financial statements     were addressed 
-----------------------  ------------------------------------------------------------- 
Review of the 
 actuarial valuation       *    Management presented papers to the Life Company Audit 
 process, to include            Committees detailing recommendations for the 
 the setting of                 actuarial assumptions and methodologies to be used 
 actuarial assumptions          for the interim and year-end reporting periods with 
 and methodologies,             justification and benchmarking as appropriate. These 
 and the robustness             assumptions and methodologies were debated and 
 of actuarial data              challenged by the Life Company Audit Committees, with 
                                focus on longevity, persistency and expenses, prior 
                                to their approval. 
 
 
                           *    A summary of these papers was presented for oversight 
                                review by the Audit Committee, and the Life Company 
                                Audit Committees' conclusions were reported to the 
                                Audit Committee through minutes of its meeting and a 
                                discussion between the Chairmen of the committees. 
                                The Audit Committee discussed, and questioned 
                                management and EY on, the content of the summary 
                                papers and the Life Company Audit Committee's 
                                conclusions. 
 
 
                           *    Pension assumptions for use in the IAS 19 Employee 
                                Benefits valuations were reviewed and approved by the 
                                Audit Committee prior to the finalisation of the 
                                valuation reports. 
 
 
                           *    The Audit Committee received and considered detailed 
                                written and verbal reporting from the external 
                                auditors setting out their observations and 
                                conclusions in respect of the assumptions, 
                                methodologies and actuarial models. 
-----------------------  ------------------------------------------------------------- 
Valuation of complex 
 and illiquid financial    *    Management presented papers setting out the basis of 
 assets                         valuation of financial assets, including changes in 
                                methodology and assumptions, for the interim and 
                                year-end reporting periods to the Life Company Audit 
                                Committees. The assumptions, valuations and processes, 
                                particularly for financial assets determined by 
                                valuation techniques using significant non-observable 
                                inputs (Level 3), were debated and challenged by the 
                                Life Company Audit Committee prior to being approved. 
 
 
                           *    The valuation information was then presented for 
                                oversight review by the Audit Committee who 
                                considered and confirmed the appropriateness of the 
                                basis of valuation. 
-----------------------  ------------------------------------------------------------- 
Acquisition Accounting 
                           *    The Audit Committee considered the impact of the 
                                acquisition of the Standard Life Assurance entities 
                                on the Group consolidated IFRS financial statements. 
                                This has included consideration of the adoption of 
                                Group accounting policies and methodologies by the 
                                acquired entities. 
 
 
                           *    Management presented papers detailing the basis of 
                                fair value adjustments made to the acquisition 
                                balance sheets including the valuation of tangible

                                net assets, the valuation of intangibles including 
                                the Acquired Value of In-Force business and the gain 
                                on bargain purchase. The key methodologies and 
                                assumptions applied in determining such adjustments 
                                were reviewed and approved by the Audit Committee. 
 
 
                           *    The Audit Committee considered and confirmed the 
                                appropriateness of the results of annual impairment 
                                testing carried out in respect of goodwill balances 
                                and reviews for indicators of impairment performed in 
                                respect of finite life intangibles. 
-----------------------  ------------------------------------------------------------- 
Operating Profit 
                           *    The Audit Committee reviewed the allocation of key 
                                items to operating profit to ensure the allocations 
                                were in line with the Group's operating profit 
                                framework and consistent with previous practice. 
-----------------------  ------------------------------------------------------------- 
Assessment of 
 whether the Annual        *    The Audit Committee considered an analysis of the 
 Report and Accounts            processes and conclusions in support of management's 
 are fair, balanced             conclusions that the Annual Report and Accounts are 
 and understandable             fair, balanced and understandable. As part of the 
                                year-end procedures, the Audit Committee discussed 
                                with management and EY the review processes that 
                                operated over the production of the Annual report and 
                                Accounts. 
-----------------------  ------------------------------------------------------------- 
Going concern 
 analysis                  *    A comprehensive going concern assessment was 
                                undertaken by the Audit Committee for the 2018 
                                year-end and 2018 interim reporting periods, based on 
                                an assessment by management of the Group's liquidity 
                                for the going concern review period together with 
                                forecasts and a stress and sensitivity analysis. The 
                                analysis also confirmed that all regulatory and 
                                working capital requirements would be met under the 
                                base case and adverse stress scenarios throughout the 
                                going concern review period. 
-----------------------  ------------------------------------------------------------- 
Viability Statement 
                           *    The Audit Committee reviewed the process to support, 
                                and the contents of, the Viability Statement. The 
                                Committee concluded that the period covered by the 
                                Viability Statement should continue to be five years 
                                to align it to the Group's strategic plan. 
-----------------------  -------------------------------------------------------------

Note

Please note that references in this table to Life Company Audit Committees include Audit Committees for the acquired Standard Life Assurance entities in respect of post-acquisition activity.

RISK COMMITTEE

The role of the Risk Committee is to advise the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board's overall degree of risk aversion, the current financial situation of the Group and the Group's capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters.

The performance of the Committee during 2018 was assessed as part of both an overall internal annual Board effectiveness review and a Committee-specific effectiveness review. The conclusions demonstrate that the Committee continues to operate effectively.

Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 39 to 46.

RISK COMMITTEe's Role

-- The Committee is comprised of four Independent Non-Executive Directors.

-- A set of 'Operating Principles' are in place to define the responsibilities and accountabilities of the Risk Committees of Phoenix Group Holdings and its subsidiary company boards to avoid any overlap of focus or assurance activity.

-- The Committee's meetings are attended by the Chair of the Audit Committee, Alastair Barbour, which allows the review of internal control effectiveness to be managed through collaborative working and oversight.

-- The Chairman of the Phoenix Life and Standard Life Risk Committees and Model Governance Committee, John Lister, is a regular attendee to the Committee and provides members with a regular update on the risk matters pertinent to these key subsidiaries and the matters being dealt with at the Model Governance Committee (which is a Board Committee of the Group's Life Companies).

-- Other regular attendees to the Committee include the Group Chief Actuary, Deputy Group Finance Director, the Chief Executives of the subsidiary company boards, the Group General Counsel and the Group Head of Internal Audit.

-- The Committee met a total of seven times in 2018 to including two out of cycle meetings by telephone.

-- A joint briefing session was held between the Phoenix Group and Phoenix Life Risk Committee members to review Emerging Risks and Forward Looking Scenarios, the Counterparty Concentration Exposures Process and a deep dive into Credit and Illiquid Assets.

-- The Chief Risk Officer, Jonathan Pears, who joined from Standard Life Assurance on 31 August 2018, has full access to the Chair and the Committee and attends all meetings.

-- The Committee receives frequent reporting from the Chief Risk Officer and the Group Risk function on consolidated risk matters affecting the Group to including risk profile assessments and emerging risks.

Significant matters discussed in 2018

Standard Life Assurance acquisition

-- To ensure the safe delivery of the Group's acquisition strategy in line with risk appetite, the Committee evaluated the acquisition and provided a recommendation to the Board based on the risk profile, execution risks and overall risk appetite. In doing so, the Committee considered the financing and capital structure of the acquisition, reverse stress testing, acquiring risk infrastructure and regulatory engagement.

-- Throughout the acquisition, the Risk Committee continued to be informed on any risk matters including review of the Risk Factors included in the acquisition prospectus, the capital policy framework in operation at Standard Life and the execution risks presented at the time of transfer.

 
Members: 
------------------- 
Chair: John Pollock 
------------------- 
Alastair Barbour 
------------------- 
Wendy Mayall 
------------------- 
Belinda Richards 
-------------------

Consequences/Implications of a 'Hard Brexit'

-- Due to the ongoing uncertainty of the UK's exit from the European Union, the Committee reviewed and considered the preparations in place for a 'Hard Brexit' and the potential financial and operational impacts on the Group. This continued to be reflected within the top risk reporting to the Committee during the course of 2018 and 2019 to date.

Implementation of a single, digitally enhanced outsourcer platform

-- The Committee considered the estimated impact that delivery of this platform would have on the risk profile of Phoenix Life.

Building the UK Financial Sector's Operational Resilience

-- Following the issue of a tripartite discussion paper from the Bank of England, PRA and FCA, the Committee discussed the drive to move the industry toward a more comprehensive risk-based view of operational resilience which is more visible to boards. The Committee considered and supported the prepared response by the Risk function on behalf of the Company.

RISK COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

In addition to the significant matters discussed in 2018, the Committee also:

-- Reviewed adherence to the Group Risk Management Framework and approved its harmonisation following the acquisition of Standard Life Assurance Limited, to include consideration of the appropriateness of the Group's overall Risk Appetite Statements.

-- Monitored progress against the 2018 Group Risk function plan.

-- Approved the Group Market Risk Appetite Targets.

-- Considered the refresh of the Group's capital risk appetite.

-- Monitored compliance with the Group's principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient.

-- Reviewed the Group's risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk as well as contingency planning.

-- Received regular updates on Cyber Security.

-- Reviewed Reverse Stress Testing analysis, completed and provided oversight of, and challenge to, the design and execution of the Group's stress and scenario testing, including any changes of assumptions.

-- Informed the Remuneration Committee regarding the management of the Group's material risks to support their consideration of executive's Annual Incentive Plan rewards.

-- Considered a Line 2 review of the 2019 Annual Operating Plan.

REVIEW OF SYSTEM OF INTERNAL CONTROLS

The Board has overall responsibility for the Group's risk management and internal control systems and for reviewing their effectiveness in accordance with the Code. The Group's systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through the Audit and Risk Committees, which draw upon input from all three lines of defence. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2018, in accordance with the 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' published by the Financial Reporting Council. The assessment for 2018 was presented to the Board, following review by both Audit and Risk Committees, on 4 March 2019. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored by both the business and the Committees accordingly.

"DURING 2018, IN ADDITION TO ITS EXISTING PRINCIPAL ACTIVITIES, the COMMITTEE HAS REVIEWED AND CHALLENGED MATTERS RELATING TO THE STANDARD LIFE ACQUISITION AND THE IMPACT OF EXTERNAL POLITICAL AND ECONOMIC UNCERTAINTIES IN ORDER TO ENSURE THE COMPANY IS IN A STRONG POSITION TO DRIVE ITS STRATEGIC OBJECTIVES FORWARD."

JOHN POLLOCK

CHAIR OF RISK COMMITTEE

NOMINATION COMMITTEE

The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size, composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and senior management; and making recommendations to the Board on these matters.

The Nomination Committee met five times in 2018.

The Nomination Committee also met three times in 2018 as the Chair Selection Committee, chaired by Kory Sorenson, with other members being Karen Green, Wendy Mayall, John Pollock and Belinda Richards.

The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group and, in the case of executive appointments, also considers internal candidates. Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board.

This process was used for the appointment of the new Chairman, Nicholas Lyons, in 2018. The search consultancy used in 2018 for Director appointments was Russell Reynolds which has no other connection with the Company.

NOMINATION COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2018

-- As the Chair Selection Committee, delivered a recommendation to the Board for the appointment of Nicholas Lyons as Chairman following a comprehensive search process led by the Chair Selection Committee with Russell Reynolds search consultancy.

-- Delivered a recommendation to the Board for Alastair Barbour to succeed Ian Cormack as Senior Independent Director.

-- Taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board.

-- Taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board.

-- Reviewed the time spent by Directors in fulfilling their duties, concluding that the time spent appeared to be high in comparison with other FTSE 250 companies.

-- Reviewed the succession plans for Executive and Non-Executive Directors and recommended their approval to the Board.

-- Reviewed progress updates on Diversity and Inclusion, supporting initiatives being undertaken to accelerate and enhance management diversity.

The Board's policy on diversity is as follows:

-- The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new Directors.

-- The Board's overriding aim is to appoint the right Directors to the Board to drive forward the Group's strategy within a robustly compliant framework.

-- The Board will undertake regular skills audits to ensure the Board's skills remain appropriate for its strategy and providing diversity where possible.

"THE NOMINATION COMMITTEE HAS PERFORMED ITS ROLE SUCCESSFULLY OVER THE LAST THREE YEARS OF BOARD RENEWAL, WITH EIGHT NEW NON-EXECUTIVE DIRECTORS APPOINTED OVER 2016, 2017 AND 2018, REFLECTING THE SKILLS AND EXPERIENCE Required TO DRIVE THE GROUP FORWARD."

NIChOLAS LYONS

CHAIRMAN

 
Members: 
------------------------------- 
Chair: Nicholas Lyons 
------------------------------- 
Alastair Barbour 
------------------------------- 
Nicholas Shott 
------------------------------- 
Ian Cormack (until 2 May 2018) 
------------------------------- 
Kory Sorenson (from 2 May 2018) 
-------------------------------

Note

Henry Staunton (Chair until 31 October 2018, when he was succeeded by Nicholas Lyons).

REMUNERATION COMMITTEE

The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met seven times during 2018.

The Remuneration Committee is responsible for making recommendations to the Board on the Company's remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors, Executive Committee members (and other Solvency II identified staff) and the Chairman. Other than in relation to the Chairman, these include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Remuneration Committee's activities in 2018 are provided in the Directors' Remuneration Report on pages 76 to 105.

Our Remuneration Committee terms of reference were updated during the course of this year to reflect the expectations of the new Corporate Governance Code, of which we are fully supportive.

FIT Remuneration Consultants provided advice to the Remuneration Committee until March 2018. PwC provided advice from May 2018 onwards. Both organisations are independent of the Group.

"The Committee believes that Phoenix Group Holdings' approach to remuneration plays a key part in supporting the Group's strategic priorities and alignment with shareholders' and customers' interests."

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

 
Members: 
-------------------- 
Chair: Kory Sorenson 
-------------------- 
Karen Green 
-------------------- 
Nicholas Shott 
--------------------

Note

There were no changes to the composition of the Committee during 2018.

DIRECTORS' REMUNERATION REPORT

REMUNERATION COMMITTEE CHAIR'S LETTER

DEAR SHAREHOLDER

On behalf of the Board and its Remuneration Committee ('Committee'), I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2018. This report covers remuneration for Executive Directors and Non-Executive Directors of the Company, operated in line with the Remuneration Policy approved by shareholders at the 2017 AGM.

2018 was a transformational year for Phoenix with the acquisition of the Standard Life Assurance businesses, as set out in the Group Chief Executive Officer's report at the beginning of this Annual Report and Accounts. This and other achievements, in line with our strategic objectives, reflect the strong performance, commitment and leadership shown by the Group's management team.

Particular operational and financial highlights for the year included:

Highlights

-- Cash generation of GBP664 million in 2018 taking the total cash generation in 2017 and 2018 to GBP1.3 billion and exceeding the upper end of the target range for this period of GBP1.0 billion to GBP1.2 billion.

-- Completion of the acquisition of the Standard Life Assurance businesses financed in part by a GBP950 million rights issue and a GBP945 million debt issuance.

-- Strategic Partnership with Standard Life Aberdeen plc.

-- Completion of AXA Wealth and Abbey Life integrations.

-- Completion of three Bulk Purchase Annuity ('BPA') transactions.

-- Successful on-shoring of the Group.

-- Strong Customer Satisfaction scores of 93%.

INCENTIVE OUTCOMES FOR 2018

The Committee believes that Phoenix's approach to remuneration plays a key part in supporting the Group's strategic priorities and alignment with shareholders' and customers' interests. As indicated in last year's report, following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within our variable pay plans and made the necessary adjustments to ensure that the plans operated as originally intended and properly reflected our aim to reward long-term value generation.

Specifically:

-- 2018 Annual Incentive Plan ('AIP'):

-- Solvency II Management Action targets have been increased by GBP260 million to reflect the equity hedging action announced to the market.

-- Solvency II Own Funds targets have been increased by GBP1,837 million to reflect equity raised as part of the acquisition.

-- No changes were made to other AIP metrics.

-- 2016 Long Term Incentive Plan ('LTIP'):

-- No changes were made to the targets, recognising that no net cash is expected from the Standard Life Assurance businesses over the performance period ending December 2018.

For completeness. the targets relating to the 2017 and 2018 LTIP awards were also reviewed and the adjustments are described on page 94.

The Committee evaluated the performance of each Executive Director against both business objectives and individual personal objectives and decided the overall outturns of the AIP and LTIP are appropriate, specifically:

-- 2018 AIP: Clive Bannister and James McConville should receive 85.5% and 88.0% of their maximum bonus opportunity, respectively.

-- 2016 LTIP: Awards will vest at 49.5% of maximum opportunity for both Clive Bannister and James McConville.

Further details of the performance assessment are provided in this report.

REMUNERATION POLICY APPROVAL FOR 2019

The current Directors' Remuneration Policy was approved by shareholders at the 2017 AGM, with a 99% vote in favour. While this policy was put in place for three years, the recent establishment of Phoenix Group Holdings plc as the ultimate parent company of the Group means that the Directors' Remuneration Policy will need to be submitted for a formal binding shareholder approval at this year's AGM before an updated Remuneration Policy is put to shareholders at the 2020 AGM.

This will largely be a roll forward of the previously approved Phoenix Group Holdings policy. However, in recognition of the 2018 update to the UK Corporate Governance Code, we propose the following two changes to our current Policy:

-- Alignment of pension contributions for new Executive Directors with those provided to the wider workforce, with a review of the policy for current Executive Directors as part of the full policy review later this year.

-- Introduction of post-cessation shareholding requirements for both new and current Executive Directors.

AIP and ltip for 2019

The Committee reviewed the AIP and LTIP metrics in light of the acquisition of the Standard Life Assurance businesses and concluded that they continue to reflect the Group's evolving business focus and are aligned to the success of the Enlarged Group. Therefore, we propose no changes for the 2019 performance measures.

AIP 2019 (metrics unchanged from 2018)

 
Metric                                                        2019 Weightings 
-------------------------------------------  -------------------------------- 
Cash Generation                              24% (30% of Corporate component) 
-------------------------------------------  -------------------------------- 
Adjusted Shareholder Solvency II Own Funds   24% (30% of Corporate component) 
-------------------------------------------  -------------------------------- 
Management Actions                           12% (15% of Corporate component) 
-------------------------------------------  -------------------------------- 
Customer Experience                          20% (25% of Corporate component) 
-------------------------------------------  -------------------------------- 
Personal Objectives                                                       20% 
-------------------------------------------  --------------------------------

LTIP 2019 (metrics unchanged from 2018)

 
Metric                                                 2019 Weightings 
-----------------------------------------------------  --------------- 
Cumulative Cash Generation                                         40% 
-----------------------------------------------------  --------------- 
Return on Adjusted Shareholder Solvency II Own Funds               35% 
-----------------------------------------------------  --------------- 
TSR                                                                25% 
-----------------------------------------------------  ---------------

BOARD CHANGES

During the year, Henry Staunton announced his retirement from the Phoenix Group Holdings Board. Following an intensive search process, Henry was succeeded by Nicholas Lyons from 31 October 2018. Nicholas brings a wealth of experience in life insurance as well as the broader financial services sector. The Board is delighted to welcome Nicholas and looks forward to working with him in the future. The new Chairman's annual fee is the same as that paid to his predecessor.

LOOKING FORWARD

During 2019 the Committee will conduct a full review of the Remuneration Policy to ensure that it continues to align with the Group's strategy, motivates and incentivises management, and promotes alignment with shareholders' and customers' interests. This review will incorporate the new requirements of the UK Corporate Governance Code, which we have already started to embrace through the early adoption of certain aspects of the Code and expanded remit of the Committee as set out in the Terms of Reference. An updated Remuneration Policy will be put to shareholders at the 2020 AGM.

As part of the review process, I will be formally reaching out to engage with and seek the views of the Group's major shareholders. As ever, I welcome the views of all stakeholders, look forward to these meetings, and am very grateful for your time taken and valuable feedback.

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

4 March 2019

DIRECTORS' REMUNERATION REPORT

AT A GLANCE

HOW WE PERFORMED IN 2018

Group performance measures

Annual Incentive Plan ('AIP'):

Below we show the target ranges and outturn against the metrics within the 2018 AIP. More details of the 2018 AIP can be found on page 89. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company strategy and remuneration outcomes.

OPERATING CASH GENERATION (GBPm)

KPI

 
Threshold       550 
----------  ------- 
Target          640 
----------  ------- 
Maximum         690 
----------  ------- 
Outturn     GBP664m 
----------  -------

SOLVENCY II MANAGEMENT ACTIONS (GBPm)

 
Threshold         360 
----------  --------- 
Target            400 
----------  --------- 
Maximum           460 
----------  --------- 
Outturn     GBP1,080m 
----------  ---------

ADJUSTED SHAREHOLDER SOLVENCY II OWN FUNDS (GBPm)

 
Threshold       4,700 
----------  --------- 
Target          4,750 
----------  --------- 
Maximum         4,850 
----------  --------- 
Outturn     GBP5,603m 
----------  ---------

CUSTOMER SATISFACTION (%)

KPI

 
Threshold      90 
----------  ----- 
Target         91 
----------  ----- 
Maximum        93 
----------  ----- 
Outturn     93.1% 
----------  -----

ORIGO TIMESCALES (DAYS)

KPI

 
Threshold        <=12 
---------  ---------- 
Target           <=11 
---------  ---------- 
Maximum         <=9.5 
---------  ---------- 
Outturn    10.73 days 
---------  ----------

CAT. B INCIDENT CLOSURES (%)

 
Threshold     >=70 
----------  ------ 
Target      >=72.5 
----------  ------ 
Maximum       >=75 
----------  ------ 
Outturn      73.4% 
----------  ------

SERVICING COMPLAINTS (%)

 
Threshold    60 
----------  --- 
Target       65 
----------  --- 
Maximum      70 
----------  --- 
Outturn     50% 
----------  ---

FOS OVERTURNS (%)(1)

KPI

 
Threshold   <=20 
----------  ---- 
Target      <=19 
----------  ---- 
Maximum     <=18 
----------  ---- 
Outturn      17% 
----------  ----

1 See note 5 on page 89 for detail of the FOS Overturn Rate used in the AIP.

Long Term Incentive Plan ('LTIP'):

Below we show outturn against the measures which applied for the 2016 LTIP awards which are reflected in the Single Figure Table on page 88. Cumulative cash generation and TSR performance are shown over the three-year performance period (financial years 2016, 2017 and 2018). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts), with median being the 50th percentile and upper quintile being the 80th percentile. Cash generation continues to be one of our key corporate strategic objectives, while TSR provides a direct linkage to shareholder interests.

CUMULATIVE CASH GENERATION (GBPbn)

 
Threshold        1.311 
----------  ---------- 
Target           1.511 
----------  ---------- 
Outturn     GBP1.507bn 
----------  ----------

TOTAL SHAREHOLDER RETURN (percentile)

 
Threshold                  50 
----------  ----------------- 
Target                     80 
----------  ----------------- 
Outturn     46(th) percentile 
----------  -----------------

Shareholding Guidelines ('SOGs')

The charts below show the shares and vested LTIP awards held by the Executive Directors as a percentage of salary as at 31 December 2018. The figures are based on a share price of GBP5.63 as at 31 December 2018. LTIPs which have vested but are subject to a holding period have counted towards the SOGs figure. The LTIP vested figure reflects performance outturn, dividend accrual, and the expected impact of income tax and National Insurance that will be payable on exercise. Further details on shareholding requirements are included in the Remuneration Policy under the Shareholding Guidelines section on page 84.

SHAREHOLDING GUIDELINES (% OF SALARY)

 
Group Chief Executive Officer - Clive 
 Bannister 
--------------------------------------  ---- 
Shareholding guidelines                 200% 
--------------------------------------  ---- 
Shares held at 31 December 2018         740% 
--------------------------------------  ---- 
 
 
Group Finance Director - James McConville 
------------------------------------------  ---- 
Shareholding guidelines                     200% 
------------------------------------------  ---- 
Shares held at 31 December 2018             399% 
------------------------------------------  ----

INTRODUCTION

This report contains the material required to be set out as the Directors' Remuneration Report ('Remuneration Report') for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 ('the DRR regulations').

Phoenix Group Holdings previously voluntarily complied with the DRR regulations as a matter of good practice although it was not strictly required to do so as a non-UK incorporated quoted company. Subsequent to the completion of Phoenix Group Holdings' re-domicile to the UK and following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted as the new ultimate parent company of the Group in place of Phoenix Group Holdings. Accordingly, the Company, as a UK-registered quoted company, must now comply with the DRR regulations as a matter of UK company law.

The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.

DIRECTORS' REMUNERATION POLICY

The 2019 AGM is the Company's first AGM as a UK-registered quoted company, and so the Company is seeking approval from its shareholders for its Directors' Remuneration Policy ('Remuneration Policy').

The Remuneration Policy which is being put forward for approval by shareholders of Phoenix Group Holdings plc at the 2019 AGM is in all material respects the same as the policy approved by the shareholders of Phoenix Group Holdings at that company's AGM on 11 May 2017. From the date of listing of Phoenix Group Holdings plc on 13 December 2018 the Remuneration Committee has voluntarily applied the policy previously established by Phoenix Group Holdings. This Policy will be reviewed in 2019 in light of changes to the UK Corporate Governance Code and other investor body guidelines and a new revised Policy will be presented to shareholders for approval at the AGM of Phoenix Group Holdings plc in 2020.

Ahead of this full review however, the Group has taken the opportunity to make two immediate updates to the Policy:

-- The alignment of pension entitlement for newly appointed Executive Directors to that of the majority of the workforce.

-- The introduction of a shareholding requirement post cessation of employment.

The Remuneration Policy is set out in section A of this report overleaf.

Section A: This section contains the Directors' Remuneration Policy as proposed for approval by the Company's shareholders at the Company's 2019 AGM on 2 May 2019.

GENERAL POLICY

The Remuneration Policy for Executive Directors is summarised in the table below along with the policy on the Chairman's and the Non-Executive Directors' fees.

Summary of changes from previous policy:

As explained in the Remuneration Committee Chairman's letter at the beginning of this Directors' Remuneration Report, the Remuneration Policy proposed for adoption by the Company's shareholders at the 2019 AGM is largely unchanged from the Remuneration Policy approved by the shareholders of Phoenix Group Holdings at its 2017 AGM with the exception of the specific details outlined on page 79 and the addition of the 2019 LTIP metrics. In line with legislative requirements, a revised Remuneration Policy will be presented to shareholders in 2020 being three years following the 2017 AGM.

 
Overall positioning* 
------------------------------------------------------------------------- 
The Company's overall positioning on remuneration for Executive Directors 
 remains unchanged from prior years: 
------------------------------------------------------------------------- 
 
  *    An appropriate balance is maintained between fixed 
       and variable components of remuneration. 
------------------------------------------------------------------------- 
 
  *    Our Remuneration Policy benchmarks the total target 
       remuneration for the Executive Directors between FTSE 
       31-100 and FTSE 250 data sets, and remuneration for 
       both Executive Directors is positioned appropriately 
       between these data sets. This benchmark will be 
       reviewed in 2019 in accordance with Phoenix's 
       position within the FTSE market. 
-------------------------------------------------------------------------

* This section does not form part of the Remuneration Policy and is for information only.

HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2018/potential rewards under various scenarios (GBP000)

The charts below compare the maximum levels of Total Remuneration payable under the Directors' Remuneration Policy (see page 81) and the actual payments for 2018 detailed in the Single Figure Table (see page 88).

TOTAL REMUNERATION OPPORTUNITY (GBP000)

 
Group Chief Executive                           Share price 
 Officer -              Total fixed              growth and 
 Clive Bannister                pay  AIP  LTIP    dividends  Total 
----------------------  -----------  ---  ----  -----------  ----- 
Minimum                        100%                            839 
----------------------  -----------  ---  ----  -----------  ----- 
On-target                       49%  31%   20%               1,717 
----------------------  -----------  ---  ----  -----------  ----- 
Maximum                         25%  32%   43%               3,292 
----------------------  -----------  ---  ----  -----------  ----- 
Maximum with growth             21%  26%   35%          18%  3,992 
----------------------  -----------  ---  ----  -----------  ----- 
Actual                          34%  36%   25%           5%  2,482 
----------------------  -----------  ---  ----  -----------  ----- 
 
 
Group Finance Director                           Share price 
 -                       Total fixed              growth and 
 James McConville                pay  AIP  LTIP    dividends  Total 
-----------------------  -----------  ---  ----  -----------  ----- 
Minimum                         100%                            533 
-----------------------  -----------  ---  ----  -----------  ----- 
On-target                        49%  30%   21%               1,086 
-----------------------  -----------  ---  ----  -----------  ----- 
Maximum                          26%  32%   42%               2,076 
-----------------------  -----------  ---  ----  -----------  ----- 
Maximum with growth              21%  26%   35%          18%  2,516 
-----------------------  -----------  ---  ----  -----------  ----- 
Actual                           34%  37%   24%           5%  1,582 
-----------------------  -----------  ---  ----  -----------  -----

-- Minimum, on-target and maximum represent the scenario charts required under the Directors' Remuneration Policy - see the data assumptions below.

-- 'Maximum with growth' is the maximum scenario, but with the LTIP element increased to reflect a 50% share price growth assumption over the three-year period until LTIP vesting. The element of the total representing the value from these assumptions on share price growth and dividends is shown separately.

-- 'Actual' represents the values shown in the 2018 Single Figure Table. Within this, the actual share price growth and dividends in the three-year period until LTIP vesting are shown separately.

 
                   Base salary  Benefits  Pension  Total fixed 
Name                    GBP000    GBP000   GBP000       GBP000 
-----------------  -----------  --------  -------  ----------- 
Clive Bannister            700        16      140          856 
-----------------  -----------  --------  -------  ----------- 
James McConville           440        16       88          544 
-----------------  -----------  --------  -------  ----------- 
 
 
Minimum    Consists of base salary, benefits and pension: 
             *    Base salary is the salary to be paid in 2019 
                  (unchanged from 2018). 
 
 
             *    Benefits measured as benefits paid in 2018 as set out 
                  in the Single Figure Table. 
 
 
             *    Pension measured as the full entitlement of 
                  approximately 17.6% of base salary receivable (after 
                  the reduction to payments made in cash for employers' 
                  National Insurance Contributions). 
---------  ----------------------------------------------------------------- 
On-target  Based on what the Executive Director would receive if performance 
            was on-target: 
             *    AIP: consists of the on-target annual incentive (75% 
                  of base salary). 
 
 
             *    LTIP: consists of the threshold level of vesting (50% 
                  of base salary). In addition, the potential value of 
                  Sharesave and Share Incentive Plan ('SIP') 
                  participation is also recognised. 
---------  ----------------------------------------------------------------- 
Maximum    Based on the maximum remuneration receivable: 
             *    AIP: consists of the maximum annual incentive (150% 
                  of base salary). 
 
 
             *    LTIP: assumes maximum vesting of awards and valued as 
                  on the date of grant (normal award 200% of base 
                  salary). Sharesave and SIP valued on the same basis 
                  as in the on-target row. 
---------  -----------------------------------------------------------------

Remuneration Policy table

 
Element and purpose 
 Base Salary 
 This is the core element of pay and reflects the individual's role and 
 position within the Group with some adjustment to reflect their capability 
 and contribution 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    Base salaries are reviewed each year against 
       companies of similar size and complexity. Both salary 
       levels and overall remuneration are set by reference 
       to the median data of comparators which the 
       Remuneration Committee considers to be suitable using 
       both the FTSE 31-100 and the FTSE 250 as a whole, and 
       positioning the Executive Directors' salaries around 
       the average of the median positions in these 
       pan-sector groups. Consideration is also given to 
       other relevant insurance company data. 
 
 
  *    The Remuneration Committee uses this data as a key 
       reference point in considering the appropriate level 
       of salary. Other relevant factors including corporate 
       and individual performance and any changes in an 
       individual's role and responsibilities, and the level 
       of salary increases awarded to other employees of the 
       Group are also considered. 
 
 
  *    Base salary is paid monthly in cash. 
 
 
  *    Changes to base salaries normally take effect from 1 
       January. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    The Remuneration Committee will apply the factors set 
       out above in considering any salary adjustments 
       during the duration of this policy. No increase will 
       be made if it would take an Executive Director's 
       salary above GBP780,000 (being the median level of 
       salaries for CEOs in the FTSE 31-100 when the prior 
       policy was adopted in 2017), provided that this 
       figure may be increased in line with UK RPI inflation 
       from the adoption of the prior policy in May 2017. 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    N/A 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Benefits 
 To provide other benefits valued by recipient 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    The Group provides market competitive benefits in 
       kind. Details of the benefits provided in each year 
       will be set out in the Implementation Report. The 
       Remuneration Committee reserves discretion to 
       introduce new benefits where it concludes that it is 
       in the interests of the Group to do so, having regard 
       to the particular circumstances and to market 
       practice. 
 
 
  *    Where appropriate, the Company will meet certain 
       costs relating to Executive Director relocations. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    It is not possible to prescribe the likely change in 
       the cost of insured benefits or the cost of some of 
       the other reported benefits year-to-year, but the 
       provision of benefits will normally operate within an 
       annual limit of 10% of an Executive Director's base 
       salary. 
 
 
  *    The Remuneration Committee will monitor the costs in 
       practice and ensure that the overall costs do not 
       increase by more than the Remuneration Committee 
       considers to be appropriate in all the circumstances. 
 
 
  *    Relocation expenses are subject to a maximum limit of 
       GBP150,000. 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    N/A 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Pension 
 To provide retirement benefits and remain competitive within the marketplace 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    The Group provides a competitive employer sponsored 
       defined contribution pension plan. 
 
 
  *    All Executive Directors are eligible to participate 
       in the Group Personal Pension ('GPP'). Executive 
       Directors receive a contribution to the GPP or they 
       may opt to receive the contribution in cash if they 
       are impacted by the relevant lifetime or annual 
       limits. Any such cash payments are reduced for the 
       effect of employers' National Insurance 
       Contributions. 
 
 
  *    Phoenix will honour the pensions obligations entered 
       into under all previous policies in accordance with 
       the terms of such obligations. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    Pension contributions for new Executive Directors 
       will be aligned with the wider workforce. The exact 
       contribution rate will be disclosed next year 
       following a review of overall Company pension 
       provision. 
 
 
  *    Pension contributions for current Executive Directors 
       are limited to 20% of base salary per annum (reduced 
       to 17.6% when taken as cash in lieu of contribution), 
       with the intention to review this against the wider 
       workforce as part of the full policy review later 
       this year. 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    N/A 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Annual Incentive Plan ('AIP') and Deferred Bonus Share Scheme ('DBSS') 
 To motivate employees and incentivise delivery of annual performance 
 targets 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    AIP levels and the appropriateness of measures are 
       reviewed annually to ensure they continue to support 
       the Group's strategy. 
 
 
  *    AIP outcomes are paid in cash in one tranche (less 
       the deferred share award). 
 
 
  *    At least 40% of any annual AIP award is to be 
       deferred into shares for a period of three years 
       although the Remuneration Committee reserves 
       discretion to alter the current practice of deferral 
       (whether by altering the portion deferred, the period 
       of deferral or whether amounts are deferred into cash 
       or shares). Such alterations may be required to 
       ensure compliance with regulatory guidelines for pay 
       within the insurance sector, but will not otherwise 
       reduce the current deferral level or the period of 
       deferral. 
 
 
  *    Deferral of AIP outcomes into shares is currently 
       made under the DBSS. 
 
 
  *    Awards under DBSS will be in the form of awards to 
       receive shares for nil-cost (with the shares either 
       being delivered automatically at vesting or being 
       delivered at a time following vesting at the 
       individual's choice). 
 
 
  *    DBSS awards are made automatically each year on the 
       fourth dealing day following the announcement of 
       annual results, using the average of the preceding 
       three dealing days' share prices to calculate the 
       number of shares in awards. 
 
 
  *    The three-year period of deferral will run to the 
       third anniversary of the award date. 
 
 
  *    Dividend entitlements will accrue over the three-year 
       deferral period and be delivered as additional 
       vesting shares. 
 
 
  *    Malus/clawback provisions apply to the AIP and to 
       amounts deferred under DBSS as explained in the notes 
       to this table. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    The maximum annual incentive level for an Executive 
       Director is 150% of base salary per annum. 
------------------------------------------------------------------------------------------- 
     Performance measures 
       *    The performance measures applied to AIP will be set 
            by the Remuneration Committee and may be financial or 
            non-financial and corporate, divisional or individual 
            and in such proportions as it considers appropriate. 
            However, the weighting of financial performance 
            measures will not be reduced below 50% of total AIP 
            potential in any year for the duration of this 
            policy. 
 
 
       *    In respect of the financial performance measures, 
            attaining the threshold performance level produces a 
            GBPnil annual incentive payment and for non-financial 
            performance measures the threshold performance level 
            produces an annual incentive outcome that is 10% of 
            the weighting given to these measures. 
 
 
       *    On-target performance on all measures produces an 
            outcome of 50% of maximum annual incentive 
            opportunity. However, the Remuneration Committee 
            reserves the right to adjust the threshold and target 
            levels for future financial years in light of 
            competitive practice. 
 
 
       *    The AIP operates subject to three levels of 
            moderation: 
 
 
      i. The Committee seeks to set suitable ranges for each measure in the 
      context both of the Company's own internal budgets and of external projections 
      (whether through management guidance or consensus forecasts). As an 
      entirely closed life business, targets are significantly impacted by 
      management actions and year-on-year growth is not an inherent objective. 
      Recognising that the business of the Company is to engage in corporate 
      activity, the Remuneration Committee may adjust targets during the year

      to take account of such activity and ensure the targets continue to 
      reflect performance as originally intended. 
      ii. There is a specific adjustment factor of 80%-120% of the provisional 
      outturn whereby the Remuneration Committee may adjust the provisional 
      figure (but subject to any over-riding cap) to take account of its broad 
      assessment of performance both against pre-set targets and more generally, 
      of the wider universe of stakeholders. With respect to financial performance 
      measures, this assessment will include consideration of the quality 
      of how particular outcomes were achieved. 
      iii. The AIP remains a discretionary arrangement and the Remuneration 
      Committee reserves discretion to adjust the outturn (from zero to any 
      cap) should it consider that to be appropriate. In particular, the Remuneration 
      Committee may operate this discretion in respect of any risk concerns. 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Long Term Incentive Plan ('LTIP') 
 To motivate and incentivise delivery of sustained performance over the 
 long term, and to promote alignment with shareholders' interests, the 
 Group operates the Phoenix Group Holdings Long Term Incentive Plan 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    Awards under the LTIP may be in any of the forms of 
       awards to receive shares for nil-cost (as described 
       for DBSS above). 
 
 
  *    LTIP awards are made automatically each year on the 
       fourth dealing day following the announcement of 
       annual results, using the average of the preceding 
       three dealing days' share prices to calculate the 
       number of shares in awards. 
 
 
  *    The vesting period will be at least three years and 
       run until the third anniversary of the award date 
       (unless a longer vesting period is introduced). 
 
 
  *    A holding period will apply so that Executive 
       Directors may not normally exercise vested LTIP 
       awards until the fifth anniversary of the award date. 
 
 
  *    Dividend entitlements will accrue until the end of 
       the holding period in respect of performance vested 
       shares and be delivered as additional vesting shares. 
 
 
  *    Malus/clawback provisions apply on a basis consistent 
       with the equivalent provisions in the AIP and DBSS 
       and as explained in the notes to this table. 
 
 
  *    The Company will honour the vesting of all awards 
       granted under previous policies in accordance with 
       the terms of such awards. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    The formal limit under the LTIP is 300% of base 
       salary per annum (and 400% per annum in exceptional 
       cases). 
 
 
  *    The Remuneration Committee's practice is to make LTIP 
       awards to Executive Directors each year over shares 
       with a value (as at the award date) of 200% of the 
       individual's annual base salary although discretion 
       is reserved to make awards up to the maximum levels 
       for the policy as stated above. 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    The Remuneration Committee may set such performance 
       measures for LTIP awards as it considers appropriate 
       (whether financial or non-financial and whether 
       corporate, divisional or individual). The measures 
       for the 2019 LTIP are as set out below (unchanged 
       from 2018): 
------------------------------------------------------------------------------------------- 
 Measure                                                              Weighting 
 -------------------------------------------------------------------  ------------------- 
 Cumulative Cash Generation                                           40% 
 -------------------------------------------------------------------  ------------------- 
 Return on Adjusted Shareholder 
  Solvency II Own Funds                                               35% 
 -------------------------------------------------------------------  ------------------- 
 Total Shareholder Return                                             25% 
 -------------------------------------------------------------------  ------------------- 
 
  *    The Remuneration Committee retains discretion to 
       adjust the weightings/substitute metrics but would 
       expect to consult with its major shareholders if it 
       proposed changing materially the current performance 
       measures applied for LTIP awards made to Executive 
       Directors or the relative weightings between these 
       performance measures. 
 
 
  *    For every LTIP award, appropriate disclosures 
       regarding the proposed performance conditions will be 
       made in the annual Implementation Report. 
 
 
  *    Once set, performance measures and targets will 
       generally remain unaltered unless events occur which, 
       in the Remuneration Committee's opinion, make it 
       appropriate to make adjustments to the performance 
       measures, provided that any adjusted performance 
       measure is, in its opinion, neither materially more 
       nor less difficult to satisfy than the original 
       measure. 
 
 
  *    For each part of an LTIP award subject to a specific 
       performance condition, the threshold level of vesting 
       will be no more than 25% of that part of the LTIP 
       award. 
 
 
  *    The performance period for LTIP awards will be at 
       least three years, but the Remuneration Committee 
       reserves discretion to lengthen the applicable 
       performance periods for LTIP awards. 
----------------------------------------------------------------------------------------- 
 
Element and purpose 
 All-employee share plans 
 To encourage share ownership by employees, thereby allowing them to 
 participate in the long-term success of the Group and align their interests 
 with those of the shareholders 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    Executive Directors are able to participate in 
       all-employee share plans on the same terms as other 
       Group employees as required by HMRC legislation. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    Sharesave - the Remuneration Committee has the 
       facility to allow individuals to save up to a maximum 
       of GBP500 each month (or such other level as 
       permitted by HMRC legislation) for a fixed period of 
       three or five years. At the end of the savings period, 
       individuals may use their savings to buy ordinary 
       shares in the Company at a discount of up to 20% of 
       the market price set at the launch of each scheme. 
 
 
  *    Share Incentive Plan ('SIP') - the Remuneration 
       Committee has the facility to allow individuals to 
       have the opportunity to purchase, out of their 
       pre-tax salary, shares in the Company and receive up 
       to two matching shares for every purchased share. 
       Maximum saving is GBP150 each month (or up to such 
       level as permitted by the Company in line with HMRC 
       legislation). SIP also has the facility to allow for 
       reinvestment of dividends in further shares, or the 
       award of additional free shares (up to the limits as 
       permitted by HMRC legislation). 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    Consistent with normal practice, such awards are not 
       subject to performance conditions. 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Shareholding guidelines 
 To encourage share ownership by the Executive Directors and ensure interests 
 are aligned 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    Executive Directors are expected to retain all shares 
       (net of tax) which vest under the DBSS and under the 
       LTIP (or any other discretionary long term incentive 
       arrangement introduced in the future) until such time 
       as they hold a minimum of 200% of their base salary 
       in shares. 
 
 
  *    Only beneficially owned shares and vested share 
       awards (discounted for anticipated tax liabilities) 
       may be counted for the purposes of the guidelines. 
       Share awards do not count prior to vesting (including 
       DBSS awards). 
 
 
  *    Once shareholding guidelines have been met, 
       individuals are expected to retain these levels as a 
       minimum. The Remuneration Committee will review 
       shareholdings annually in the context of this policy. 
 
 
  *    Post cessation of employment, Executive Directors are 
       expected to retain their full level of employment 
       shareholding requirement in the first year and half 
       the level of their employment shareholding 
       requirement in the second year. 
------------------------------------------------------------------------------------------- 
Maximum 
  *    N/A 
------------------------------------------------------------------------------------------- 
Performance measures 
  *    N/A 
------------------------------------------------------------------------------------------- 
 
Element and purpose 
 Chairman and Non-Executive Director fees 
------------------------------------------------------------------------------------------- 
Policy and operation 
  *    The fees paid to the Chairman and the fees of the 
       other Non-Executive Directors are set to be 
       competitive with other listed companies of equivalent 
       size and complexity.

* Fee levels are periodically reviewed. The Company
does not adopt a quantitative approach to pay
positioning and exercises judgement as to what it
considers to be reasonable in all the circumstances
as regards quantum.

* Additional fees are paid to Non-Executive Directors
who chair a Board committee, or sit on the board of a
subsidiary company or on the Solvency II Model
Governance Committee, and to the Senior Independent
Director ('SID'). No separate Board committee
membership fees are currently paid.

* Fees are paid monthly in cash.

* Fee levels for Non-Executive Directors are reviewed
annually with any changes normally taking effect from
1 January.
-------------------------------------------------------------------------------------------
Maximum
* The aggregate fees of the Chairman and Non-Executive
Directors will not exceed the limit from time to time
prescribed within the Company's Articles of
Association for such fees (currently GBP2 million per
annum in aggregate).

* The Company reserves the right to vary the structure
of fees within this limit including, for example,
introducing time-based fees or reflecting the
establishment of new Board committees.
-------------------------------------------------------------------------------------------
Performance measures
* N/A
-------------------------------------------------------------------------------------------

NOTES TO THE REMUNERATION POLICY TABLE

1. Differences between the Policy on Remuneration for Directors and the Policy on Remuneration of other employees

When determining Executive Directors' remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate.

The Group has (as required by Solvency II regulations) one consistent reward policy for all levels of employees and this policy is made available to all staff. Therefore, the same reward principles guide reward decisions for all Phoenix employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business:

-- AIP - all Phoenix employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by level. The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies for employees in 'control functions' (risk, compliance, internal audit and actuarial) to exclude financial performance measures.

-- LTIP - our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below the Board for future awards.

-- All-employee share plans - the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP), and equivalent arrangements in foreign jurisdictions (including on a tax advantaged basis permitted under local laws). In addition, selected individuals may receive ad-hoc share awards contingent on continued employment.

2. Stating maximum amounts for the Remuneration Policy

The DRR regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration.

3. Malus and clawback

Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the AIP, DBSS and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following:

-- a review of the conduct, capability or performance of an individual;

-- a review of the performance of the Company or a Group member;

-- any material misstatement of the Company's or a Group member's financial results for any period;

-- any material failure of Risk Management by an individual, a Group member or the Company; or

-- any other circumstances that have a sufficiently significant impact on the reputation of the Company.

4. Travel and hospitality

While the Remuneration Committee does not consider this to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality (whether paid for by the Company or another) and certain instances of business travel (including any related tax liabilities settled by the Company or another Group company) for Directors may technically be considered as benefits and so the Remuneration Committee expressly reserves the right to authorise such activities and reimbursement of associated expenses within its agreed policies.

5. Discretions reserved in operating incentive plans

The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including:

-- (as described in the Remuneration Policy table) the determination of performance measures and targets and resultant vesting and pay-out levels;

-- (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended;

-- (as described in the Termination Policy) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and

-- the ability to make adjustments to existing awards made under the incentive plans in certain circumstances (e.g. rights issues, corporate restructurings or special dividends). Any exercise of discretion will be disclosed in the Implementation Report for the year.

RECRUITMENT REMUNERATION POLICY

The Company's recruitment remuneration policy aims to give the Remuneration Committee sufficient flexibility to secure the appointment and promotion of high calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.

-- In terms of the principles for setting a package for a new Executive Director, the starting point for the Remuneration Committee will be to apply the general policy for Executive Directors as set out above and structure a package in accordance with that policy.

-- The AIP and LTIP will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.

-- For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment as appropriate.

-- For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.

-- For external candidates, it may be necessary to make awards in connection with the recruitment to buy-out awards forfeited by the individual on leaving a previous employer. For such buy-out awards, Phoenix will not pay more than is, in the view of the Remuneration Committee, necessary and will in all cases seek, in the first instance, to deliver any such awards under the terms of the existing incentive pay structure. It may, however, be necessary in some cases to make such awards on terms that are more bespoke than the existing annual and equity-based pay structures in Phoenix in order to secure a candidate. Details of any buy-out awards will be appropriately disclosed.

-- All such buy-out awards, whether under the AIP, LTIP or otherwise (for example, specific arrangements made under Listing Rule 9.4.2), will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make buy-out awards subject to what are, in its opinion, comparable requirements in respect of service and performance. However, the Remuneration Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interests of shareholders and where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.

-- For the avoidance of doubt, such buy-out awards are not subject to a formal cap.

-- A new Non-Executive Director would be recruited on the terms explained in the Remuneration Policy for such Directors.

DIRECTORS' SERVICE CONTRACTS

Executive Directors

Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, certain fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Remuneration Committee believes the contracts to be consistent with best practice. The Remuneration Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing after the initial period of six months if the Executive Director finds alternative employment. Contracts do not contain change of control provisions. The template contract is reviewed from time to time and may be amended provided it is not overall more generous than the terms described above.

Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group.

Non-Executive Directors

The Non-Executive Directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for an initial fixed term of three years (which may be renewed), terminable by one month's notice from either side (six months in the case of the Chairman). Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance and life insurance.

Copies of Executive Director service contracts and Non-Executive Director letters of appointment are available for inspection at the Company's registered office.

Termination policy summary

In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers. Therefore, it is appropriate for the Remuneration Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the Remuneration Committee may choose to apply under the discretions available to it under the terms of the AIP, DBSS and LTIP plans. The potential treatments on termination under these plans are summarised below.

 
Incentives  Good Leaver(1)                      Bad Leaver                    Exceptional Events 
----------  ----------------------------------  ----------------------------  ------------------------- 
            A participant is considered         A participant would           For example change 
             a Good Leaver if leaving            typically be considered       in control or winding-up 
             through redundancy, serious         a Bad Leaver following        of the Company 
             ill health or death or otherwise    a voluntary resignation 
             at the discretion of the            or leaving for disciplinary 
             Remuneration Committee              reasons 
----------  ----------------------------------  ----------------------------  ------------------------- 
AIP         Pro-rated annual incentive.         No awards made                Either the AIP will 
             Pro-rating to reflect only                                        continue for the 
             the period worked. Performance                                    year or there will 
             metrics determined by the                                         be a pro-rated annual 
             Remuneration Committee                                            incentive. Performance 
                                                                               metrics determined 
                                                                               by the Remuneration 
                                                                               Committee 
----------  ----------------------------------  ----------------------------  ------------------------- 
DBSS        Deferred awards vest at the         Deferred awards               Deferred awards 
             end of the original vesting         normally lapse                vest 
             period 
----------  ----------------------------------  ----------------------------  ------------------------- 
LTIP        Will receive a pro-rated            All awards will               Will receive a pro-rated 
             award subject to the application    normally lapse                award subject to 
             of the performance conditions                                     the application 
             at the normal measurement                                         of the performance 
             date and, generally, any                                          conditions at the 
             holding period will continue                                      date of the event. 
             to apply                                                          Remuneration Committee 
             Remuneration Committee discretion                                 discretion to disapply 
             to disapply pro-rating or                                         pro-rating 
             to accelerate vesting to 
             the date of leaving (subject 
             to pro-rating and performance 
             conditions) and/or the release 
             of any holding period 
----------  ----------------------------------  ----------------------------  -------------------------

1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of their continued retirement before any payments are released to them after the end of the vesting period.

The Company has power to enter into settlement agreements with executives and to pay compensation to settle potential legal claims. In addition, and consistent with market practice, in the event of termination of an Executive Director, the Company may pay a contribution towards the individual's legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees would be disclosed as part of the detail of termination arrangements. For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments.

In the event of cessation of a Non-Executive Director's appointment (excluding the Chairman) they would be entitled to a one month's notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months' notice period.

Consideration of employment conditions elsewhere in the Group

As explained in the notes to the Remuneration Policy table, the Remuneration Committee takes into account Group-wide pay and employment conditions. The Remuneration Committee reviews the average Group-wide base salary increase and annual incentive costs and is responsible for all discretionary and all-employee share arrangements.

Consistent with previous practice, the Remuneration Committee did not consult with employees in preparing the 2017 Remuneration Policy although will be establishing further employee engagement in 2019 in accordance with the requirement under the Corporate Governance Code. Further details are shown on page 101.

Consideration of shareholders' views

Each year the Remuneration Committee takes into account the approval levels of remuneration-related matters at our AGM in determining that the current Remuneration Policy remains appropriate for the Company.

The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company's executive pay arrangements in particular. The Remuneration Committee consulted extensively with shareholders prior to the approval of the prior policy which was approved with 99.7% support in 2017. As this new policy is largely a rollover of the previous shareholder approved policy subject to the amendments described on page 79, it was not considered necessary to re-consult.

Section B: This section contains the Annual Report on Remuneration which forms part of the Directors' Remuneration Report to be proposed for approval by the Company's shareholders at the Company's 2019 AGM on

2 May 2019

As explained on page 79 Phoenix Group Holdings plc became the ultimate parent company of the Group and was listed on the London Stock Exchange on 13 December 2018. For ease of comparison to 2017, 2018 full year data is shown below. Details of remuneration paid by each of the two entities Phoenix Group Holdings and Phoenix Group Holdings plc is shown in the Appendix to this report on page 104.

IMPLEMENTATION REPORT - AUDITED INFORMATION

SINGLE FIGURE TABLE

 
                                                        Annual             Long-term 
                Salary/fees(1)    Benefits(2)     Incentive(3)            incentives    Pension(6)               Total 
------------  ----------------  -------------  ---------------  --------------------  ------------  ------------------ 
                                                                             2017(5)                           2017(5) 
                 2018     2017    2018   2017     2018    2017  2018(4)   (restated)   2018   2017   2018   (restated) 
------------  -------  -------  ------  -----  -------  ------  -------  -----------  -----  -----  -----  ----------- 
Clive 
 Bannister        700      700      16     16      898     902      745        1,147    123    123  2,482        2,888 
------------  -------  -------  ------  -----  -------  ------  -------  -----------  -----  -----  -----  ----------- 
James 
 McConville       440      440      16     16      581     567      468          724     77     77  1,582        1,824 
------------  -------  -------  ------  -----  -------  ------  -------  -----------  -----  -----  -----  -----------

1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections.

2 Benefits for Clive Bannister comprise car allowance and private medical insurance totalling GBP16,290. Benefits for James McConville comprise car allowance and private medical insurance totalling GBP16,032.

3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 40% of the AIP award for 2018). In 2018 and 2017, GBP359,100 and GBP360,835 respectively of Clive Bannister's incentive payment is subject to three-year deferral delivered in shares, and GBP232,320 and GBP226,810 of James McConville's incentive payment is subject to a similar deferral. Deferred amounts are subject to continued employment.

4 In accordance with the requirements of the DRR regulations, the 2018 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2016 and which are due to vest on 2 June 2019 for Clive Bannister and James McConville. These vesting levels are at 49.5% reflecting outcomes against the Cumulative cash generation and TSR performance measures to 31 December 2018 (see page 91) and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2018 and 31 December 2018 (600.04p) to produce the estimated long-term incentives figures shown for 2018 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2019. The disclosed LTIP figure of GBP745,255 for Clive Bannister reflects the proportion of the original award which ultimately vested (GBP619,744) plus the value of dividend roll-up on those shares (GBP125,511). For James McConville the equivalent values are GBP468,433 as the disclosed LTIP figure, comprising GBP389,547 for the value of the proportion of the original LTIP award which ultimately vested plus the value of dividend roll-up on those shares (GBP78,886). All values are calculated using the three month average share price to 31 December 2018 (600.04p).

5 For 2015's LTIP awards which are reflected in the 2017 long-term incentives column above, the performance conditions were met as to 64.28% of maximum. The 2017 long-term incentives values in the above table reflect the value of the Company's shares on the date of vesting which was 28 September 2018 (676p per share) multiplied by the number of shares vesting whereas the equivalent figure within the published 2017 Single Figure Table was an estimate which reflected the average share price between 1 October 2017 and 31 December 2017 (759.8462p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting.

6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 17.6% which is paid in cash. Pension contributions paid as cash supplements are reduced for the effect of employers' National Insurance contributions. Both Clive Bannister and James McConville received the pension contributions as cash supplements. No Director participated in a defined benefit pension arrangement in the year and none have any prospective entitlement to a defined benefit pension arrangement.

PAYMENTS FOR LOSS OF OFFICE AND PAYMENTS TO PAST DIRECTORS

There were no payments made to former Directors and no payments for loss of office in the year.

AIP OUTCOMES FOR 2018- AUDITED INFORMATION

As explained in the Committee Chairman's statement, the business of the Group is to engage in corporate activity and the Remuneration Committee may adjust targets during the year to include such activity and ensure the targets continue to reflect performance as originally intended. 2018 was a transformational year for the Group in terms of corporate activity with respect to the acquisition of the Standard Life Assurance businesses. In light of this acquisition, the Committee approved the following adjustments to the AIP targets:

Solvency II Management Actions: Threshold, target and maximum levels increased by GBP260 million to reflect the equity hedging action announced to the market. The range therefore increased from GBP100 million (threshold), GBP140 million (target), GBP200 million (maximum) to GBP360 million (threshold), GBP400 million (target), GBP460 million as shown in the table below.

Solvency II Management Actions are disclosed on page 32 and 33 of the Business Review and includes capital synergies associated with the acquisition of the Standard Life Assurance businesses.

Adjusted Shareholder Solvency II Own Funds: Threshold, target and maximum levels increased by GBP1,837 million to reflect equity raised as part of the acquisition, net of any dividends paid or payable in the first 12 months arising from the additional equity. The range therefore increased from GBP2,863 million (threshold), GBP2,913 million (target), GBP3,013 million (maximum) to GBP4,700 million (threshold), GBP4,750 million (target), GBP4,850 million as shown below.

Adjusted Shareholder Solvency II Own Funds represents the Group's Own Funds adjusted to remove the impacts of unsupported with-profit funds, the unsupported pension scheme (PGL Pension Scheme), restricted Tier 1 notes and Tier 2 or Tier 3 subordinated liabilities.

Against the specific Corporate measures, outturns were as follows:

 
                                                                                            % of incentive 
                        Threshold                                 Maximum      Performance       potential 
                      performance  Target performance         performance   level attained        based on 
                        level for           level for           level for              for     Performance 
Performance measure      2018 AIP            2018 AIP            2018 AIP         2018 AIP         Measure  % achieved 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Operating 
 companies' cash 
 generation               GBP550m             GBP640m             GBP690m          GBP664m           30.0%       22.2% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Solvency II 
 Management Actions       GBP360m             GBP400m             GBP460m        GBP1,080m           15.0%       15.0% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Adjusted 
 Shareholder 
 Solvency 
 II Own Funds           GBP4,700m           GBP4,750m           GBP4,850m        GBP5,603m           30.0%       30.0% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Customer experience 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Customer 
 satisfaction(1)              90%                 91%                 93%            93.1%            7.5%        7.5% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Origo timescales(2)     <=12 days           <=11 days          <=9.5 days       10.73 days            7.5%        4.4% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
CAT B incident 
 closures(3)                >=70%             >=72.5%               >=75%            73.4%            5.0%        3.4% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Servicing complaint 
 closure(4)                   60%                 65%                 70%            50.0%            2.5%        0.0% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
FOS overturn 
 rate(5)                    <=20%               <=19%               <=18%            17.0%            2.5%        2.5% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ---------- 
Total                                                                                               100.0%       85.0% 
-------------------  ------------  ------------------  ------------------  ---------------  --------------  ----------

1 The rating is a customer satisfaction score based on the results of a satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 4 or 5 regarded as satisfied). 93.1% of all questions asked scored a rating of 4 or above.

2 The Origo Options service is a recognised industry-wide initiative for processing Pension Transfers to ensure payments are made in a timely fashion. The service has set a benchmark standard of a 12 calendar day average elapsed time for processing transfers.

3 This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial). It measures the timeliness of actions when things go wrong. The metrics in the table represent the percentage of cases closed within nine months.

4 This measure looks at servicing (ie not product or advice) complaints which are closed within three days.

5 This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision making in dealings with customers or an aspect of it. For the AIP the FOS overturn rate is calculated based on an average of the H1 current year and H2 prior year rates. This is due to the timing of when the FOS rates are published. The figures exclude cases from past Abbey Life businesses that are subject to the FCA's past business review as such cases must follow an approach prescribed by the FCA and are therefore not an indicator of Phoenix customer treatment.

Before confirming these outcomes for the 2018 AIP, the Committee undertook a review which confirmed that the Company had operated within its stated risk appetite during the year and that there were no other risk-related concerns that required the moderation of 2018 AIP outcomes.

Personal objectives were agreed by the Group Board and shared with the Remuneration Committee at the start of the year. The Board regards a number of the personal objectives set as commercially sensitive and, accordingly, it is not appropriate for such objectives to be disclosed. However a number of achievements for the Executive Directors are shown below:

Clive Bannister, Group Chief Executive Officer ('Group CEO')

 
Objectives                  Achievements 
--------------------------  ----------------------------------------------------------- 
Identify acquisition        The Group CEO played the critical role in securing 
 opportunities capable       and delivering the transformational acquisition 
 of individually and         of the Standard Life Assurance businesses leading 
 collectively, materially    the negotiation, transaction, and pricing of the 
 enhancing shareholder       deal and welcoming Standard Life Aberdeen plc as 
 value, and execute          a strategic partner. Subsequent to the closure of 
 as appropriate              the above acquisition, repositioned the Group to 
                             leverage Edinburgh as an operational headquarters 
                             alongside sites in London and Wythall, with a joint 
                             leadership team appropriately representative of 
                             the enlarged entity. 
--------------------------  ----------------------------------------------------------- 
Deliver the financial       The Group CEO has sponsored the achievement of all 
 results at or ahead         the financial targets including above target cash 
 of plan                     flow, reduced expense, reduced leverage. 
--------------------------  ----------------------------------------------------------- 
Maintain or improve         In conjunction with the Group FD, has helped deliver 
 solvency                    raising GBP1 billion of equity, GBP0.9 billion of 
                             subordinated debt, retaining a stable outlook from 
                             Fitch, delivering the highest Solvency II surplus 
                             and the lowest leverage ratio in the Group's history. 
--------------------------  ----------------------------------------------------------- 
Deliver management          Actively sponsored the Group's evolving strategic 
 actions and deliver         asset allocation and the sourcing of GBP1.4 billion 
 on the strategic asset      of alternative illiquid assets and the establishment 
 allocation strategy         of the Group's Bulk Purchase Annuity capabilities. 
                             Drove GBP570 million of SII management actions and 
                             a further GBP510 million of capital synergies to 
                             the Standard Life Assurance businesses. 
--------------------------  ----------------------------------------------------------- 
Maintain strong effective   Championed another solid year of maintaining a wholly 
 relationships with          effective and transparent relationship with our 
 regulators                  regulators. 
--------------------------  ----------------------------------------------------------- 
Complete on-shoring         Re-domiciled Phoenix Group Holdings to the UK and 
 of Phoenix Group Holdings   established Phoenix Group Holdings plc as the new 
                             parent company of the Group. 
--------------------------  ----------------------------------------------------------- 
Finalise outstanding        Completed the outstanding matters related to the 
 integration issues          AXA and Abbey Life integrations with total cost 
 related to AXA and          savings of GBP27 million per annum, GBP10 million 
 Abbey Life                  above target. GBP1 billion of cash generation delivered 
                             from these businesses to date, 75% of total consideration. 
--------------------------  ----------------------------------------------------------- 
Deliver on Diversity        Diversity targets were not met as they were largely 
 targets                     impacted by changes in senior management through 
                             acquisition, structural changes, resignation and 
                             retirement. However improved metrics, governance, 
                             and accountability have re-enforced the importance 
                             of Phoenix's broader diversity agenda. 
--------------------------  -----------------------------------------------------------

James McConville, Group Finance Director ('Group FD')

 
Objectives                        Achievements 
--------------------------------  ----------------------------------------------------------- 
Complete at least                 The Group FD has played a critical role in supporting 
 1 acquisition enhancing           the Group's transformational acquisition of the 
 of shareholder value              Standard Life Assurance businesses both as a transaction, 
                                   with its associated successful rights issue, and 
                                   in its strategic on-boarding in Q4 2018. The Group 
                                   FD has taken in Q3 2018 further responsibility as 
                                   Group Director Scotland, and Head of Transformation 
                                   for the acquisition. 
--------------------------------  ----------------------------------------------------------- 
Deliver the financial             All financial targets have been exceeded with reference 
 results at or ahead               to our Corporate targets: generating GBP664 million 
 of plan                           of cash, a reduced expense base (excluding acquisition 
                                   costs), a reduced Fitch leverage ratio (22%) and 
                                   an operating profit of GBP708 million. 
--------------------------------  ----------------------------------------------------------- 
Maintain or improve               The Group FD has delivered the raising GBP1 billion 
 solvency                          of equity, GBP0.9 billion of subordinated debt, 
                                   retaining a stable outlook from Fitch, delivering 
                                   the highest Solvency II surplus and the lowest leverage 
                                   ratio in the Group's history. 
--------------------------------  ----------------------------------------------------------- 
Deliver management                Management actions have been delivered materially 
 actions and deliver               ahead of target, including securing of over GBP1.4 
 on the strategic asset            billion of alternative assets. 
 allocation strategy 
--------------------------------  ----------------------------------------------------------- 
Complete on-shoring               Re-domiciled Phoenix Group Holdings plc to the UK 
 of Phoenix Group Holdings         and established Phoenix Group Holdings plc as the 
                                   new parent company of the group. 
--------------------------------  ----------------------------------------------------------- 
Finalise outstanding              Completed the outstanding matters related to the 
 integration issues                AXA and Abbey Life integrations with total cost 
 related to AXA and                savings of GBP27 million per annum, GBP10 million 
 Abbey Life                        above target. GBP1 billion of cash generation delivered 
                                   from these businesses to date, 75% of total consideration. 
--------------------------------  ----------------------------------------------------------- 
Deliver on Diversity              The Group FD chairs the Diversity Committee. Improved 
 targets                           metrics, governance, and accountability have re-enforced 
                                   the importance of Phoenix's broader diversity agenda. 
                                   Diversity targets were not met as they were largely 
                                   impacted by changes in senior management through 
                                   acquisition, structural changes, resignation and 
                                   retirement. 
--------------------------------  ----------------------------------------------------------- 
Manage investor relations         The Group FD ran a comprehensive Investor engagement 
 and the external communications   programme across debt and equity with 33 investor 
 function                          roadshows and met 414 debt and equity investors, 
                                   plus a capital markets event attended by 120 investors 
                                   and analysts. These activities supported the successful 
                                   rights issue and debt issues undertaken as part 
                                   of the financing for the acquisition of the Standard 
                                   Life Assurance businesses. 
--------------------------------  -----------------------------------------------------------

Taking account of the attainment of personal objectives, the Group Chief Executive Officer received an 87.5% payout (GBP183,750) for this element and the Group Finance Director received a 100%payout (GBP132,000) for this element, consistent with their ratings for 2018. These Personal (individual objectives) measures applied to 20% of incentive opportunity and Corporate (financial and strategic) measures applied to 80% of incentive opportunity. Overall outturns as a percentage of maximum opportunity are 85.5% for the Group Chief Executive Officer and 88.0% for the Group Finance Director.

The table below shows the actual outturn against the annual incentive maximum.

 
                                        Corporate                       Personal       Total     Maximum         Total 
-----------------  ------------------  ----------  -----------------  ----------  ----------  ----------  ------------ 
                            As a % of                      As a % of                                            As a % 
                    maximum corporate      As a %   maximum personal      As a %      As a %      As a %    of maximum 
Name                          element   of salary            element   of salary   of salary   of salary   opportunity 
-----------------  ------------------  ----------  -----------------  ----------  ----------  ----------  ------------ 
Clive Bannister                 85.00      102.00              87.50       26.25      128.25      150.00         85.50 
-----------------  ------------------  ----------  -----------------  ----------  ----------  ----------  ------------ 
James McConville                85.00      102.00             100.00       30.00      132.00      150.00         88.00 
-----------------  ------------------  ----------  -----------------  ----------  ----------  ----------  ------------

As described in the Remuneration Policy, 40% of 2018 AIP outcomes will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.

In addition, whilst the performance measures for the AIP for 2019 have been disclosed (see Implementation of Remuneration Policy for 2019 on page 97), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for 2019's AIP retrospectively in next year's Remuneration Report on a similar basis to the disclosures made above in respect of 2018's AIP.

LTIP OUTCOMES FOR 2016 AWARDS - AUDITED INFORMATION

 
Performance measure                                                 Performance   Vesting          % 
 and weighting        Target range                                     achieved   outcome   achieved 
--------------------  -------------------------------------------  ------------  --------  --------- 
                      Target range between Cumulative cash 
                       generation of GBP1.311 billion and 
Cumulative cash        Cumulative cash generation of GBP1.511 
 generation (50%)      billion.                                      GBP1.507bn       99%      49.5% 
--------------------  -------------------------------------------  ------------  --------  --------- 
                      Target range between median performance 
                       against the constituents of the FTSE 
                       250 (excluding Investment Trusts) 
                       rising on a pro rata basis until full 
                       vesting for upper quintile performance. 
                       In addition, the Committee must consider 
                       whether the TSR performance is reflective 
                       of the underlying financial performance 
TSR (50%)              of the Company.                                     46th        0%       0.0% 
--------------------  -------------------------------------------  ------------  --------  --------- 
Total                                                                                          49.5% 
-------------------------------------------------------------------------------  --------  ---------

The above targets were all measured over the period of three financial years 1 January 2016 to 31 December 2018.

In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and Risk Management within the Group, customer satisfaction and, in exceptional cases, personal performance (as described more fully on page 94, had been achieved in the performance period.

NON-EXECUTIVE FEES - AUDITED INFORMATION

The emoluments of the Non-Executive Directors for 2018 based on the current disclosure requirements were as follows:

 
                              Directors'      Directors' 
                           salaries/fees   salaries/fees  Benefits(1)  Benefits(1)    Total    Total 
                                    2018            2017         2018         2017     2018     2017 
Name                              GBP000          GBP000       GBP000       GBP000   GBP000   GBP000 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Non-Executive Chairman 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Henry Staunton(2)                    271             325            -            -      271      325 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Nicholas Lyons(3)                     55               -            2            -       57        - 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Non-Executive Directors 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Alastair Barbour                     143             150           12            3      155      153 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Ian Cormack(4)                        39             116            -            -       39      116 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Campbell Fleming(5)                    -               -            -            -        -        - 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Karen Green(6)                       105              52            3            -      108       52 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Isabel Hudson(7)                       -              39            -            -        -       39 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Wendy Mayall                         107             118            2            -      109      118 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Barry O'Dwyer(5)                       -               -            -            -        -        - 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
John Pollock                         127             136            -            -      127      136 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Belinda Richards(8)                  105              26            1            -      106       26 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Nicholas Shott                       105             105            2            -      107      105 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Kory Sorenson                        125             116            -            -      125      116 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
David Woods(9)                         -              53            -            2        -       55 
------------------------  --------------  --------------  -----------  -----------  -------  ------- 
Total                              1,182           1,236           22            5    1,204    1,241 
------------------------  --------------  --------------  -----------  -----------  -------  -------

1 The amounts within the benefits columns reflect the fact that the reimbursement of expenses to Non-Executive Directors for travel and accommodation costs incurred in attending Phoenix Group Holdings and Phoenix Group Holdings plc Board and associated meetings represent a taxable benefit. This position has been clarified with HMRC and the amounts shown are for reimbursed travel and accommodation expenses (and the related tax liability which is settled by the Group).

2 Henry Staunton retired from the Board of Phoenix Group Holdings on 31 October 2018.

3 Nicholas Lyons became Chairman designate of Phoenix Group Holdings from 1 September 2018 and was confirmed in this appointment on 31 October 2018. Figure above reflects fee paid from 31 October 2018.

4 Ian Cormack retired from the Board of Phoenix Group Holdings on 2 May 2018.

5 Campbell Fleming and Barry O'Dwyer joined the Board of Phoenix Group Holdings on 31 August 2018 and waived all current and future emoluments with regard to their Directors' fees.

6 Karen Green joined the Board of Phoenix Group Holdings on 1 July 2017.

7 Isabel Hudson retired from the Board of Phoenix Group Holdings on 11 May 2017.

8 Belinda Richards joined the Board of Phoenix Group Holdings on 1 October 2017.

9 David Woods retired from the Board of Phoenix Group Holdings on 11 May 2017.

The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was GBP4.055 million (2017: GBP4.082million).

SHARE-BASED AWARDS - AUDITED INFORMATION

As at 31 December 2018, Directors' interests under long-term share-based arrangements were as follows:

LTIP

 
                                                                    No. of 
                                 No. of             Increase      dividend                            No. of 
                         Share   shares    No. of  in shares        shares                   No. of   shares 
                 Date    price    as at    shares  following  accumulating        No. of     shares    as at 
                   of       on    1 Jan   granted      right            at        shares        not   31 Dec   Vesting 
Name            grant    grant     2018   in 2018      issue    vesting(1)  exercised(2)  vested(3)     2018   date(4) 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
Clive 
Bannister 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
              28 Sept                                                                                          28 Sept 
LTIP             2015   632.8p  198,931         -     22,286        42,737             -   (94,285)  169,669      2018 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
                2 Jun                                                                                            2 Jun 
LTIP             2016   670.9p  187,634               21,020                           -          -  208,654      2019 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
               24 Mar                                                                                           24 Mar 
LTIP             2017   708.7p  177,627         -     19,899             -             -          -  197,526      2020 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
               21 Mar                                                                                           21 Mar 
LTIP             2018   703.6p        -   178,913     20,043                                         198,956      2021 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
                                564,192   178,913     83,248        42,737             -   (94,285)  774,805 
 --------------------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
James 
McConville 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
              28 Sept                                                                                          28 Sept 
LTIP             2015   632.8p  125,041         -     14,008        26,860             -   (59,263)  106,646      2018 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
                2 Jun                                                                                            2 Jun 
LTIP             2016   670.9p  117,940         -     13,212             -             -          -  131,152      2019 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
               24 Mar                                                                                           24 Mar 
LTIP             2017   708.7p  111,651         -     12,508             -             -          -  124,159      2020 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
               21 Mar                                                                                           21 Mar 
LTIP             2018   703.6p        -   112,460     12,598                                         125,058      2021 
-----------  --------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  -------- 
                                354,632   112,460     52,326        26,860             -   (59,263)  487,015 
 --------------------  -------  -------  --------  ---------  ------------  ------------  ---------  -------  --------

The number of shares for outstanding LTIP awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on 9 November 2016 and 27 July 2018. The number of shares for outstanding LTIP awards granted between 2017 and 2018 were increased to take into account the impact of the rights issues which took place on 27 July 2018. All adjustments were based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.

1 In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period (and which for awards made from 2015, will include dividends paid during any applicable holding period).

2 Gains of Directors from share options exercised and vesting shares under the LTIP in 2018 were GBPnil (2017: GBP2,533,277).

3 The 2016 LTIP award vested at 49.5% of maximum.

4 All LTIP awards are now subject to a holding period so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date.

LTIP Targets

Following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within the variable pay plans and made the necessary adjustments to ensure that the plans continue to operate as originally intended, properly reflect the aim to reward long-term value generation and are aligned to the market announcements directly in connection with the acquisition. This review resulted in an adjustment to the 2018 targets as follows:

Cumulative Cash Generation: target range increased from GBP1.474 billion (threshold) to GBP1.674 billion (maximum) to GBP1.824 billion (threshold) to GBP2.024 billion (maximum) as shown below reflecting the additional net cash generation expected by the end of 2020.

Return on Adjusted Solvency II Shareholders Own Funds: rebasing of the opening position to reflect the equity issued and any synergy benefits expected by the end of 2020.

The Committee were satisfied these adjustments ensured the LTIP continued to operate as originally intended with the targets no easier to satisfy as a result of the acquisition.

No changes were made to the targets for the 2016 and 2017 awards.

The performance conditions for the 2016, 2017 and 2018 awards are set out below and include these adjustments to the 2018 targets.

2018 award
(40% Cumulative
cash
2016 award 2017 award generation, 35%
(50% Cumulative (50% Cumulative Return on Adjusted
cash cash Shareholder Solvency
generation and generation and II Own Funds and
Performance measure 50% TSR) 50% TSR) 25% TSR)
-------------------------- -------------------------- -------------------------- --------------------------
Return on Adjusted Not applicable. Not applicable. Between 4% CAGR
Shareholder Solvency and 6% CAGR.
II Own Funds
25% of this part
vests at threshold
performance rising
on a pro rata basis
until 100% vests.
Measured over three
financial years
commencing with
the year of award.
-------------------------- -------------------------- -------------------------- --------------------------
Cumulative cash Target range of Target range of Target range of
generation GBP1.311bn to GBP1.511bn. GBP1.372bn to GBP1.572bn. GBP1.824bn to GBP2.024bn.
25% of this part
vests at threshold
performance rising
on a pro rata basis
until 100% vests.
Measured over three
financial years
commencing with
the year of award.
-------------------------- -------------------------- -------------------------- --------------------------
TSR Target range between Target range as Target range as
25% of this part median performance for 2016. for 2016.
vests at threshold against the constituents
performance rising of the FTSE 250
on a pro rata basis (excluding Investment
until 100% vests. Trusts) rising on
In addition, the a pro rata basis
Committee must consider until full vesting
whether the TSR for upper quintile
performance is reflective performance.
of the underlying
financial performance
of the Company.
Measured over three
financial years
commencing with
the year of award.

--------------------------  --------------------------  --------------------------  -------------------------- 
Underpin: Notwithstanding the Return on Adjusted Shareholder Solvency 
 II Own Funds, Cumulative cash generation and TSR performance targets, 
 if the Committee determines that the Group's debt levels and associated 
 interest costs have not remained within parameters acceptable to the 
 Committee over the performance period, and that the Group has not made 
 progress considered to be reasonable by it in executing any strategy 
 agreed by the Board on debt management, capital structuring and Risk 
 Management, the level of awards vesting will either be reduced or lapse 
 in full. The underpin also includes consideration of customer satisfaction 
 and, to meet Solvency II requirements, in exceptional cases, personal 
 performance. 
--------------------------------------------------------------------------------------------------------------

DBSS

 
                                                                      No. of 
                                   No. of             Increase      dividend                           No. of 
                                   shares    No. of  in shares        shares                  No. of   shares 
                 Date      Share    as at    shares  following  accumulating        No. of    shares    as at 
                   of      price    1 Jan   granted     rights            at        shares   lapsed/   31 Dec  Vesting 
                grant   on grant     2018   in 2018      issue    vesting(1)  exercised(2)    waived     2018     date 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
Clive 
Bannister 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
              28 Sept                                                                                           19 Mar 
DBSS             2015     632.8p   33,917         -                    6,479      (40,396)         -        -     2018 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
                2 Jun                                                                                           24 Mar 
DBSS             2016     670.9p   38,464         -      4,309             -             -         -   42,773     2019 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
               24 Mar                                                                                           20 Mar 
DBSS             2017     708.7p   37,363         -      4,185             -             -         -   41,548     2020 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
               21 Mar                                                                                           15 Mar 
DBSS             2018     703.6p        -    46,112      5,165                                         51,277     2021 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
                                  109,744    46,112     13,659         6,479      (40,396)         -  135,598 
 --------------------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
James 
McConville 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
              28 Sept                                                                                           19 Mar 
DBSS             2015     632.8p   22,491         -                    4,296      (26,787)         -        -     2018 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
                2 Jun                                                                                           24 Mar 
DBSS             2016     670.9p   25,283         -      2,832             -             -         -   28,115     2019 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
               24 Mar                                                                                           20 Mar 
DBSS             2017     708.7p   23,485         -      2,631             -             -         -   26,116     2020 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
               21 Mar                                                                                           15 Mar 
DBSS             2018     703.6p        -    28,985      3,247             -             -             32,232     2021 
-----------  --------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  ------- 
                                   71,259    28,985      8,710         4,296      (26,787)         -   86,463 
 --------------------  ---------  -------  --------  ---------  ------------  ------------  --------  -------  -------

The number of shares for outstanding DBSS awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on 9 November 2016 and 27 July 2018. The number of shares for outstanding DBSS awards granted between 2017 and 2018 were increased to take into account the impact of the rights issues which took place on 27 July 2018. All adjustments were based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.

1 In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually vest) to reflect the dividends paid during the vesting period.

2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2018 were GBP525,707 (2017: GBP595,978). Clive Bannister's gain was GBP316,099 arising from an award exercised on 20 March 2018 at a share price of GBP7.825. James McConville's gain was GBP209,608 arising from an award exercised on 20 March 2018 at a share price of GBP7.825.

The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, other than being subject to continued employment.

SCHEME INTERESTS AWARDED IN THE YEAR - AUDITED INFORMATION

 
                                                                 Percentage 
                                     Basis on                     vesting 
                  Date of   Type of   which award  Face value     at threshold    Vesting   Performance 
Recipient          award     award    made          of award      performance(1)   date      measures 
----------------  --------  -------  ------------  ------------  ---------------  --------  ----------- 
                  21 March           Nil cost                                     21 March  See page 
Clive Bannister    2018     LTIP      option       GBP1,399,854  25%               2021      94 
----------------  --------  -------  ------------  ------------  ---------------  --------  ----------- 
                  21 March           Nil cost                                     15 March 
Clive Bannister    2018     DBSS(1)   option       GBP360,785    -                 2021     None 
----------------  --------  -------  ------------  ------------  ---------------  --------  ----------- 
                  21 March           Nil cost                                     21 March  See page 
James McConville   2018     LTIP      option       GBP879,908    25%               2021      94 
----------------  --------  -------  ------------  ------------  ---------------  --------  ----------- 
                  21 March           Nil cost                                     15 March 
James McConville   2018     DBSS(1)   option       GBP226,784    -                 2021     None 
----------------  --------  -------  ------------  ------------  ---------------  --------  -----------

1 The DBSS awards have no threshold performance level.

The face value represents the maximum vesting of awards granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of the average of the closing middle market prices of Phoenix shares for the three dealing days preceding the award date.

SHARESAVE - AUDITED INFORMATION

 
                             Increase 
                            in shares 
                    As at   following                         As at                            Date 
                    1 Jan      rights      Shares   Shares   31 Dec  Exercise  Exercisable       of 
                     2018       issue   exercised   lapsed     2018     price         from   expiry 
-----------------  ------  ----------  ----------  -------  -------  --------  -----------  ------- 
Clive Bannister         -           -           -        -        -         -            -        - 
-----------------  ------  ----------  ----------  -------  -------  --------  -----------  ------- 
                                                                                     1 Jun    1 Dec 
James McConville    2,852         319           -        -    3,171  GBP5.674         2020     2020 
-----------------  ------  ----------  ----------  -------  -------  --------  -----------  -------

The number of options were increased to take into account the impact of the rights issues which took place on 27 June 2018. This adjustment was based on the Theoretical Ex-Rights Price ('TERP') and approved by the Remuneration Committee and HMRC. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on the share price.

Gains of Directors from share options exercised under Sharesave during 2018 were nil (2017: nil). Sharesave options are granted with an option price that is a 20% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.

Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2018 were GBP525,707 (2017: GBP3,129,255).

During the year ended 31 December 2018, the highest mid-market price of the Company's shares was 733p and the lowest mid-market price was 544p. At 31 December 2018, the Company's share price was 563.4p.

DIRECTORS' INTERESTS - AUDITED INFORMATION

The number of shares and share plan interests held by each Director and their connected persons are shown below:

 
                                                                           Total share plan  Total share plan 
                                                         Total share plan      interests as      interests as 
                                                             interests as                at                at 
                             As at           As at                     at       31 December       31 December 
                    1 January 2018     31 December            31 December              2018              2018 
                        or date of            2018                   2018     - Not subject      - Vested but 
                       appointment   or retirement           - Subject to    to performance       unexercised 
Name                      if later      if earlier   performance measures          measures   scheme interest 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Clive Bannister            727,329         827,178                605,136           135,598           169,669 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
James McConville           187,493         253,227                380,369            89,634           106,646 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Alastair Barbour             6,625           9,716                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Ian Cormack                  5,779           5,779                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Campbell Fleming                 -               -                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Karen Green                      -               -                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Nicholas Lyons              20,000          20,000                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Wendy Mayall                25,000          30,000                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Barry O'Dwyer                    -               -                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
John Pollock                10,000          14,666                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Belinda Richards                 -               -                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Nicholas Shott               5,000           7,333                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Kory Sorenson                2,185          15,704                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ---------------- 
Henry Staunton              70,000         102,666                      -                 -                 - 
-----------------  ---------------  --------------  ---------------------  ----------------  ----------------

There have been no changes in the Directors' share interests between 31 December 2018 and 22 February 2019 (being one month prior to the date of the notice of the AGM).

SHAREHOLDING REQUIREMENTS - AUDITED INFORMATION

As explained in the Remuneration Policy under the Shareholding Guidelines section, the Executive Directors are subject to shareholding requirements.

The extent to which Executive Directors have achieved the requirements by 31 December 2018 (using the share price of 563.4p as at 31 December 2018) can be summarised as follows:

 
                                                    Value of 
                                              shares held at 
                   Shareholding Guideline   31 December 2018 
Position            (minimum % of salary)      (% of salary) 
-----------------  ----------------------  ----------------- 
Clive Bannister                      200%               740% 
-----------------  ----------------------  ----------------- 
James McConville                     200%               399% 
-----------------  ----------------------  -----------------

The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with Phoenix, enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any shares which are required to be held for the purposes of the Company's Shareholding requirements or any vested LTIP award shares subject to a LTIP holding period.

IMPLEMENTATION OF REMUNERATION POLICY IN 2019 - NON-AUDITABLE

 
Element of Remuneration 
 Policy                       Detail of Implementation of Policy for 2019 
----------------------------  --------------------------------------------------------------------- 
Base Salary                   Base salaries are set by reference to appropriate 
                               market comparables. Salaries in 2019 will remain 
                               unchanged at GBP700,000 for the Group Chief Executive 
                               Officer (unchanged from 2011) and GBP440,000 for 
                               the Group Finance Director (unchanged from 2014). 
                               This means that their salaries will not have increased 
                               for eight and five years respectively. 
----------------------------  --------------------------------------------------------------------- 
Benefits                      There are no proposed changes to the benefits offered 
                               to Executive Directors in 2019. 
----------------------------  ------------------------------------------------------------------- 
Pension                       There are no proposed changes to the pension benefits 
                               offered to current Executive Directors in 2019. Pension 
                               benefits for newly appointed Executive Directors 
                               will be aligned to that of the wider workforce. 
----------------------------  ------------------------------------------------------------------- 
Annual Incentive Plan         The AIP for 2019 will operate on a basis that is 
 ('AIP')                       consistent with how the AIP operated in 2018. 
                               The AIP maximum potential and on-target levels remain 
                               unchanged at 150% of base salary and at 50% of maximum 
                               levels (75% of base salary) respectively. 
                               The overall weightings between Corporate and Personal 
                               performance measures for AIP in 2019 are: 
                                *    Corporate (financial and strategic) performance 
                                     measures - 80% (2018: 80%). 
 
 
                                *    Personal (individual objectives) - 20% (2018: 20%). 
 
 
                               The weightings of the AIP performance measures for 
                               2019 remain unchanged from 2018 and are summarised 
                               below: 
----------------------------  ------------------------------------------------------------------- 
                              Performance measure                          % of incentive potential 
----------------------------  -------------------------------------  ------------------------------ 
                              Corporate measure 
                              -------------------------------------  ------------------------------

                                                                       (30% of Corporate component) 
                              Operating Companies' Cash Generation                              24% 
                              -------------------------------------  ------------------------------ 
                              Adjusted Shareholder Solvency            (30% of Corporate component) 
                               II Own Funds                                                     24% 
                              -------------------------------------  ------------------------------ 
                                                                       (15% of Corporate component) 
                              Solvency II Management Actions                                    12% 
                              -------------------------------------  ------------------------------ 
                                                                       (25% of Corporate component) 
                              Customer Experience                                               20% 
                              -------------------------------------  ------------------------------ 
                              Personal 
                              -------------------------------------  ------------------------------ 
 Individual Objectives                                                                          20% 
 ------------------------------------------------------------------  ------------------------------ 
 Total                                                                                         100% 
 ------------------------------------------------------------------  ------------------------------ 
                              Outcomes from performance measures for 2019's AIP 
                               may be moderated by the Committee in line with the 
                               approved Remuneration Policy. This will include a 
                               review by the Committee that the Company has operated 
                               within its stated risk appetite and that there are 
                               no other risk-related concerns before any 2019 AIP 
                               outcomes are confirmed. 
                               The targets for the specific performance measures 
                               for AIP in 2019 are regarded as commercially sensitive 
                               by the Company but will be disclosed retrospectively 
                               in the Remuneration Report for 2019. 
                               40% of AIP outcomes for 2019 will be delivered as 
                               an award of deferred shares under the Deferred Bonus 
                               Share Scheme which will vest after a three-year deferral 
                               period. 
----------------------------  ------------------------------------------------------------------- 
Deferred Bonus Share Scheme   DBSS awards made in 2019 (in respect of 2018's AIP 
 ('DBSS')                      outcome) will be made automatically on the fourth 
                               dealing day following the announcement of the Company's 
                               2018 annual results in accordance with the Remuneration 
                               Policy. 
                               The number of shares for DBSS awards will be calculated 
                               using the average share price for the three dealing 
                               days before the grant of the DBSS awards. 
                               The three-year deferral period will run to the three-year 
                               anniversary of the making of the DBSS awards. Dividend 
                               entitlements for the shares subject to DBSS awards 
                               will accrue over the three-year deferral period. 
----------------------------  ------------------------------------------------------------------- 
Long-Term Incentive Plan      Awards under the LTIP will be made automatically 
 ('LTIP')                      on the fourth dealing day following the announcement 
                               of the Company's 2018 annual results under a procedure 
                               similar to that described above for awards under 
                               the DBSS. 
                               The number of shares for LTIP awards will be calculated 
                               using the average share price for the three dealing 
                               days before the grant of the LTIP awards. 
                               The initial three-year vesting period will run to 
                               the three-year anniversary of the making of the LTIP 
                               awards. At this time, the performance conditions 
                               will be determined. 
                               All annual LTIP awards made to Executive Directors 
                               are subject to a holding period so that any LTIP 
                               awards for which the performance conditions are satisfied 
                               will not be released for a further two years from 
                               the third anniversary of the original award date. 
                               Dividend accrual for LTIP awards will continue until 
                               the end of the holding period. 
                               Award levels for Executive Directors for 2019 are 
                               unchanged at 200% of base salary. 
                               The weightings of the LTIP performance measures for 
                               2019 remain unchanged from 2018 and are summarised 
                               below: 
----------------------------  ------------------------------------------------------------------- 
                                                                           Weighting of performance 
                              Performance measure                                           measure 
----------------------------  -------------------------------------  ------------------------------ 
 Cumulative cash generation                                                                     40% 
 ------------------------------------------------------------------  ------------------------------ 
 Return on Adjusted Shareholder 
  Solvency II Own Funds                                                                         35% 
 ------------------------------------------------------------------  ------------------------------ 
 TSR                                                                                            25% 
 ------------------------------------------------------------------  ------------------------------ 
 Total                                                                                         100% 
 ------------------------------------------------------------------  ------------------------------ 
 The performance measures are measured over a period 
  of three financial years, commencing with financial 
  year 2019. 
  All 2019 LTIP awards are subject to a further underpin 
  measure relating to debt and risk management within 
  the Group, consideration of customer satisfaction 
  and, to meet Solvency II requirements, in exceptional 
  cases, personal performance. These measures and the 
  relative weightings are considered to be appropriate 
  for 2019's LTIP awards. 
  The relative TSR measure is calculated against the 
  constituents of the FTSE 250 (excluding Investment 
  Trusts), with vesting commencing at median (where 
  25% of this part of the award vests) and full vesting 
  at upper quintile levels, subject to an underpin 
  regarding underlying financial performance. 
  The performance targets for the Cumulative cash generation 
  measure are GBP2,097 million (where 25% of this part 
  of the award vests) and GBP2,397 million (full vesting 
  of this part of the award). 
  The performance targets for the return on Adjusted 
  Shareholder Solvency II Own Funds measure are 4.5% 
  in excess of the risk-free rate (where 25% of this 
  part of the award vests) and 6.5% in excess of the 
  risk-free rate (full vesting of this part of the 
  award). 
  The rules of the Company's LTIP reserves discretion 
  for the Committee to adjust the outturn for any LTIP 
  performance measures (from zero to any cap) should 
  it consider that to be appropriate. The Committee 
  may operate this discretion having regard to such 
  factors as it considers relevant, including the performance 
  of the Company, any individual or business. 
 ------------------------------------------------------------------------------------------------ 
All-Employee Share Plans      Executive Directors have the opportunity to participate 
                               in HMRC tax advantaged Sharesave and Share Incentive 
                               Plans on the same basis as all other UK employees. 
----------------------------  ------------------------------------------------------------------- 
Shareholding requirements     Requirement levels are 200% of base salary for the 
                               Executive Directors. 
                               Where any performance vested LTIP awards are subject 
                               to a holding period requirement, the relevant LTIP 
                               award shares (discounted for anticipated tax liabilities) 
                               will count towards the shareholding requirements. 
                               Unvested awards under the LTIP and DBSS are not included 
                               in this assessment. Details of current shareholding 
                               levels are shown on page 97. 
                               Post cessation of employment, Executive Directors 
                               are expected to retain their full shareholding requirement

                               in Year 1 and 50% of the requirement in Year 2. 
----------------------------  ------------------------------------------------------------------- 
Chairman and Non-Executive    The fee levels for 2019 remain the same as for 2018 
 Directors' fees               and are GBP325,000 for the Chairman, GBP105,000 for 
                               the role of Non-Executive Director with additional 
                               fees of: (i) GBP10,000 payable for the role of SID; 
                               and/or (ii) GBP20,000 payable where an individual 
                               also chairs the Audit, Remuneration or Risk Committee; 
                               and/or (iii) GBP20,000 payable where a Non-Executive 
                               Director also serves on the board of a subsidiary 
                               company; and/or (iv) GBP10,000 payable for service 
                               on the Solvency II Model Governance Committee. 
----------------------------  -------------------------------------------------------------------

Note: All incentive plans are subject to malus/clawback. See page 85 'Notes to the Remuneration Policy' for details.

DISTRIBUTION STATEMENT

The DRR regulations require each quoted company to provide a comparison between profits distributed by way of dividend and overall expenditure on pay.

RELATIVE IMPORTANCE (GBPm)

 
Profits distributed 
 by way of dividend 
 (% change +67%)        Total 
--------------------    ----- 
2017                      198 
----------------------  ----- 
2018                      332 
----------------------  ----- 
 
 
Overall expenditure 
 on pay 
 (% change +47%)      SLA businesses  Group (excl.SLA businesses)  Total 
--------------------  --------------  ---------------------------  ----- 
2017                                                                 128 
--------------------  --------------  ---------------------------  ----- 
2018                              66                          122    188 
--------------------  --------------  ---------------------------  -----

Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2018 this is the interim dividend paid (GBP163 million) and the recommended final dividend of 23.4p per share multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 in the notes to the consolidated financial statements. No share buy-backs were made in either year.

Overall expenditure on pay has been taken as the employee costs as set out in note C2 'Administrative expenses' in the notes to the consolidated financial statements. Expenditure on pay has increased by 47%, and decreased by 5% on a like for like basis excluding the impact of the acquisition of the Standard Life Assurance businesses.

The decrease was primarily driven by the reduction in the number of AXA Wealth employees during the year, a significant portion of whom transferred to the Group's outsource provider. This was partly offset by small increases in share-based payment costs (see note I2) and AIP costs, increased salaries for new activities such as Bulk Purchase Annuities and also the impact of the salary increase for staff during the year.

PERFORMANCE GRAPH AND TABLE

The graph below shows the value to 31 December 2018 on a TSR basis, of GBP100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Company's Premium Listing) compared with the value of GBP100 invested in the FTSE 250 Index (excluding Investment Trusts).

The FTSE 250 Index (excluding Investment Trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Company is a constituent.

TOTAL SHAREHOLDER RETURN

Value of a 100 unit investment made on 5 July 2010

 
                    Jul 2010  Dec 2010  Dec 2011  Dec 2012  Dec 2013  Dec 2014  Dec 2015  Dec 2016  Dec 2017  Dec 2018 
------------------  --------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Phoenix Group 
 Holdings/Phoenix 
 Group Holdings 
 plc                     100        94        87        97       144       177       208       208       237       202 
------------------  --------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
FTSE 250 
 (excluding 
 investment 
 trusts)                 100       127       114       146       197       203       227       239       282       239 
------------------  --------  --------  --------  --------  --------  --------  --------  --------  --------  --------

Source: Thomson Reuters Datastream

The DRR regulations also require that a performance graph is supported by a table summarising aspects of the Group Chief Executive Officer's remuneration for the period covered by the above graph (which will in due course be for a period of ten years).

GROUP CHIEF EXECUTIVE OFFICER REMUNERATION

 
                                                                        Long-term 
                                                Annual variable         incentive 
                            Single figure         element award     vesting rates 
                                 of total         rates against   against maximum 
                             remuneration   maximum opportunity       opportunity 
                                 (GBP000)               ('AIP')          ('LTIP') 
-----  -------------------  -------------  --------------------  ---------------- 
2018   Clive Bannister              2,482                   86%             49.5% 
-----  -------------------  -------------  --------------------  ---------------- 
2017   Clive Bannister             2,8881                   86%               64% 
-----  -------------------  -------------  --------------------  ---------------- 
2016   Clive Bannister              2,878                   84%               55% 
-----  -------------------  -------------  --------------------  ---------------- 
2015   Clive Bannister              2,867                   82%               57% 
-----  -------------------  -------------  --------------------  ---------------- 
2014   Clive Bannister              3,104                   68%            57%(2) 
-----  -------------------  -------------  --------------------  ---------------- 
2013   Clive Bannister              2,737                   69%            67%(2) 
-----  -------------------  -------------  --------------------  ---------------- 
2012   Clive Bannister              1,583                   69%            n/a(3) 
-----  -------------------  -------------  --------------------  ---------------- 
2011   Clive Bannister(4)           1,333                   73%            n/a(3) 
-----  -------------------  -------------  --------------------  ---------------- 
 Jonathan Moss(4,5)                   704                   n/a               n/a 
 -------------------------  -------------  --------------------  ----------------

1 The single figure of total remuneration for 2017 has been restated and now reflects the actual price of shares on the day the 2015 LTIP vested (28 September 2018: 676p per share) rather than the three-month average share price to 31 December 2017 (759.8642p per share) which was required to be used last year for the single figure of total remuneration.

2 The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested.

3 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years.

4 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left Phoenix Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011.

5 Jonathan Moss' 2011 single figure of total remuneration does not include compensation for loss of office.

PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2017 TO 2018

In accordance with the DRR regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2017 and 2018 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2017 and 2018 on a matched basis). This group was selected as being representative of the wider workforce using the same process as was used for this comparison in last year's annual report and accounts.

 
Year-on-year % change           Salary  Taxable Benefits  Annual incentive   Total 
------------------------------  ------  ----------------  ----------------  ------ 
Group Chief Executive Officer    0.00%             0.82%            -0.48%  -0.26% 
------------------------------  ------  ----------------  ----------------  ------ 
Staff                            3.97%             7.80%             1.20%   3.56% 
------------------------------  ------  ----------------  ----------------  ------

There has been minimal movement overall in the level of remuneration for the Group Chief Executive Officer; the small increase in taxable benefits is due to a rise in the cost of funding for Private Medical Insurance. There was a slight reduction in AIP which was a result of a lower outcome under the Corporate element of the 2018 AIP.

Staff more generally have seen a slight overall increase, the primary reason for this is due to an increase in taxable benefits as a result of the implementation of Private Medical Insurance to all employees, extending the benefit to c.150 employees within the Company. The median salary increase for staff was 2.5%; this is lower than the figures above which are based on averages. There has been a small increase in average AIP for employees, which is linked in part to increases in employee salary levels.

VOTING OUTCOMES ON REMUNERATION MATTERS

The table below shows the votes cast to approve the Directors' Remuneration Report for the year ended 31 December 2017 at the 2018 AGM held on 2 May 2018 and to approve the Directors' Remuneration Policy at the 2017 AGM held on 11 May 2017.

 
                                                              For                 Against 
---------------------------------------  -----------  -----------  ---------  -----------  -------------- 
                                                             % of                    % of 
                                              Number   votes cast     Number   votes cast  Abstain Number 
---------------------------------------  -----------  -----------  ---------  -----------  -------------- 
To approve the Directors' Remuneration 
 Report 
 for the year ended 31 December 
 2017 (2018 AGM)                         294,152,705        99.15  2,528,520         0.85       1,291,938 
---------------------------------------  -----------  -----------  ---------  -----------  -------------- 
To approve the Directors' Remuneration 
 Policy 
 (2017 AGM)                              296,336,785        99.67    976,191         0.33           2,243 
---------------------------------------  -----------  -----------  ---------  -----------  --------------

DILUTION

The Company monitors the number of shares issued under the Phoenix Group employee share plans and their impact on dilution limits. The Company's practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company's all-employee Sharesave scheme only, new shares are issued. Therefore the usage of shares compared to the 10% dilution limits (in any rolling 10-year period) set by the Investment Association in respect of all share plans as at 31 December 2018 is 0.23%, and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).

CONSIDERATION OF EMPLOYEE PAY

As explained in the Notes to the Remuneration Policy table:

-- when determining Executive Directors' remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate, and

-- the Group has one consistent reward policy for all levels of employees, and therefore the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business.

The Remuneration Committee intends to publish the ratios comparing CEO to employee pay as prescribed by the DRR regulations for financial year 2019. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018, we have been integrating our employee pay systems and are not in the position to adopt this disclosure requirement early. Accordingly, Phoenix has come to the conclusion that it would not be appropriate to publish on a voluntary basis a CEO to employee pay ratio disclosure for 2018.

GER PAY GAP

The reporting entity for Gender Pay Gap reporting remains as Pearl Group Management Services; details of the 2018 Gender Pay Gap are shown on page 27 of the Annual Report and Accounts within the People Section. Employees who transferred from Standard Life Aberdeen are included in the Gender Pay Gap reporting for Standard Life Aberdeen as they were employees of that entity on the relevant date.

ADDITIONAL UNAUDITED INFORMATION

The information provided below relates to the Directors' membership of both the Phoenix Group Holdings and Phoenix Group Holdings plc boards and committees throughout 2018.

DIRECTORS' SERVICE CONTRACTS

The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows:

Executive Directors' contracts

 
                                                                 Notice period 
                                                             from either party 
Name                Date of appointment   Date of contract            (months) 
-----------------  --------------------  -----------------  ------------------ 
Clive Bannister           28 March 2011    7 February 2011                  12 
-----------------  --------------------  -----------------  ------------------ 
James McConville           28 June 2012        28 May 2012                  12 
-----------------  --------------------  -----------------  ------------------

Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group. The Executive Directors are entitled to retain any external fees. During 2018, Clive Bannister received GBP45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. He is also Chairman of the Museum of London for which he receives no payment. James McConville received GBP112,000 from Tesco Personal Finance plc.

Non-Executive Directors' contracts

 
                                                 Date of 
                                             joining the 
                     Date of letter        Phoenix Group        Appointment  Unexpired term 
Name                 of appointment    Holdings Board(1)           end date        (months) 
-----------------  ----------------  -------------------  -----------------  -------------- 
Alastair Barbour    1 November 2018       1 October 2013         2 May 2019               2 
-----------------  ----------------  -------------------  -----------------  -------------- 
Campbell Fleming    1 November 2018       31 August 2018     31 August 2021              30 
-----------------  ----------------  -------------------  -----------------  -------------- 
Karen Green         1 November 2018          1 July 2017        1 July 2020              16 
-----------------  ----------------  -------------------  -----------------  -------------- 
Nicholas Lyons      1 November 2018      31 October 2018    31 October 2021              32 
-----------------  ----------------  -------------------  -----------------  -------------- 
Wendy Mayall        1 November 2018     1 September 2016   1 September 2019               6 
-----------------  ----------------  -------------------  -----------------  -------------- 
Barry O'Dwyer       1 November 2018       31 August 2018     31 August 2021              30 
-----------------  ----------------  -------------------  -----------------  -------------- 
John Pollock        1 November 2018     1 September 2016   1 September 2019               6 
-----------------  ----------------  -------------------  -----------------  -------------- 
Nicholas Shott      1 November 2018     1 September 2016   1 September 2019               6 
-----------------  ----------------  -------------------  -----------------  -------------- 
Belinda Richards    1 November 2018       1 October 2017     1 October 2020              19 
-----------------  ----------------  -------------------  -----------------  -------------- 
Kory Sorenson       1 November 2018          1 July 2014         2 May 2019               2 
-----------------  ----------------  -------------------  -----------------  --------------

1 All Directors above joined the Phoenix Group Holdings plc Board on 15 October 2018 and services are considered to have commenced with effect from 13 December 2018.

The above tables have been included to comply with UKLA Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director's appointment (excluding the Chairman) they would be entitled to a one month notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months' notice period.

REMUNERATION COMMITTEE GOVERNANCE

The Group originally established a Remuneration Committee in 2010. On 13 December 2018 the Phoenix Group Holdings plc Remuneration Committee was formally constituted following admission of the new entity to the London Stock Exchange. The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the Committee in 2018 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman's letter to shareholders at the start of the Remuneration Report.

The table below shows the independent Non-Executive Directors who served on the Committee during 2018 and their date of appointment:

 
Member                                             From       To 
--------------------------------------  ---------------  ------- 
Kory Sorenson (Committee Chair from 11 
 May 2017)                                  3 July 2014  To date 
--------------------------------------  ---------------  ------- 
Karen Green                                 1 July 2017  To date 
--------------------------------------  ---------------  ------- 
Nicholas Shott                          20 October 2016  To date 
--------------------------------------  ---------------  -------

Under the Committee's Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2018, seven Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 67.

Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the firm-wide remuneration policy in the context of business strategy and changing risk conditions. The firm-wide remuneration policy focuses on ensuring sound and effective risk management so as not to encourage risk-taking outside of the Company's risk appetite. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.

The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration.

ADVICE

During the year, the Committee received independent remuneration advice from its appointed advisers, FIT Remuneration Consultants LLP ('FIT') and PwC (who were appointed by the Committee as their adviser from May 2018 following a competitive tender). Both firms are members of the Remuneration Consultants Group (the professional body for remuneration consultants) and adhere to its code of conduct.

The Committee was satisfied that the advice provided by both firms was objective and independent. FIT's fees in respect of 2018 were GBP45,250, all of which were attributed to work relating to the Committee and were charged on the basis of the firm's standard terms of business for advice provided. PwC's fees in respect of 2018 were GBP160,850 all of which were attributed to work relating to the Committee and were charged on the basis of the firm's standard terms of business for advice provided. PwC have not provided any other services to Phoenix Group Holdings plc in relation to remuneration.

FIT have provided some technical specialist advice to management since stepping down as the Committee's adviser. PwC also provided general consultancy services to management during the year. Separate teams within PwC provided unrelated services in respect of tax, assurance, risk consulting and transaction support during the year. The Committee is satisfied that these activities do not compromise the independence or objectivity of the advice it has received from PwC.

The Committee assesses the performance of its advisers annually, the associated level of fees and reviews the quality of advice provided to ensure that it is independent of any support provided to management.

The Committee consulted with the Group Chief Executive Officer, Group HR Director and Deputy Group Finance Director who attended, by invitation, various Committee meetings during the year although no executive is ever permitted to participate in discussions or decisions regarding his or her own remuneration.

Input is also sought from the Chief Risk Officer (without management present) and from representatives from finance, as appropriate. The Chief Risk Officer is asked to confirm each year that the Company has operated within its stated risk appetite during the year and also to confirm whether there were otherwise any risk-related concerns that required the Committee to consider using its judgement to moderate incentive plan outcomes. There were no such concerns in 2018.

APPIX - STATUTORY SINGLE FIGURE TABLES - Audited Information

Following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted into the Group as the new ultimate parent company of the Group in place of Phoenix Group Holdings (further details are included in note A1 to the consolidated financial statements). The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.

The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December 2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of services provided to Phoenix Group Holdings plc or its subsidiaries. Services are considered to have been provided effective from 13 December 2018. As there was no change to the remuneration arrangements this simply reflects the annual data pro-rated from 13 December 2018 to 31 December 2018 and therefore the separate footnotes shown under the Single Figure Table on page 88 have not been repeated.

For comparison purposes, the remuneration paid for the period up to 13 December in respect of services to Phoenix Group Holdings has also been included.

Phoenix Group Holdings plc - Single Figure Table from 13 December 2018 to 31 December 2018

 
                                                                      Long-term 
                     Salary/fees    Benefits    Annual Incentive     incentives     Pension       Total 
-----------------  -------------  ----------  ------------------  -------------  ----------  ---------- 
GBP000               2018   2017  2018  2017      2018      2017    2018   2017  2018  2017  2018  2017 
-----------------  ------  -----  ----  ----  --------  --------  ------  -----  ----  ----  ----  ---- 
Clive Bannister        36      -     1     -        47         -      39      -     6     -   129     - 
-----------------  ------  -----  ----  ----  --------  --------  ------  -----  ----  ----  ----  ---- 
James McConville       23      -     1     -        30         -      24      -     4     -    82     - 
-----------------  ------  -----  ----  ----  --------  --------  ------  -----  ----  ----  ----  ----

Phoenix Group Holdings - Single Figure Table from 1 January 2018 to 12 December 2018

 
                                                                          Long-term 
                  Salary/fees       Benefits    Annual Incentive         incentives        Pension               Total 
--------------  -------------  -------------  ------------------  -----------------  -------------  ------------------ 
                                                                            2017(1)                            2017(1) 
GBP000          2018  2017(1)  2018  2017(1)    2018     2017(1)  2018   (restated)  2018  2017(1)   2018   (restated) 
--------------  ----  -------  ----  -------  ------  ----------  ----  -----------  ----  -------  -----  ----------- 
Clive 
 Bannister       664      700    15       16     851         902   706        1,147   117      123  2,353        2,888 
--------------  ----  -------  ----  -------  ------  ----------  ----  -----------  ----  -------  -----  ----------- 
James 
 McConville      417      440    15       16     551         567   444          724    73       77  1,503        1,824 
--------------  ----  -------  ----  -------  ------  ----------  ----  -----------  ----  -------  -----  -----------

1 The comparative 2017 data represents a full year.

Phoenix Group Holdings plc - NED fees from 13 December 2018 to 31 December 2018

 
                              Directors'      Directors' 
                           salaries/fees   salaries/fees  Benefits  Benefits    Total    Total 
                                    2018            2017      2018      2017     2018     2017 
Name                              GBP000          GBP000    GBP000    GBP000   GBP000   GBP000 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Non-Executive Chairman 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Henry Staunton                         -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Nicholas Lyons                        17               -         -         -       17        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Non-Executive Directors 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Alastair Barbour                       7               -         -         -        7        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Ian Cormack                            -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Campbell Fleming                       -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Karen Green                            5               -         -         -        5        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Isabel Hudson                          -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Wendy Mayall                           5               -         -         -        5        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Barry O'Dwyer                          -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
John Pollock                           6               -         -         -        6        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Belinda Richards                       5               -         -         -        5        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Nicholas Shott                         5               -         -         -        5        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Kory Sorenson                          6               -         -         -        6        -

------------------------  --------------  --------------  --------  --------  -------  ------- 
David Woods                            -               -         -         -        -        - 
------------------------  --------------  --------------  --------  --------  -------  ------- 
Total                                 56               -         -         -       56        - 
------------------------  --------------  --------------  --------  --------  -------  -------

Phoenix Group Holdings - NED fees from 1 January 2018 to 12 December 2018

 
                              Directors'      Directors' 
                           salaries/fees   salaries/fees  Benefits  Benefits    Total     Total 
                                    2018         2017(1)      2018   2017(1)     2018   2017(1) 
Name                              GBP000          GBP000    GBP000    GBP000   GBP000    GBP000 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Non-Executive Chairman 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Henry Staunton                       271             325         -         -      271       325 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Nicholas Lyons                        38               -         2         -       40         - 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Non-Executive Directors 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Alastair Barbour                     136             150        12         3      148       153 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Ian Cormack                           39             116         -         -       39       116 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Campbell Fleming                       -               -         -         -        - 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Karen Green                          100              52         3         -      103        52 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Isabel Hudson                          -              39         -         -        -        39 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Wendy Mayall                         102             118         2         -      104       118 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Barry O'Dwyer                          -               -         -         -        -         - 
------------------------  --------------  --------------  --------  --------  -------  -------- 
John Pollock                         121             136         -         -      121       136 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Belinda Richards                     100              26         1         -      101        26 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Nicholas Shott                       100             105         2         -      102       105 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Kory Sorenson                        119             116         -         -      119       116 
------------------------  --------------  --------------  --------  --------  -------  -------- 
David Woods                            -              53         -         2        -        55 
------------------------  --------------  --------------  --------  --------  -------  -------- 
Total                              1,126           1,236        22         5    1,148     1,241 
------------------------  --------------  --------------  --------  --------  -------  --------

1 The comparative 2017 data represents a full year.

APPROVAL

This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by:

KORY SORENSON

REMUNERATION COMMITTEE CHAIR

4 March 2019

DIRECTORS' REPORT

The Directors present their report for the year ended 31 December 2018.

Phoenix Group Holdings plc is incorporated in the United Kingdom (registered no. 11606773) and has a Premium Listing on the London Stock Exchange.

SHAREHOLDERS

Dividends

Dividends for the year are as follows:

 
Ordinary shares 
--------------------------  -------------------------------------- 
                            22.6p per share (2017: 22.6p1 per 
Paid interim dividend        share) 
--------------------------  -------------------------------------- 
                            23.4p per share (2017: 22.6p1 per 
Recommended final dividend   share) 
--------------------------  -------------------------------------- 
Total ordinary dividend     46p per share (2017: 45.2p1 per share) 
--------------------------  --------------------------------------

1 2017 dividends per share figures have been rebased to take into account the bonus element of the rights issue completed in July 2018.

As a result of regulatory changes applicable to the Group under Solvency II, dividends declared in respect of the Company's ordinary shares must be capable of being cancelled and withheld or deferred at any time prior to payment. This is in order that the Company's ordinary shares be counted towards Group capital. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The Directors do not expect to exercise this right other than where they believe that it may be necessary to do so as a result of legal or regulatory requirements.

Share Capital

The issued share capital of the Company* was increased by 327,966,570 during 2018 which related to:

-- shares issued in relation to the acquisition of Standard Life Assurance Limited (SLAL);

-- shares issued to Standard Life Aberdeen plc (SLA plc) in relation to the acquisition of SLAL;

-- 144,114,450 shares were issued to SLA plc on 31 August 2018; and

-- shares issued under the Company's Sharesave Scheme.

At 31 December 2018, the issued ordinary share capital totalled 721,199,214. Subsequently, 3,531 ordinary shares have been issued in 2019 in connection with the Group's Sharesave Scheme to bring the total in issue to 721,202,745 at the date of this report.

Full details of the issued and fully paid share capital as at 31 December 2018 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.

At the General Meeting of Phoenix Group Holdings plc held in October 2018, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under this authority would, subject to the Companies Act 2006 either be cancelled by operation of law or held in treasury.

* Any references to the Company refer to both Phoenix Group Holdings (the Group's former Cayman Islands registered holding company) and Phoenix Group Holdings plc (the Group's new UK registered holding company)

Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM on 2 May 2019, the Company is authorised to make purchases of its own shares and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Act 2006 including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The Company held no treasury shares during the year or up to the date of this report.

The rights and obligations attaching to the Company's ordinary shares are set out in the Company's Articles of Association (the 'Company's Articles') which are available on the Company's website at www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.

Where the Phoenix Group Employee Benefit Trust ('EBT') holds shares for unvested awards, the voting rights for these shares are exercisable by the trustees of the EBT at their discretion, taking into account the recommendations of the Group.

Restrictions on transfer of shares

Under the Company's Articles, the Directors may in certain circumstances refuse to register transfers of shares. Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Conduct Authority ('FCA') and the Group's own share dealing rules whereby Directors and certain employees of the Group require individual authorisation to deal in the Company's ordinary shares.

Substantial shareholdings

Information provided to the Company pursuant to the FCA's Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company's website. As at 4 March 2019, the Company had been notified of the following significant holdings of voting rights in its shares.

 
                             Number of voting rights  Percentage of shares 
                                           in shares              in issue 
---------------------------  -----------------------  -------------------- 
Standard Life Aberdeen plc               194,275,410                26.93% 
---------------------------  -----------------------  -------------------- 
BlackRock Inc.                            37,167,390                 5.15% 
---------------------------  -----------------------  --------------------

Annual General Meeting ('AGM')

The AGM of the Company will be held at Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH on Thursday 2 May 2019 at 9.00am.

A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting.

Communication with investors

The Company places considerable importance on communication with investors and regularly engages with them on a wide range of topics.

The Company's Investor Relations department is dedicated to facilitating communication with investors and analysts and maintains an active investor relations programme. Please see page 58 for further details regarding the Company's engagement with investors.

In addition, continued engagement is undertaken with shareholders and proxy advisers on evolving governance issues.

The Directors consider it important to understand the views of the market. Board members regularly receive copies of the latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies, designed to determine the investment community's view of the core business.

The Company's AGM provides another opportunity to communicate with its shareholders. At the 2018 meeting, the Code provisions were complied with. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2019 AGM.

The Company's Annual Report and Accounts, together with the Company's Interim Report and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group's activities and prospects. These are available on the Company's website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company's financial calendar.

Board

Board of Directors

The membership of the Board of Directors during 2018 is given within the Corporate Governance Report on pages 62 and 63, which is incorporated by reference into this report. Details of Directors' (and persons closely associated with them) interests in the shares of the Company are shown in the Directors' Remuneration Report.

During 2018 and up to the date of this report, the following changes to the Board took place:

-- Ian Cormack resigned from the Board on 2 May 2018

-- Campbell Fleming and Barry O'Dwyer were appointed to the Board on 31 August 2018

-- Henry Staunton resigned from the Board on 31 October 2018

-- Nicholas Lyons was appointed to the Board on 31 October 2018

Details of related party transactions which took place during the year with Directors of the Company and consolidated entities where Directors are deemed to have significant influence, are provided in the Directors' Remuneration Report and in note I5 to the IFRS consolidated financial statements.

The rules about the appointment and replacement of Directors are contained in the Company's Articles. These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next AGM following the appointment.

In accordance with the UK Corporate Governance Code, Directors must stand for election/re-election annually. The Board of Directors will be unanimously recommending that all of the Directors should be put forward for election at the forthcoming AGM to be held on 2 May 2019.

The Articles give details of the circumstances in which Directors will be treated as having automatically vacated their office and also state that the Company's shareholders may remove a Director from office by passing an ordinary resolution.

The powers of the Directors are determined by the Companies Act 2006, the provisions of the Company's Articles and by any valid directions given by shareholders by way of special resolution.

The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under the Company's Articles.

Directors' remuneration and interests

A report on Directors' remuneration is presented within the Directors' Remuneration Report including details of their interests in shares and share options or any rights to subscribe for shares in the Company.

Directors' indemnities

The Company has entered into deeds of indemnity with each of its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply when prohibited by any applicable law.

The deeds of indemnity remains in-force as at the date of signature of this Directors' Report.

Directors' conflicts of interest

The Board has established procedures for handling conflicts of interest in accordance with the Companies Act 2006 and the Company's Articles.

On an ongoing basis, Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise.

Directors' and Officers' liability insurance

The Company maintains Directors' and Officers' liability insurance cover which is renewed annually.

Employees

Diversity and inclusion

The Group is committed to creating a work environment free of discrimination where everyone is treated with dignity and respect.

We value the individuality, diversity, and creativity that every colleague brings to the workplace. Everyone has the right to be treated with dignity and respect and not to be disadvantaged in any way as a result of their age, race, gender, disability, religion or belief, sexual orientation, gender re-assignment, marriage and civil partnership or pregnancy and maternity. The Company is committed to achieving equality of opportunity and the equal treatment of all colleagues and those applying to join us. Equality of opportunity, which includes equality of pay, is seen as an integral part of our employment practices, policies and procedures. To this end all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.

The Company will not tolerate bullying and harassment of any kind. All allegations of bullying and harassment will be investigated and, if appropriate, disciplinary action will be taken. The Company will also not tolerate victimisation of a person for making allegations of bullying or harassment in good faith or supporting someone to make such a complaint.

Employee engagement

Phoenix Group continues to communicate with staff across a wide variety of channels, including regular news bulletins via the intranet, Executive Committee presentations and other face-to-face briefings. The staff briefings and Executive Committee presentations typically include updates on the Company's strategy and plans, progress against key financial and operational targets, regulatory and risk management updates and review of economic or other factors which could affect the Company's strategy and performance. Regular feedback mechanisms are also in place, ensuring communication at Phoenix is a continuous two-way dialogue.

The views and opinions of staff are sought through Phoenix's Engagement Survey and more regular interim surveys and employee communication and engagement forums. While no survey was undertaken in 2018 as a result of the Standard Life acquisition, all employees of the Enlarged Group took part in a Culture survey in December 2018. Phoenix undertakes meaningful consultation with staff representatives on all major organisational changes and other matters affecting employee engagement. An Engagement survey of the Enlarged Group is planned for Q3 2019.

Employee shareholding

The Group also provides the opportunity for employees to participate in the Company's all-employee share schemes, which includes Sharesave and the Share Incentive Plan, to encourage broader share ownership in the Company.

Governance

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group's cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 43 to 45. In addition, the IFRS consolidated financial statements include, amongst other things, notes on the Group's borrowings (note E5), management of its financial risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I6 and I7) and its capital and management (note I3). The Strategic Report (on pages 2 to 47) sets out the business model and how the Group creates value for shareholders and policyholders.

The Board has followed the requirements of the UK Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, (September 2014) when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has undertaken a review of the liquidity and solvency of the Group under both normal and stressed conditions as at the date of preparation of the statement of consolidated financial position.

Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each principal subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company's ability to continue as a going concern.

The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

The Directors have acknowledged their responsibilities in the Statement of Directors' Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2018.

Viability statement

The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for a period of five years to align to the Group's business planning and is contained in the Risk Management section on page 46.

Corporate governance statement

The disclosures required by section 7.2 of the FCA's Disclosure Guidance and Transparency Rules can be found in the Corporate Governance Report on pages 60 to 75 which is incorporated by reference into this Directors' Report and comprises the Company's Corporate Governance Statement.

The disclosures required in respect of the Company's diversity policy are addressed in the Strategy and KPIs section of the Strategic Report on page 51. The UK Corporate Governance Code (the 'Code') applies to the Company and full details on the Company's compliance with the Code are included in the Corporate Governance Report. The Code is available on the website of the Financial Reporting Council - www.frc.org.uk.

Greenhouse gas emissions

All disclosures concerning the Group's greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on pages 56 and 57.

Financial risk management

The Group operates a Risk Management Framework ('RMF') consisting of several components, as detailed in the Risk Management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein). At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness, customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories. The Risk Management section also describes how the Enterprise Risk Management (ERM) framework operated by the acquired Standard Life Assurance businesses aligns with the Phoenix RMF.

Articles of Association

Changes to the Company's Articles require prior shareholder approval.

The Articles are available on the Company's website at www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.

Re-Appointment of the Auditors

Ernst & Young LLP ('EY') has indicated its willingness to continue in office and shareholders' approval will be sought at the AGM on 2 May 2019.

There is no cap on auditor liability in place in relation to audit work carried out on the IFRS consolidated financial statements and the Group's UK subsidiaries' individual financial statements.

Details of fees paid to EY during 2018 for audit and non-audit work are disclosed in note C4 to the IFRS consolidated financial statements.

Disclosure of information to Auditors

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Group Company Secretary

The Group Company Secretary throughout the 2018 financial period was Gerald Watson.

Contractual/Other

Significant agreements impacted by a change of control of the Company

There are change of control clauses contained in certain of the Group's financing agreements. The GBP900million revolving credit facility and GBP600million acquisition facility have provisions which would enable the lending banks to require repayment of all amounts borrowed following a change of control.

All of the Company's employee share and incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.

Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts. None is considered to be significant in terms of their potential impact on the business of the Group.

Disclosures under listing rule 9.8.4R

For the purposes of Listing Rule 9.8.4C, the information required to be disclosed under Listing Rule 9.8.4R can be found within the following sections of the Report and Accounts:

 
Section  Requirement                          Location 
-------  -----------------------------------  ------------------------------------- 
                                              Note E5 to the Consolidated Financial 
1        Statement of interest capitalised     Statements 
-------  -----------------------------------  ------------------------------------- 
         Publication of unaudited financial 
2         information                         Not applicable 
-------  -----------------------------------  ------------------------------------- 
3        Deleted                              Not applicable 
-------  -----------------------------------  ------------------------------------- 
         Details of long-term incentive 
4         schemes                             Not applicable 
-------  -----------------------------------  ------------------------------------- 
5        Waiver of emoluments by a Director   Directors' Remuneration Report 
-------  -----------------------------------  ------------------------------------- 
         Waiver of any future emoluments 
6         by a Director                       Directors' Remuneration Report 
-------  -----------------------------------  ------------------------------------- 
         Non pre-emptive issue of equity 
7         for cash                            Not applicable 
-------  -----------------------------------  ------------------------------------- 
         As per 7, but for major subsidiary 
8         undertakings                        Not applicable 
-------  -----------------------------------  ------------------------------------- 
         Parent participation in any placing 
9         of a subsidiary                     Not applicable 
-------  -----------------------------------  ------------------------------------- 
10       Contracts of significance            Not applicable 
-------  -----------------------------------  ------------------------------------- 
         Controlling shareholder provision 
11        of services                         Not applicable 
-------  -----------------------------------  ------------------------------------- 
12       Shareholder dividend waiver          Not applicable 
-------  -----------------------------------  ------------------------------------- 
         Shareholder dividend waiver - 
13        future periods                      Not applicable 
-------  -----------------------------------  ------------------------------------- 
14       Controlling shareholder agreements   Not applicable 
-------  -----------------------------------  -------------------------------------

STATEMENT OF DIRECTORS' RESPONSIBILITIES

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS OF PHOENIX GROUP HOLDINGS PLC

The Directors are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors' Report, the Directors' remuneration report, the consolidated financial statements and the Company financial statements in accordance with applicable law and regulations.

The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group's business for the year ended 31 December 2018, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries; and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the 'Management Report' can be found in the Strategic Report and this Directors' Report, including the sections of the Annual Report and Accounts incorporated by reference.

The Directors have prepared the consolidated financial statements and the Company financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU'). The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.

In preparing these financial statements the Directors are required to:

-- Select suitable accounting policies and then apply them consistently.

-- Make judgements and accounting estimates that are reasonable and prudent.

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

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

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

The Directors are responsible for making, and continuing to make, the Company's Annual Report and Accounts available on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 62 and 63, confirm that, to the best of their knowledge:

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

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

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

The Strategic Report and the Directors' Report were approved by the Board of Directors on 4 March 2019.

By order of the Board

   CLIVE BANNISTER                                                              JAMES MCCONVILLE

GROUP CHIEF EXECUTIVE OFFICER GROUP FINANCE DIRECTOR AND GROUP DIRECTOR, SCOTLAND

4 March 2019

FINANCIALS

IN THIS SECTION

 
Independent Auditor's Report                112 
------------------------------------------  --- 
IFRS Consolidated Financial Statements      121 
Notes to the Consolidated Financial 
 Statements                                 128 
Parent Company Accounts                     214 
Notes to the Parent Company Financial 
 Statements                                 216 
Additional Life Company Asset Disclosures   222 
Additional Capital Disclosures              228 
Alternative Performance Measures            230

INDEPENT AUDITOR'S REPORT

TO THE MEMBERS OF PHOENIX GROUP HOLDINGS PLC

Opinion

In our opinion:

-- Phoenix Group Holdings plc's consolidated financial statements and parent company financial statements (the 'Financial Statements') give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2018 and of the Group's profit for the year then ended;

-- the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU');

-- the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2006; and

-- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.

We have audited the consolidated financial statements of Phoenix Group Holdings plc and its subsidiaries (collectively 'the Group') and the parent company financial statements which comprise:

 
Group                                        Parent company 
-------------------------------------------  -------------------------------------- 
The statement of consolidated financial      The statement of changes in equity 
 position as at 31 December 2018              for the period then ended 
-------------------------------------------  -------------------------------------- 
The consolidated income statement            The statement of financial position 
 for the year then ended                      as at 31 December 2018 
-------------------------------------------  -------------------------------------- 
The consolidated statement of comprehensive  The statement of cash flows for the 
 income for the year then ended               period then ended 
-------------------------------------------  -------------------------------------- 
The statement of consolidated cash           Related notes 1 to 17 to the financial 
 flows for the year then ended                statements 
-------------------------------------------  -------------------------------------- 
The statement of consolidated changes 
 in equity for the year then ended 
-------------------------------------------  -------------------------------------- 
Related notes A1 to I8 to the consolidated 
 financial statements (except for 
 note I3 which is marked as unaudited), 
 including a summary of significant 
 accounting policies 
-------------------------------------------  --------------------------------------

The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs') and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

Further to our confirmation that we are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, we have specifically considered the impact of the acquisition of Standard Life Assurance Limited ('SLAL') and other associated entities during the period on our independence. Material business relationships and prescribed non-audit services with the acquired entities at the time of the acquisition were terminated within the provisions of the Ethical Standard and appropriate safeguards were put in place. These safeguards included the migration of our workplace pension scheme arrangement to a different provider.

Conclusions relating to principal risks, going concern and viability statement

We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to:

-- the disclosures in the Annual Report set out on pages 43 to 45 that describe the principal risks and explain how they are being managed or mitigated;

-- the Directors' confirmation set out on page 110 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

-- the Directors' statement set out on page 108 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;

-- whether the Directors' statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or

-- the Directors' explanation set out on page 46 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Overview of our audit approach

 
Key audit matters 
                        *    Valuation of insurance contract liabilities, 
                             comprising the following risk areas: 
 
 
                        *    actuarial assumptions; 
 
 
                        *    actuarial modelling; and 
 
 
                        *    data. 
 
 
                        *    Valuation of certain complex and illiquid financial 
                             investments. 
 
 
                        *    Accounting for the acquisition of SLAL and other 
                             associated entities. 
-----------------  ------------------------------------------------------------- 
Audit scope 
                     *    We performed an audit of the complete financial 
                          information of the Group Function, Phoenix Life 
                          Division and SLAL and audit procedures on specific 
                          balances for Other Companies. Our scope is explained 
                          further on pages 117 to 118. 
-----------------  ------------------------------------------------------------- 
 
                     *    The components where we performed full or specific 
                          audit procedures accounted for more than 99% of the 
                          equity and profit before tax of the Group. 
-----------------  ------------------------------------------------------------- 
Materiality 
                     *    Overall Group materiality of GBP100 million (2017: 
                          GBP63 million) which represents 1.9% (2017: 2%) of 
                          total equity attributable to owners of the parent 
                          ('Group equity'). 
-----------------  -------------------------------------------------------------

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole and in our opinion thereon, and we do not provide a separate opinion on these matters.

 
Risk 
------------------------------------------------------------------------------- 
Valuation of insurance contract liabilities (GBP92.6bn; 2017: GBP45.4bn) 
 Refer to the Audit Committee Report (pages 68 to 71); Critical accounting 
 estimates (page 129); Accounting policies and note F1 of the consolidated 
 financial statements (pages 166 to 168) 
 We considered the valuation of insurance contract liabilities to be 
 a significant risk for the Group. Specifically, we considered the actuarial 
 assumptions and modelling that are applied, as these involve complex 
 and significant judgements about future events, both internal and external 
 to the business for which small changes can result in a material impact 
 to the resultant valuation. Additionally, the valuation process is conditional 
 upon the accuracy and completeness of the data. 
-------------------------------------------------------------------------------

We have split the risks relating to the valuation of insurance contract liabilities into the following component parts:

-- actuarial assumptions;

-- actuarial modelling; and

-- data.

We assessed management's analysis of movements in insurance contract liabilities over the year and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below:

 
                                                                                                 Key observations 
                                                                                                  communicated 
                                                                                                  to the Audit 
Risk area                        Our response to the risk                                         Committee 
-------------------------------  --------------------------------------------------------------  --------------------- 
Actuarial assumptions            To obtain sufficient audit evidence                             We determined 
There has been no change          to conclude on the appropriateness                              that the actuarial 
in our identification             of actuarial assumptions, we engaged                            assumptions 
of this risk from the             our actuaries as part of our audit                              used by management 
prior year. Whilst we             team and performed the following                                are reasonable 
consider the risks to             procedures:                                                     based on the 
be similar in nature,              *    obtained an understanding and tested the design and       analysis of 
due to the increased                    operating effectiveness of key controls over              the experience 
account balances following              management's process for setting and updating             to date, industry 
the acquisition of Standard             actuarial assumptions;                                    practice and 
Life Assurance Limited                                                                            the financial 
and other associated                                                                              and regulatory 
entities in the year,              *    challenged and assessed whether the assumptions           requirements. 
we believe the identified               applied were appropriate based on our knowledge of        In addition, 
risk to have a higher                   the Group, industry standards and regulatory and          we are satisfied 
magnitude of potential                  financial reporting requirements;                         that the disclosures 
misstatement.                                                                                     made in the 
Economic assumptions                                                                              financial 
are set by management              *    reviewed the results of management's experience           statements 
taking into account market              analysis to assess whether these justified the            are in compliance 
conditions as at the                    adopted assumptions, and checked that the assumptions     with the applicable 
valuation date. Non-economic            used are consistent with this experience analysis;        financial 
assumptions such as future                                                                        reporting 
expenses, longevity and                                                                           standards. 
mortality are set based            *    in respect of longevity improvements we have 
on the Group's past experience,         evaluated the use of the chosen industry standard 
market experience, market               Continuous Mortality Investigation ('CMI') model and 
practice, regulations                   the parameters used to validate that it was 
and expectations about                  appropriate relative to the industry; 
future trends. 
The assumptions that 
we consider to have the            *    benchmarked the demographic and economic assumptions 
most significant impact                 against those of other comparable industry 
are the base and trend                  participants; and 
longevity and persistency 
assumptions. 
These assumptions are              *    reviewed and assessed whether the disclosures in the 
used as inputs into a                   financial statements, relating to insurance contract 
valuation model which                   liabilities, complied with the applicable financial 
uses standard actuarial                 reporting standards. 
methodologies. 
 
                                  We performed full scope audit procedures 
                                  over this risk area in two components 
                                  and specific scope audit procedures 
                                  in one component, which covered 100% 
                                  of the risk amount. 
-------------------------------  --------------------------------------------------------------  --------------------- 
Actuarial modelling              To conclude on core actuarial modelling                         We determined 
 There has been no change         systems, including balances calculated                          that the models 
 in our identification            outside these systems, we engaged                               used are appropriate 
 of this risk from the            our actuaries and performed the following                       and that changes 
 prior year. Whilst we            procedures:                                                     to the models 
 consider the risks                *    obtained an understanding of the process and tested       were implemented 
 to be similar in nature,               the design, implementation and operating                  as intended 
 due to the increased                   effectiveness of key controls over management's           and that controls 
 account balances following             process for testing and approval of model changes and     over management's 
 the acquisition of Standard            key adjustments outside of the actuarial model during     processes 
 Life Assurance Limited                 the year;                                                 for modelling

 and other associated                                                                             insurance 
 entities in the year,                                                                            contract liabilities 
 we believe                        *    we challenged and evaluated the methodology, inputs       outside of 
 the identified risk                    and assumptions applied for model changes and out of      the actuarial 
 to have a higher magnitude             model adjustments, on a sample basis, based on our        modelling 
 of potential misstatement.             knowledge of the Group, industry standards and            system were 
 We consider the integrity              regulatory and financial reporting requirements;          operating 
 and appropriateness of                                                                           effectively. 
 models to be critical 
 to the overall valuation          *    reviewed the governance process around model changes 
 of insurance contract                  and assessed the completeness of identified model 
 liabilities.                           changes; and 
 Over GBP88.0bn of the 
 GBP92.6bn insurance contract 
 liabilities are modelled          *    assessed the results of the analysis of movements in 
 using the core actuarial               insurance contract liabilities in order to 
 modelling systems with                 corroborate the completeness of model changes. 
 the residual balance 
 modelled outside these 
 systems to cater for             We performed full scope audit procedures 
 any additional required          over this risk area in two components 
 liabilities not reflected        and specific scope audit procedures 
 in the model. The key            in one component, which covered 100% 
 risk is therefore associated     of the risk amount. 
 with the modelling systems 
 but risks also exist 
 in the calculation of 
 amounts outside these 
 systems. 
-------------------------------  --------------------------------------------------------------  --------------------- 
Data                             To obtain sufficient audit evidence                             We determined 
 There has been no change         to assess the integrity of policyholder                         based on our 
 in our identification            data we performed the following procedures:                     audit work 
 of this risk from the             *    obtained an understanding of the process and tested       that the data 
 prior year. Whilst we                  the design and operating effectiveness of key             used for the 
 consider the risks to                  controls, including information technology general        actuarial 
 be similar in nature,                  controls, over management's data collection,              model inputs 
 due to the increased                   extraction and validation process;                        is materially 
 account balances following                                                                       complete and 
 the acquisition of Standard                                                                      accurate. 
 Life Assurance Limited            *    for Outsourced Service Providers ('OSP') where we 
 and other associated                   have placed reliance on the Service Organisation 
 entities in the year,                  Controls ('SOC1') report, we have reviewed the SOC1 
 we believe                             report and concluded on the design effectiveness of 
 the identified risk                    the relevant controls; 
 to have a higher magnitude 
 of potential misstatement. 
 The policyholder data             *    for OSPs where we do not receive a SOC1 we have 
 is a key input into the                obtained an understanding of the process and 
 valuation process. The                 performed direct testing of the operating 
 valuation of insurance                 effectiveness of the key controls; 
 contract liabilities 
 is therefore conditional 
 upon the accuracy and             *    where we have not relied on controls at the OSP, or 
 completeness of the data               for policies administered internally, we have 
 used.                                  performed additional procedures including agreeing 
                                        policyholder documentation to the policyholder data 
                                        used in the actuarial model on a sample basis; 
 
 
                                   *    assessed the integrity of policy level data, 
                                        performing corroborative testing on i) changes to 
                                        static data during the period and ii) unusual trends 
                                        and anomalies in the data. We did this based upon our 
                                        knowledge of the Group's products, industry standards 
                                        and through using advanced data analytics; 
 
 
                                   *    confirmed that the actuarial model data extracts 
                                        provided by the OSPs were those used as an input to 
                                        the actuarial model; 
 
 
                                   *    assessed the appropriateness of management's grouping 
                                        of data for input into the actuarial model; and 
 
 
                                   *    tested the reconciliations of premiums and claims 
                                        information extracted from the policy adminstration 
                                        systems to the general ledger, where applicable. 
 
 
                                  We performed full scope audit procedures 
                                  over this risk area in two components 
                                  and specific scope audit procedures 
                                  in one component, which covered 100% 
                                  of the risk amount. 
-------------------------------  --------------------------------------------------------------  --------------------- 
Valuation of certain                We engaged our valuation specialists                         Based on our 
 complex and illiquid               and actuaries to test valuation of                            procedures 
 financial investments              ERMs and modelled corporate bonds.                            performed 
 (GBP2.5bn; 2017: GBP1.4bn)         To obtain sufficient audit evidence                           on the ERM 
 We have refined our assessment     to conclude on the valuation of ERMs,                         and modelled 
 of risk from the prior             we:                                                           corporate 
 year, focussing on those            *    tested the design and operating effectiveness of key    bonds, we 
 investments with the                     controls over management's process in respect of the    are satisfied 
 highest degree of judgement              valuation of ERMs;                                      that the valuation 
 such as Equity Release                                                                           of these complex 
 Mortgages ('ERM'). In                                                                            and illiquid 
 addition, following the             *    tested the completeness and accuracy of the mortgage    assets is 
 acquisition of SLAL and                  data used in the valuation model by agreeing a sample   reasonable. 
 other associated entities,               of new loans to supporting evidence and validating      In addition, 
 we have identified heightened            any movements on static data over the period;           we are satisfied 
 risk on the Standard                                                                             that the disclosures 
 Life modelled corporate                                                                          made in the 
 bonds due to a combination          *    evaluated the methodology, inputs and assumptions       financial 
 of size of these financial               used (such as house price inflation, residential        statements 
 investments and level                    house price volatility, longevity improvement and       are in compliance 
 of judgement involved                    base mortality, as well as economic assumptions such    with the applicable 
 in valuation.                            as discount rate);                                      financial 
 Refer to the Audit Committee                                                                     reporting 
 Report (pages 68 to 71);                                                                         standards. 
 Critical accounting estimates       *    we have validated the key assumptions by comparing 
 (page 129); Accounting                   them to published market benchmarks and demographic 
 policies and notes E1                    and economic assumptions used by other industry 
 and E2 of the consolidated               participants, to confirm that key valuation inputs 
 financial statements                     were consistent with industry norms and our 
 (pages 143 to 151).                      understanding of the instrument type; 
 The extent of judgement 
 applied by management 
 in valuing the Group's              *    assessed the reasonableness of the fair value of the 
 financial investments                    mortgages at the reporting date including an 
 varies with the nature                   assessment of the valuation approach to the 
 of securities held, the                  no-negative equity guarantee; and 
 markets in which they 
 are traded and the valuation 
 methodology applied.                *    reviewed that disclosures have been made in the 
 We performed additional                  financial statements regarding the sensitivity of the

 audit procedures on the                  valuation of the ERMs to changes in the key 
 ERM financial investments                assumptions and audited the figures in the 
 and the Standard Life                    sensitivity disclosures. 
 modelled corporate bonds, 
 such as private placements, 
 which require judgement            To obtain sufficient audit evidence 
 to be applied and for              to conclude on the valuation of modelled 
 which quoted market prices         corporate bonds, we: 
 are not readily available           *    tested the design and operating effectiveness of key 
 and consequently where                   controls over management's process in respect of the 
 management use models                    valuation of modelled corporate bonds; 
 and other inputs to estimate 
 their value. 
 These investments are               *    tested inputs in the models including coupons and 
 referred to as Level                     maturity and assessed reasonableness of assumptions 
 3 assets in the financial                and judgements in particular related to spread at the 
 statements.                              acquisition date; 
 
 
                                     *    performed independent valuation of a sample of 
                                          modelled corporate bonds and benchmarked management's 
                                          valuation approach against market best practice; and 
 
 
                                     *    reviewed that disclosures have been made in the 
                                          financial statements regarding the sensitivity of the 
                                          valuation of the modelled corporate bonds to changes 
                                          in the key assumptions and audited the figures in the 
                                          sensitivity disclosures. 
 
 
                                    We performed full scope audit procedures 
                                    over this risk area in two components, 
                                    which covered 100% of the risk amount. 
-------------------------------  --------------------------------------------------------------  --------------------- 
Accounting for the acquisition   To obtain sufficient audit evidence                             Based on our 
 of Standard Life Assurance       to assess the impact of the acquisition                         procedures 
 Limited and other associated     of the Standard Life Assurance businesses,                      performed 
 entities                         we:                                                             on the acquisition 
 This is a new significant         *    being the first year of our appointment as auditors       of the Standard 
 risk for the current                   of the Standard Life Assurance businesses, performed      Life assurance 
 year.                                  review of the predecessor auditor working papers and      businesses, 
 Refer to the Audit Committee           discussed the significant risk and judgemental areas      we are satis 
 Report (pages 68 to 71);               with them;                                                ed that, on 
 Critical accounting estimates                                                                    an overall 
 (page 130); Accounting                                                                           basis, the 
 policies and notes G7             *    agreed the key product features on a sample of            fair value 
 and H2 of the consolidated             products to underlying policy terms/documentations        of the assets 
 financial statements                   and reviewed the output of management's own model         and liabilities 
 (pages 190 to 192 and                  reviews in order to gain assurance that the actuarial     acquired lies 
 pages 195 to 197).                     models appropriately capture the product features and     within a reasonable 
 On 31 August 2018, the                 that the calculations reflect the approved business       range of what 
 Group acquired SLAL,                   and reporting requirements;                               a market participant 
 Standard Life International                                                                      in an orderly 
 Designated Activity Company,                                                                     transaction 
 Standard Life Assets              *    assessed the integrity of data used in the valuation      would pay 
 and Employee Services                  process through a combination of re-performance of        for the identifiable 
 Limited and other related              key reconciliations and the use of analytic               assets and 
 entities (collectively                 techniques to compare, on a sample basis, policy          liabilities 
 'the Standard Life Assurance           level data between data in the actuarial models and       and there 
 businesses') from Standard             that contained within the policy administration           is a justification 
 Life Aberdeen plc ('SLA                systems;                                                  for the gain 
 plc') for total consideration                                                                    on acquisition. 
 of GBP2,994 million.                                                                             In addition, 
 We consider the identification    *    audited the SLAL statement of nancial position as at      we are satisfied 
 and valuation of identifiable          the date of acquisition;                                  that the acquisition 
 intangible assets, such                                                                          accounting 
 as acquired in-force                                                                             and disclosures 
 business ('AVIF') and             *    Ensured appropriate recognition of all identifiable       are in compliance 
 other intangibles, arising             intangible assets by understanding the transaction        with the applicable 
 from the acquisition                   and comparing it to other acquisitions of similar         accounting 
 of the Standard Life                   businesses;                                               framework. 
 Assurance businesses 
 to be a significant risk 
 due to the nature of              *    assessed the methodology and assumptions adopted by 
 judgements and estimates               management for calculating the fair values of 
 involved.                              intangible assets arising on acquisition and 
 Under the Group's accounting           considered how market participants would value 
 policy, acquired value                 identifiable assets and liabilities in an orderly 
 of in-force insurance                  transaction; 
 contracts is measured 
 as the difference between 
 the Generally Accepted            *    considered whether any fair value adjustments are 
 Accounting Practice ('GAAP')           required in the insurance contract liabilities 
 value of the insurance                 recognised on a best estimate basis within the 
 contract liabilities                   acquired business, and assess any impact on the 
 and the determined fair                calculation of goodwill and AVIF; 
 value. 
 As a result, we focused 
 on signi cant judgements          *    ensured that the acquisition accounting and 
 in respect of the identi               disclosure of the acquisition are in compliance with 
 cation of the intangible               IFRS 3 Business Combinations; and 
 assets acquired, GAAP 
 valuation of the SLAL 
 insurance contract liabilities    *    read relevant agreements and board minutes which 
 as at the date of acquisition,         supported the nal conclusions in respect of the 
 the fair value adjustments             acquisition accounting. 
 required in the insurance 
 contract liabilities 
 and their impact on the 
 calculation of goodwill 
 and AVIF and the valuation 
 of an intangible asset 
 relating to the Client 
 Service and Proposition 
 Agreement ('CSPA') entered 
 into between the Group 
 and SLA plc. 
 The primary elements 
 of the valuation exercise 
 assessed the fair value 
 of the identi able intangible 
 assets in the form of 
 AVIF (GBP2,931 million) 
 and a separately identifiable 
 intangible asset of GBP36 
 million relating to the 
 CSPA, both gross of tax. 
 This resulted in a gain 
 on acquisition of GBP141 
 million that was recognised 
 in the consolidated income 
 statement for the year 
 ended 31 December 2018, 
 reflecting the excess 
 of the fair value of 
 the net assets acquired 
 over the consideration 
 paid for the acquisition 
 of the Standard Life 
 Assurance businesses. 
-------------------------------  --------------------------------------------------------------  ---------------------

An overview of the scope of our audit

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each reporting unit ('reporting component') within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each reporting component.

In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we identified four reporting components of the Group. The Group reporting components consist of Phoenix Life Division, SLAL, the Group Function and Other Companies. In the Phoenix Life Division component, the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. SLAL is a newly acquired subsidiary of the Group. The Group Function consists of Group entities that primarily hold external debt, PA (GI) Limited and the pension schemes of the Group. The Other Companies include the Phoenix Life service companies and Standard Life International Designated Activity Company ('SLINTL').

Details of the four reporting components which were audited by component teams are set out below:

 
Component                                 Scope     Auditor 
----------------------------------------  --------  ------- 
Phoenix Life Division                     Full      EY 
----------------------------------------  --------  ------- 
Standard Life Assurance Limited ('SLAL')  Full      EY 
----------------------------------------  --------  ------- 
Group Function                            Full      EY 
----------------------------------------  --------  ------- 
Other Companies                           Specific  EY 
----------------------------------------  --------  -------

Of the four components selected, we performed an audit of the complete financial information of three components ('full scope components') which were selected based on their size or risk characteristics. For the remaining Other Companies ('specific scope components'), we performed audit procedures on specific accounts of Phoenix Life service companies (provisions, accruals and deferred income, wages and salaries and administrative expenses) and of SLINTL (cash and cash equivalents and insurance contract liabilities).

The reporting components where we performed audit procedures accounted for more than 99% (2017: 99%) of the Group's equity and the Group's profit before tax. For the current year, the full scope components contributed 93% (2017: 98%) of the Group's equity and 97% (2017: 99%) of the Group's profit before tax. The specific scope component contributed 6% (2017: 2%) of the Group's equity and 2% (2017: 1%) of the Group's profit before tax. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.

The charts below illustrate the coverage obtained from the work performed by our audit teams.

EQUITY

 
Phoenix Life Division (full scope)   45% 
-----------------------------------  --- 
SLAL (full scope)                    33% 
-----------------------------------  --- 
Group Function (full scope)          15% 
-----------------------------------  --- 
Other Companies (specific scope)      6% 
-----------------------------------  --- 
Out of scope                         <1% 
-----------------------------------  ---

PROFIT BEFORE TAX

 
Phoenix Life Division (full scope)   44% 
-----------------------------------  --- 
SLAL (full scope)                    28% 
-----------------------------------  --- 
Group Function (full scope)          25% 
-----------------------------------  --- 
Other Companies (specific scope)      2% 
-----------------------------------  --- 
Out of scope                         <1% 
-----------------------------------  ---

Changes from the prior year

In prior year, we identified Abbey Life Assurance Company Limited ('ALAC') as a separate component of the Group. In the 2018 financial year, management completed the Part VII transfer of the ongoing insurance business of ALAC into Phoenix Life Division and at 31 December 2018 ALAC is no longer a separate identifiable component of the Group.

SLAL is a new component of the Group in 2018 following the acquisition completed on 31 August 2018. Due to the size and risk inherent in the component, we have designated it as a full scope component. SLINTL, acquired as part of the Standard Life Assurance businesses, is within the 'Other Companies' component and is designated as a specific scope component.

Involvement with component teams

In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction.

The primary audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the relevant risks of material misstatement detailed above, and set out the information required to be reported to the primary audit team.

Of the three full scope components, audit procedures were performed on one of these directly by the primary audit team whilst the remaining two components were audited by the component audit teams. For Other Companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.

The primary audit team followed a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visited each of the components where the Group audit scope was focused at least once every year and the most significant of them more than once a year. For all full scope components, in addition to the component visits, the primary audit team reviewed key working papers and participated in the component teams' planning, including the component teams' discussion of fraud and error. The primary audit team attended the closing meetings with the management of the Phoenix Life Division and SLAL and attended key Audit Committee meetings at the components.

For the specific scope component, the primary audit team have reviewed the audit procedures performed by the component team on the specific accounts.

The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the consolidated financial statements as a whole.

Our application of materiality

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

Materiality

The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be GBP100 million (2017: GBP63 million), which is 1.9% (2017: 2%) of Group equity. In the current year we considered profit-based measures for materiality given that the Standard Life Assurance business changed the business mix of the Group to include a greater proportion of open business. Whilst profit before tax or operating profit are common bases used across the life insurance industry and might be an appropriate measure for an open business, we believe that the use of equity as the basis for assessing materiality remains more appropriate given that the Group remains primarily a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be most appropriate.

The parent company was incorporated in 2018 under the UK Companies Act 2006 and is domiciled in England and Wales. The financial statements for the period ended 31 December 2018 are the first set of financial statements prepared by the parent company. Accordingly, there is no comparative information to disclose in the individual financial statements of the parent company. We determined materiality for the parent company to be GBP82 million, which is 2% of the parent company equity attributable to owners. We have used a capital based measure for determining materiality for consistency with the approach taken for the Group where we consider equity to be the most appropriate basis when considering against other measures such as IFRS profit before tax with its inherent volatility considering the nature of the parent company as a holding company.

During the course of our audit, we reassessed initial materiality and concluded that materiality assessed at planning stages of our audit remained appropriate.

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 50% (2017: 50%) of our planning materiality, namely GBP50 million (2017: GBP31 million).

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was GBP10 million to GBP28 million (2017: GBP6 million to GBP24 million).

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of GBP5 million (2017: GBP3 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information

The other information comprises the information included in the Annual Report set out on pages 1 to 110, other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

-- Fair, balanced and understandable set out on page 110 - the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

-- Audit committee reporting set out on pages 68 to 71 - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or

-- Directors' statement of compliance with the UK Corporate Governance Code set out on page 109 - the parts of the Directors' statement required under the Listing Rules relating to the company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

-- the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

-- the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors' Report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

-- adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

-- the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or

-- certain disclosures of directors' remuneration specified by law are not made; or

-- we have not received all the information and explanations we require for our audit

Responsibilities of directors

As explained more fully in the Statement of Directors' Responsibilities set out on page 110, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

The objectives of our audit:

-- in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management; and

-- in respect of irregularities, considered to be non-compliance with laws and regulations, are to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements ('direct laws and regulations'), and perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. We are not responsible for preventing non-compliance with laws and regulations and our audit procedures cannot be expected to detect non-compliance with all laws and regulations.

Our approach was as follows:

-- We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and its subsidiaries and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority ('PRA') and the Financial Conduct Authority ('FCA') and UK Listing Authority ('UKLA). We obtained a general understanding of how Phoenix Group Holdings is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Board and Executive Committee; and gained an understanding of the Company's approach to governance, demonstrated by the Board's approval of the Company's governance framework.

-- For direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.

-- For both direct and other laws and regulations, our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, inquiring about the company's methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA.

-- The Company operates in the insurance industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate.

-- We assessed the susceptibility of the consolidated financial statements to material misstatement, including how fraud might occur by considering the controls that the Company has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, including complex transactions, performance targets, external pressures and the impact these have on the control environment. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk (valuation of insurance contract liabilities). These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.

Financial Reporting Council's website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Other matters we are required to address

-- Following the completion of the on-shoring exercise and the incorporation of Phoenix Group Holdings plc, we were appointed by the Company Directors on 13 December 2018 and signed an engagement letter on 20 February 2019 to audit the financial statements for the period ending 31 December 2018 and subsequent financial periods.

-- The non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting the audit.

-- The audit opinion is consistent with the additional report to the audit committee.

Use of our report

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Ed Jervis (Senior statutory auditor)

for and on behalf of Ernst & Young LLP, Statutory Auditor

London

4 March 2019

Consolidated Income Statement

FOR THE YEARED 31 December 2018

 
                                                                                 2017 restated 
                                                                           2018      (Note A1) 
                                                                 Notes     GBPm           GBPm 
--------------------------------------------------------------  ------  -------  ------------- 
Gross premiums written                                                    2,645          1,297 
----------------------------------------------------------------------  -------  ------------- 
Less: premiums ceded to reinsurers                                  F3    (481)          (356) 
--------------------------------------------------------------  ------  -------  ------------- 
Net premiums written                                                      2,164            941 
----------------------------------------------------------------------  -------  ------------- 
 
Fees and commissions                                                C1      385            173 
--------------------------------------------------------------  ------  -------  ------------- 
Total revenue, net of reinsurance payable                                 2,549          1,114 
----------------------------------------------------------------------  -------  ------------- 
 
Net investment income                                               C2  (9,600)          4,986 
--------------------------------------------------------------  ------  -------  ------------- 
Other operating income                                                       37              5 
----------------------------------------------------------------------  -------  ------------- 
Gain on acquisition                                               H2.1      141              - 
--------------------------------------------------------------  ------  -------  ------------- 
Net income                                                              (6,873)          6,105 
----------------------------------------------------------------------  -------  ------------- 
 
Policyholder claims                                                     (5,295)        (4,064) 
----------------------------------------------------------------------  -------  ------------- 
Less: reinsurance recoveries                                                866            594 
----------------------------------------------------------------------  -------  ------------- 
Change in insurance contract liabilities                                  4,768          1,392 
----------------------------------------------------------------------  -------  ------------- 
Change in reinsurers' share of insurance contract liabilities              (20)          (423) 
----------------------------------------------------------------------  -------  ------------- 
Transfer from/(to) unallocated surplus                              F2       88           (46) 
--------------------------------------------------------------  ------  -------  ------------- 
Net policyholder claims and benefits incurred                               407        (2,547) 
----------------------------------------------------------------------  -------  ------------- 
 
Change in investment contract liabilities                                 7,975        (2,673) 
----------------------------------------------------------------------  -------  ------------- 
Change in present value of future profits                           G7        1              5 
--------------------------------------------------------------  ------  -------  ------------- 
Amortisation of acquired in-force business                          G7    (196)          (109) 
--------------------------------------------------------------  ------  -------  ------------- 
Amortisation of other intangibles                                   G7     (18)           (17) 
--------------------------------------------------------------  ------  -------  ------------- 
Administrative expenses                                             C3  (1,056)          (596) 
--------------------------------------------------------------  ------  -------  ------------- 
Net income under arrangements with reinsurers                     F3.3        2              - 
--------------------------------------------------------------  ------  -------  ------------- 
Net expense/(income) attributable to unitholders                            159           (43) 
----------------------------------------------------------------------  -------  ------------- 
Total operating expenses                                                  7,274        (5,980) 
----------------------------------------------------------------------  -------  ------------- 
 
Profit before finance costs and tax                                         401            125 
----------------------------------------------------------------------  -------  ------------- 
 
Finance costs                                                       C5    (142)          (132) 
--------------------------------------------------------------  ------  -------  ------------- 
Profit/(loss) for the year before tax                                       259            (7) 
----------------------------------------------------------------------  -------  ------------- 
 
Tax credit/(charge) attributable to policyholders' returns          C6      211           (21) 
--------------------------------------------------------------  ------  -------  ------------- 
Profit/(loss) before the tax attributable to owners                         470           (28) 
----------------------------------------------------------------------  -------  ------------- 
 
Tax credit/(charge)                                                 C6      151           (20) 
--------------------------------------------------------------  ------  -------  ------------- 
Add: tax attributable to policyholders' returns                     C6    (211)             21 
--------------------------------------------------------------  ------  -------  ------------- 
Tax (charge)/credit attributable to owners                          C6     (60)              1 
--------------------------------------------------------------  ------  -------  ------------- 
Profit/(loss) for the year attributable to owners                           410           (27) 
----------------------------------------------------------------------  -------  ------------- 
 
Attributable to: 
--------------------------------------------------------------  ------  -------  ------------- 
Owners of the parent                                                        379           (27) 
----------------------------------------------------------------------  -------  ------------- 
Non-controlling interests                                           D4       31              - 
--------------------------------------------------------------  ------  -------  ------------- 
                                                                            410           (27) 
 ---------------------------------------------------------------------  -------  ------------- 
 
Earnings per ordinary share 
----------------------------------------------------------------------  -------  ------------- 
Basic (pence per share)                                           B3.1    66.8p        (6.3)p* 
--------------------------------------------------------------  ------  -------  ------------- 
Diluted (pence per share)                                         B3.2    66.7p        (6.3)p* 
--------------------------------------------------------------  ------  -------  -------------

* Restated following rights issue

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARED 31 December 2018

 
                                                                                        2018   2017 
                                                                                Notes   GBPm   GBPm 
-----------------------------------------------------------------------------  ------  -----  ----- 
Profit/(loss) for the year                                                               410   (27) 
-------------------------------------------------------------------------------------  -----  ----- 
 
Other comprehensive income/(expense): 
-----------------------------------------------------------------------------  ------  -----  ----- 
Items that are or may be reclassified to profit or loss: 
-----------------------------------------------------------------------------  ------  -----  ----- 
   Cash flow hedges: 
-----------------------------------------------------------------------------  ------  -----  ----- 
       Fair value gains/(losses) arising during the year                                  31   (13) 
-------------------------------------------------------------------------------------  -----  ----- 
       Reclassification adjustments for amounts recognised in profit or loss            (28)      2 
-------------------------------------------------------------------------------------  -----  ----- 
   Exchange differences on translating foreign operations                                  2      - 
-------------------------------------------------------------------------------------  -----  ----- 
 
Items that will not be reclassified to profit or loss: 
-----------------------------------------------------------------------------  ------  -----  ----- 
   Remeasurement of owner-occupied property                                        G8      -      1 
-----------------------------------------------------------------------------  ------  -----  ----- 
   Remeasurements of net defined benefit asset/liability                           G6   (54)     43 
-----------------------------------------------------------------------------  ------  -----  ----- 
   Tax (charge)/credit relating to other comprehensive income items                C6   (10)      3 
-----------------------------------------------------------------------------  ------  -----  ----- 
Total other comprehensive (expense)/income for the year                                 (59)     36 
-------------------------------------------------------------------------------------  -----  ----- 
 
Total comprehensive income for the year                                                  351      9 
-------------------------------------------------------------------------------------  -----  ----- 
 
Attributable to: 
-----------------------------------------------------------------------------  ------  -----  ----- 
   Owners of the parent                                                                  320      9 
-------------------------------------------------------------------------------------  -----  ----- 
   Non-controlling interests                                                       D4     31      - 
-----------------------------------------------------------------------------  ------  -----  ----- 
                                                                                         351      9 
 ------------------------------------------------------------------------------------  -----  -----

Statement of Consolidated Financial Position

As at 31 December 2018

 
                                                                              2018  2017 restated (Note A1) 
                                                                    Notes     GBPm                     GBPm 
-----------------------------------------------------------------  ------  -------  ----------------------- 
EQUITY AND LIABILITIES 
-----------------------------------------------------------------  ------  -------  ----------------------- 
 
Equity attributable to ordinary shareholders of the parent 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Share capital                                                          D1       72                       39 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Share premium                                                                3,077                    1,413 
-------------------------------------------------------------------------  -------  ----------------------- 
Shares held by the employee benefit trust                              D2      (6)                      (2) 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Foreign currency translation reserve                                            98                       96 
-------------------------------------------------------------------------  -------  ----------------------- 
Owner-occupied property revaluation reserve                                      5                        5 
-------------------------------------------------------------------------  -------  ----------------------- 
Cash flow hedging reserve                                                      (8)                     (11) 
-------------------------------------------------------------------------  -------  ----------------------- 
Retained earnings                                                            1,923                    1,615 
-------------------------------------------------------------------------  -------  ----------------------- 
 
Total equity attributable to ordinary shareholders of the parent             5,161                    3,155 
-------------------------------------------------------------------------  -------  ----------------------- 
 
Tier 1 Notes                                                           D3      494                        - 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Non-controlling interests                                              D4      294                        - 
-----------------------------------------------------------------  ------  -------  ----------------------- 
 
Total equity                                                                 5,949                    3,155 
-------------------------------------------------------------------------  -------  ----------------------- 
 
Liabilities 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Pension scheme liability                                               G6      596                      633 
-----------------------------------------------------------------  ------  -------  ----------------------- 
 
Insurance contract liabilities 
-----------------------------------------------------------------  ------  -------  ----------------------- 
   Liabilities under insurance contracts                               F1   91,211                   44,435 
-----------------------------------------------------------------  ------  -------  ----------------------- 
   Unallocated surplus                                                 F2    1,358                      925 
-----------------------------------------------------------------  ------  -------  ----------------------- 
                                                                            92,569                   45,360 
 ------------------------------------------------------------------------  -------  ----------------------- 
Financial liabilities 
-----------------------------------------------------------------  ------  -------  ----------------------- 
   Investment contracts                                                    114,463                   26,733 
-------------------------------------------------------------------------  -------  ----------------------- 
   Borrowings                                                          E5    2,186                    1,778 
-----------------------------------------------------------------  ------  -------  ----------------------- 
   Deposits received from reinsurers                                         4,438                      368 
-------------------------------------------------------------------------  -------  ----------------------- 
   Derivatives                                                         E3    1,093                    1,242 
-----------------------------------------------------------------  ------  -------  ----------------------- 
   Net asset value attributable to unitholders                               2,659                      840 
-------------------------------------------------------------------------  -------  ----------------------- 
   Obligations for repayment of collateral received                          2,645                    1,961 
-------------------------------------------------------------------------  -------  ----------------------- 
                                                                       E1  127,484                   32,922 
 ------------------------------------------------------------------------  -------  ----------------------- 
 
Provisions                                                             G1      377                      134 
-----------------------------------------------------------------  ------  -------  ----------------------- 
 
Deferred tax                                                           G2      843                      366 
-----------------------------------------------------------------  ------  -------  ----------------------- 
 
Reinsurance payables                                                            30                       23 
-------------------------------------------------------------------------  -------  ----------------------- 
Payables related to direct insurance contracts                         G3      902                      522

-----------------------------------------------------------------  ------  -------  ----------------------- 
Current tax                                                            G2       20                        5 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Accruals and deferred income                                           G4      337                      179 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Other payables                                                         G5      873                      144 
-----------------------------------------------------------------  ------  -------  ----------------------- 
Total liabilities                                                          224,031                   80,288 
-------------------------------------------------------------------------  -------  ----------------------- 
 
Total equity and liabilities                                               229,980                   83,443 
-------------------------------------------------------------------------  -------  ----------------------- 
 
 
                                                                     2018    2017 
                                                           Notes     GBPm    GBPm 
--------------------------------------------------------  ------  -------  ------ 
ASSETS 
--------------------------------------------------------  ------  -------  ------ 
 
Pension scheme asset                                          G6      255     322 
--------------------------------------------------------  ------  -------  ------ 
 
Intangible assets 
--------------------------------------------------------  ------  -------  ------ 
   Goodwill                                                            57      57 
----------------------------------------------------------------  -------  ------ 
   Acquired in-force business                                       4,033   1,298 
----------------------------------------------------------------  -------  ------ 
   Other intangibles                                                  221     202 
----------------------------------------------------------------  -------  ------ 
                                                              G7    4,311   1,557 
 ---------------------------------------------------------------  -------  ------ 
 
Property, plant and equipment                                 G8       48      26 
--------------------------------------------------------  ------  -------  ------ 
 
Investment property                                           G9    6,520     612 
--------------------------------------------------------  ------  -------  ------ 
 
Financial assets 
--------------------------------------------------------  ------  -------  ------ 
   Loans and deposits                                               3,612   1,812 
----------------------------------------------------------------  -------  ------ 
   Derivatives                                                E3    3,798   2,760 
--------------------------------------------------------  ------  -------  ------ 
   Equities                                                        52,716  17,234 
----------------------------------------------------------------  -------  ------ 
   Investment in associate                                            496     550 
----------------------------------------------------------------  -------  ------ 
   Fixed and variable rate income securities                       67,932  26,998 
----------------------------------------------------------------  -------  ------ 
   Collective investment schemes                                   70,606  18,901 
----------------------------------------------------------------  -------  ------ 
   Reinsurers' share of investment contract liabilities             5,417   6,085 
----------------------------------------------------------------  -------  ------ 
                                                              E1  204,577  74,340 
 ---------------------------------------------------------------  -------  ------ 
Insurance assets 
--------------------------------------------------------  ------  -------  ------ 
   Reinsurers' share of insurance contract liabilities        F1    7,564   3,320 
--------------------------------------------------------  ------  -------  ------ 
   Reinsurance receivables                                             42      32 
----------------------------------------------------------------  -------  ------ 
   Insurance contract receivables                                      67       7 
----------------------------------------------------------------  -------  ------ 
                                                                    7,673   3,359 
 ---------------------------------------------------------------  -------  ------ 
 
Current tax                                                   G2      145      47 
--------------------------------------------------------  ------  -------  ------ 
Prepayments and accrued income                                        478     355 
----------------------------------------------------------------  -------  ------ 
Other receivables                                            G10    1,047     580 
--------------------------------------------------------  ------  -------  ------ 
Cash and cash equivalents                                    G11    4,926   2,245 
--------------------------------------------------------  ------  -------  ------ 
Total assets                                                      229,980  83,443 
----------------------------------------------------------------  -------  ------

Statement of Consolidated CASH FLOWS

For the year ended 31 December 2018

 
                                                                                            2018     2017 
                                                                                    Notes   GBPm     GBPm 
---------------------------------------------------------------------------------  ------  -----  ------- 
Cash flows from operating activities 
---------------------------------------------------------------------------------  ------  -----  ------- 
Cash (utilised)/generated by operations                                                I2  (324)    1,156 
---------------------------------------------------------------------------------  ------  -----  ------- 
Taxation paid                                                                               (29)     (35) 
-----------------------------------------------------------------------------------------  -----  ------- 
Net cash flows from operating activities                                                   (353)    1,121 
-----------------------------------------------------------------------------------------  -----  ------- 
 
Cash flows from investing activities 
---------------------------------------------------------------------------------  ------  -----  ------- 
Acquisition of Standard Life Assurance subsidiaries, net of cash acquired            H2.1  1,607        - 
---------------------------------------------------------------------------------  ------  -----  ------- 
Net cash flows from investing activities                                                   1,607        - 
-----------------------------------------------------------------------------------------  -----  ------- 
 
Cash flows from financing activities 
---------------------------------------------------------------------------------  ------  -----  ------- 
Proceeds from issuing ordinary shares, net of associated commission and expenses       D1    936        2 
---------------------------------------------------------------------------------  ------  -----  ------- 
Ordinary share dividends paid                                                          B4  (262)    (193) 
---------------------------------------------------------------------------------  ------  -----  ------- 
Dividends paid to non-controlling interests                                                  (2)        - 
-----------------------------------------------------------------------------------------  -----  ------- 
Repayment of policyholder borrowings                                                        (69)     (77) 
-----------------------------------------------------------------------------------------  -----  ------- 
Repayment of shareholder borrowings                                                        (295)  (1,053) 
-----------------------------------------------------------------------------------------  -----  ------- 
Proceeds from new shareholder borrowings, net of associated expenses                         733      830 
-----------------------------------------------------------------------------------------  -----  ------- 
Proceeds from issuance of Tier 1 Notes, net of associated expenses                     D3    494        - 
---------------------------------------------------------------------------------  ------  -----  ------- 
Proceeds from sale of internal holding in GBP428 million subordinated notes                    -       32 
-----------------------------------------------------------------------------------------  -----  ------- 
Coupon paid on Tier 1 Notes                                                                 (14)        - 
-----------------------------------------------------------------------------------------  -----  ------- 
Interest paid on policyholder borrowings                                                     (5)      (8) 
-----------------------------------------------------------------------------------------  -----  ------- 
Interest paid on shareholder borrowings                                                     (89)     (75) 
-----------------------------------------------------------------------------------------  -----  -------

Net cash flows from financing activities                                                   1,427    (542) 
-----------------------------------------------------------------------------------------  -----  ------- 
 
Net increase in cash and cash equivalents                                                  2,681      579 
-----------------------------------------------------------------------------------------  -----  ------- 
Cash and cash equivalents at the beginning of the year                                     2,245    1,666 
-----------------------------------------------------------------------------------------  -----  ------- 
Cash and cash equivalents at the end of the year                                      G11  4,926    2,245 
---------------------------------------------------------------------------------  ------  -----  -------

Statement of Consolidated Changes in Equity

FOR THE YEARED 31 December 2018

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

Statement of Consolidated Changes in Equity

FOR THE YEARED 31 December 2017

 
                                           Shares held 
                                                by the 
                                              employee      Foreign  Owner-occupied 
                      Share                    benefit     currency        property     Cash flow 
                    capital         Share        trust  translation     revaluation       hedging      Retained 
                  (note D1)       premium    (note D2)      reserve         reserve       reserve      earnings  Total 
                       GBPm          GBPm         GBPm         GBPm            GBPm          GBPm          GBPm   GBPm 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
At 1 January 
 2017 - 
 restated (note 
 A1)                     39         1,604          (7)           96               4             -         1,597  3,333 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
 
Loss for the 
 year                     -             -            -            -               -             -          (27)   (27) 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Other 
 comprehensive 
 income 
 for the year             -             -            -            -               1          (11)            46     36 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Total 
 comprehensive 
 income for the 
 year                     -             -            -            -               1          (11)            19      9 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
 
Issue of 
 ordinary share 
 capital, net 
 of associated 
 commissions 
 and expenses 
 (note D1)                -             2            -            -               -             -             -      2 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Dividends paid 
 on ordinary 
 shares                   -         (193)            -            -               -             -             -  (193) 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Credit to 
 equity for 
 equity-settled 
 share-based 
 payments                 -             -            -            -               -             -             8      8 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Shares 
 distributed by 
 the employee 
 benefit trust            -             -            9            -               -             -           (9)      - 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
Shares acquired 
 by the 
 employee 
 benefit trust            -             -          (4)            -               -             -             -    (4) 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  ----- 
At 31 December 
 2017 - 
 restated (note

 A1)                     39         1,413          (2)           96               5          (11)         1,615  3,155 
---------------  ----------  ------------  -----------  -----------  --------------  ------------  ------------  -----

Phoenix Group Holdings ('Old PGH'), the former holding company of the Group was subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group's going concern assessment criteria.

In accordance with Cayman Islands Companies Law, dividends shown in the table above were charged within equity against the share premium account. Upon creation of the new UK-registered holding company (as detailed in note A1), future dividends will be charged to retained earnings in accordance with the UK Companies Act 2006.

The comparative equity structure has been restated to reflect the difference between the par value of shares issued by Phoenix Group Holdings plc (the 'Company') and the shares issued by Old PGH prior to the share for share exchange with a corresponding adjustment to share premium. Further details are provided in note A1.

Retained earnings comprise the owners' interest in the post-acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of retained earnings held within the long-term business funds and surplus assets held within the owners' funds of the life companies is subject to retaining sufficient funds to protect policyholders' interests.

Notes to the Consolidated Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES

A1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2018 set out on pages 121 to 213 comprise the financial statements of Phoenix Group Holdings plc ('the Company') and its subsidiaries (together referred to as 'the Group'), and were authorised by the Board of Directors for issue on 4 March 2019.

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

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

In applying the principles of reverse acquisition accounting, the consolidated financial statements have been presented as a continuation of the Old PGH business and the Group is presented as if the Company had always been the ultimate parent company. The comparative equity structure has been restated to reflect the difference between the par value of shares issued by the Company (GBP39 million) and the shares issued by Old PGH (GBPnil) prior to the share for share exchange, with a corresponding adjustment to share premium. In addition, the presentation within the consolidated statement of changes in equity of the impact of shares issued during the year by Old PGH up to the date of the share for share exchange reflects the par value of the shares issued by the Company.

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

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

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

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

Statement of compliance

Following the creation of the new UK-registered holding company, the consolidated financial statements have been prepared in accordance with IFRSs as adopted by the European Union ('EU'). The consolidated financial statements were previously prepared in accordance with IFRSs as issued by the International Accounting Standards Board ('IASB'). As at 31 December 2018 there were no differences between IFRSs adopted by the EU and those issued by the IASB in terms of their application to the Group, and therefore there is no impact on the consolidated financial statements in the current or prior period as a result of this change.

Restatement of prior period information

Following the acquisition of the Standard Life Assurance businesses (see note H2), the Group has chosen to revise the presentation of its 2018 consolidated income statement to aid understanding of the Enlarged Group's results. Where necessary, 2017 comparative amounts and accompanying notes have been restated to reflect line item reclassifications.

The Group has reassessed its operating segments to reflect the way in which the business is now being managed following the acquisition of the Standard Life Assurance businesses. Comparative segmental performance information has been restated in line with the revised segments and further details are provided in note B1.

As noted above the equity structure disclosed for the 2017 comparative period has been restated to reflect the difference between the par value of shares issued by the Company and the shares issued by Old PGH prior to the share for share exchange. This impacts the statement of consolidated financial position and the statement of consolidated changes in equity.

In addition, the presentation of gross premiums written, premiums ceded to reinsurers, policyholder claims and reinsurance recoveries in respect of certain corporate pension de-risking transactions has been updated in the 2017 comparative amounts to better reflect the underlying structure of the transactions.

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

Basis of consolidation

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

-- power over the investee;

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

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

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

A2. Accounting policies

The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling 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 about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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

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 148 in note F4.

A3.2 Fair value of financial assets and liabilities

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

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

A3.3 Pension scheme obligations

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

Further detail on these estimates and the sensitivity of the defined benefit obligation to key assumptions is provided in note G6.

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 G6.

A3.5 Operating profit

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

A3.6 Acquisition of the Standard Life Assurance businesses

The identification and valuation of identifiable intangible assets, such as acquired in-force business or brand intangibles, arising from the Group's acquisition of the Standard Life Assurance businesses requires the Group to make a number of judgements and estimates. Further details are included in notes G7 '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 detailed in note H1.

A4. Adoption of new accounting pronouncements in 2018

In preparing the consolidated financial statements, the Group has adopted the following amendments, standards, and interpretations effective from 1 January 2018:

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts or financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement. The Group adopted IFRS 15 using the full retrospective method of adoption however the effect of adopting IFRS 15 has been minimal and has not resulted in any adjustment in either the current or prior period. There has been no change to the Group's accounting policies or to the basis of revenue recognition. As required by the standard, 'Disaggregation of Revenue' disclosures have been included in note C1 to the consolidated financial statements. 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.

Amendments to IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4

The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing IFRS 17 Insurance Contracts, which replaces IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach. The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria as at 31 December 2015. As required by IFRS 4, a number of disclosures have been included in note E1 to the consolidated financial statements to provide information to allow comparison with entities adopting the standard in 2018. The IASB has recommended that the deferral period is extended to 1 January 2022.

Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions

The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Group has reviewed its current share-based payment schemes and has determined that it does not have any cash-settled share based payment schemes and that the narrow scope amendment regarding 'net settlement features' does not apply. As a consequence, these amendments do not currently have any impact on the Group.

Amendments to IAS 40 Transfers of Investment Property

The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A change in management's intentions for the use of a property in and of itself does not provide evidence of a change in use. These amendments do not currently have any impact on the Group.

IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group.

Annual Improvements Cycle 2014-2016: Amendments to IFRS 1 First-time adoption of IFRSs and Amendments to IAS 28 Investments in Associates and Joint Ventures.

The first amendment deletes short-term exemptions for first time adopters as they have now served their intended purpose. The second amendment clarifies that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss ('FVTPL'). The Group currently applies the election to measure its investments in associates at FVTPL. There are no further impacts as a result of the amendments.

A5. New accounting pronouncements not yet effective

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

-- IFRS 9 Financial Instruments (2018). 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. The expected credit loss model will require the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.

-- The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 (recommended deferral period extended by the IASB to 2022) as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Group's activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018, this assessment was reperformed and the Group's activities were still considered to be predominately connected with insurance. IFRS 9 will instead be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2021 (IASB recommended extending the implementation date to 2022). The Group expects to continue to value the majority of its financial assets as at FVTPL on initial recognition, as these financial assets are managed on a fair value basis. As detailed in note A4, a number of disclosures have been made in note E1 to the consolidated financial statements to provide information to allow comparison with entities adopting the standard in 2018.

-- IFRS 16 Leases (2019). IFRS 16 will replace IAS 17 Leases. The new standard removes the classification of leases as either operating or finance leases for the lessee, thereby treating all leases as finance leases. This will result in the recognition of a right to use asset and a lease liability for all of the Group's previously classified operating leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Group has commenced an assessment of the impact of the new standard and has concluded that it will bring its property leases currently classified as operating leases (see note I5) onto the statement of consolidated financial position. A depreciation charge on the right-of-use assets and an interest expense on the lease liabilities will be recognised. The overall impact on financial performance and net equity will be immaterial due to the limited number of these contracts and their relative value.

-- Annual Improvements Cycle 2015-2017: Amendments to IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements (2019). These amendments do not currently have any impact on the Group.

-- Amendments to IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement (2019). The amendments address the accounting when a defined benefit plan amendment, curtailment or settlement occurs during a reporting period. The entity is required to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS 19 Employee Benefits specify that the entity is required to use the updated information to determine current service cost and net interest for the period followed by these changes. The Group will apply these changes to any plan amendments, curtailments or settlements occurring on or after 1 January 2019.

-- Amendments to IAS 28 Investments in Associates and Joint Ventures: Long-term interests in Associates and Joint Ventures (2019). The amendments to IAS 28 clarify that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendments are deferred as a result of the extension of the implementation date of IFRS 9 to 2021.

-- Amendments to IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation (2018 - recommended implementation date extended by the IASB to 2022 for those companies applying the IFRS 4 deferral option). The proposed amendments would allow for a narrow exception to IFRS 9 that would permit particular financial instruments with prepayment features with negative compensation to be eligible for measurement at amortised cost or at fair value through other comprehensive income.

-- IFRIC 23 Uncertainty over Income Tax Treatments (2019). This interpretation clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency.

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

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

-- Amendments to IFRS 3 Business Combinations (2020). The amendments have revised the definition of a business and aim to assist companies to determine whether an acquisition made is of a business or a group of assets. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others.

-- IFRS 17 Insurance Contracts (2021 - IASB recommended extension of implementation date to 2022). Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying 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. During 2017, the Group commenced a project to perform an initial impact assessment of the standard on the Group and to produce a detailed implementation plan. Implementation activities during 2018 have included the development of detailed methodologies and policies and the identification of specific data and systems requirements. These activities will continue into 2019.

-- 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.

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

-- Annual Improvements Cycle 2015-2017: Amendments to IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements (2019);

-- IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement;

-- IAS 28 Investments in Associates and Joint Ventures References to the Conceptual Framework in IFRS Standards;

-- IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies;

-- IFRS 3 Business Combinations; and

-- IFRS 17 Insurance Contracts.

Where not specifically stated, the impact on the Group of adopting the above standards, amendments and interpretations is subject to evaluation.

B. Earnings Performance

B1. Segmental analysis

 
The Group defines and presents operating segments in accordance with IFRS 8 'Operating Segments' 
 which requires such segments to be based on the information which is provided to the Board, 
 and therefore segmental information in this note is presented on a different basis from profit 
 or loss in the consolidated financial statements. 
 An operating segment is a component of the Group that engages in business activities from 
 which it may earn revenues and incur expenses, including revenues and expenses relating to 
 transactions with other components of the Group. 
 Following the acquisition of the Standard Life Assurance businesses, the Group has reassessed 
 its operating segments to reflect the way the business is now being managed. The Group now 
 has four reportable segments comprising UK Heritage, UK Open, Europe and Management Services, 
 as set out in note B1.1. In the prior year, the Group had one operating segment being Phoenix 
 Life which provided a range of whole life, term assurance and pension products. Comparative 
 segmental information for prior periods has been presented on a basis consistent with the 
 current year. 
 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. Prior to the acquisition of the Standard Life Assurance businesses, Phoenix 
 Life was considered to be the Group's only reportable segment, which included the Group's 
 operating insurance entities and the Management Services entities in the Group. 
 The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders 
 and which therefore run-off gradually over time. These businesses will accept incremental 
 premiums on in-force policies, and will provide annuities to existing policyholders with vesting 
 products. Bulk Purchase Annuity contracts are included in this segment. 
 The UK Open segment includes new and in-force life insurance and investment policies in respect 
 of products that the Group continues to actively market to new and existing policyholders. 
 This includes products such as workplace pensions and Self-Invested Personal Pensions ('SIPPs') 
 distributed through the Group's Strategic Partnership with Standard Life Aberdeen plc ('SLA 
 plc'), and also products sold under the SunLife brand. 
 The Europe segment includes business written in Ireland and Germany. This will include products 
 that are actively being marketed to new policyholders, and legacy in-force products that are 
 no longer being sold to new customers. 
 The Management Services segment comprises income from the life and holding companies in accordance 
 with the respective management service agreements less fees related to the outsourcing of 
 services and other operating costs. 
 Unallocated Group includes consolidation adjustments and Group financing (including finance 
 costs) which are managed on a Group basis and are not allocated to individual operating segments. 
 Inter-segment transactions are set on an arm's length basis in a manner similar to transactions 
 with third parties. Segmental results include those transfers between business segments which 
 are then eliminated on consolidation. 
Segmental measure of performance: Operating Profit 
 The Company uses a non-GAAP measure of performance, being operating profit, to evaluate segment 
 performance. Operating profit is considered to provide a comparable measure of the underlying 
 performance of the business as it excludes the impact of short-term economic volatility and 
 other one-off items. This measure incorporates an expected return, including a longer-term 
 return on financial investments backing shareholder and policyholder funds over the period, 
 with consistent allowance for the corresponding expected movement in liabilities. Annuity 
 new business profits are included in operating profit using valuation assumptions consistent 
 with the pricing of the business (including the Company's expected longer-term asset allocation 
 backing the business). 
 Operating profit includes the effect of variances in experience for non-economic items, such 
 as mortality and expenses, and the effect of changes in non-economic assumptions. It also 
 incorporates the impacts of significant management actions where such actions are consistent 
 with the Company's core operating activities (for example, actuarial modelling enhancements 
 and data reviews). Operating profit is reported net of policyholder finance charges and policyholder 
 tax. 
 Operating profit excludes the impact of the following items: 
  *    the difference between the actual and expected 
       experience for economic items and the impacts of 
       changes in economic assumptions on the valuation of 
       liabilities (see notes B2.2 and B2.3); 
 
 
  *    amortisation and impairments of intangible assets 
       (net of policyholder tax); 
 
 
  *    finance costs attributable to owners; 
 
 
  *    gains or losses on the acquisition or disposal of 
       subsidiaries (net of related costs); 
 
 
  *    the financial impacts of mandatory regulatory change; 
 
 
  *    the profit or loss attributable to non-controlling 
       interests; 
 
 
  *    integration, restructuring or other significant 
       one-off projects; and 
 
 
  *    any other items which, in the Directors' view, should 
       be disclosed separately by virtue of their nature or 
       incidence to enable a full understanding of the 
       Company's financial performance. This is typically 
       the case where the nature of the item is not 
       reflective of the underlying performance of the 
       operating companies. 
Whilst the excluded items are important to an assessment of the consolidated financial performance 
 of the Group, management considers that the presentation of the operating profit metric provides 
 useful information for assessing the performance of the Group's operating segments on an ongoing 
 basis. The IFRS results are significantly impacted by the amortisation of intangible balances 
 arising on acquisition, the one-off costs of integration activities and the costs of servicing 
 debt used to finance acquisition activity, which are not indicative of the underlying operational 
 performance of the Group's segments. 
 Furthermore, the hedging strategy of the Group is calibrated to protect the capital Solvency 
 II surplus position and cash generation capability of the operating companies, as opposed 
 to the IFRS financial position. This can create additional volatility in the IFRS result which 
 is excluded from the operating profit metric. 
 The Company therefore considers that operating profit provides a more representative indicator 
 of the ability of the Group's operating companies to generate cash available for the servicing 
 of the Group's debts and for distribution to shareholders. Accordingly, the measure is more 
 closely aligned with the business model of the Group and how performance is managed by those 
 charged with governance. 
-------------------------------------------------------------------------------------------------------

B1.1 Segmental result

 
                                                                                     2018  2017 - restated 
                                                                                     GBPm             GBPm 
----------------------------------------------------------------------------------  -----  --------------- 
 
Operating profit 
----------------------------------------------------------------------------------  -----  --------------- 
UK Heritage                                                                           640              372 
----------------------------------------------------------------------------------  -----  --------------- 
UK Open                                                                                41              (5) 
----------------------------------------------------------------------------------  -----  --------------- 
Europe                                                                                 22                - 
----------------------------------------------------------------------------------  -----  --------------- 
Management Services                                                                    25               21 
----------------------------------------------------------------------------------  -----  --------------- 
Unallocated Group                                                                    (20)             (20) 
----------------------------------------------------------------------------------  -----  --------------- 
Total segmental operating profit                                                      708              368 
----------------------------------------------------------------------------------  -----  --------------- 
 
Investment return variances and economic assumption changes on long-term business     283              (6) 
----------------------------------------------------------------------------------  -----  --------------- 
Variance on owners' funds                                                           (193)             (87) 
----------------------------------------------------------------------------------  -----  --------------- 
Amortisation of acquired in-force business                                          (189)            (102) 
----------------------------------------------------------------------------------  -----  --------------- 
Amortisation of other intangibles                                                    (18)             (17) 
----------------------------------------------------------------------------------  -----  --------------- 
Other non-operating items                                                            (38)             (80) 
----------------------------------------------------------------------------------  -----  --------------- 
Finance costs attributable to owners                                                (114)            (104) 
----------------------------------------------------------------------------------  -----  --------------- 
 
Profit/(loss) before the tax attributable to owners of the parent                     439             (28) 
----------------------------------------------------------------------------------  -----  --------------- 
 
Profit before tax attributable to non--controlling interests                           31                - 
----------------------------------------------------------------------------------  -----  --------------- 
 
Profit/(loss) before the tax attributable to owners                                   470             (28) 
----------------------------------------------------------------------------------  -----  ---------------

Other non-operating items in respect of 2018 include:

-- a provision for GBP68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products;

-- costs of GBP43 million associated with the acquisition of the Standard Life Assurance businesses, and GBP7 million incurred under the on-going transition programme;

-- costs of GBP59 million associated with the equalisation of accrued Guaranteed Minimum Pension ('GMP') benefits within the Group's pension schemes (see note G6 for further details);

-- a net benefit of GBP45 million reflecting anticipated costs savings associated with process improvements and continued investment in the digitalisation of the customer journey;

-- a gain on acquisition of GBP141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses (see note H2 for further details); and

-- net other one-off items totalling a cost of GBP47 million, including other corporate project costs of GBP42 million.

Other non-operating items in respect of 2017 include:

-- a premium of GBP25 million paid on redemption of GBP178 million principal of the senior unsecured bond;

-- costs of GBP21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth business;

-- costs of GBP20 million in respect of short-term expense overruns arising from the AXA Wealth business prior to completion of the implementation of the Phoenix operating model;

-- a provision of GBP27 million in respect of a commitment to the reduction of ongoing charges for Workplace Pension products;

-- a GBP21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA (GI) Limited, offset by the recognition of recoveries due or received from third parties under contractual arrangements of GBP39 million; and

-- net other one-off items totalling a cost of GBP5 million, including corporate project costs.

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

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

Of the revenue from external customers presented in the table above, GBP2,199 million is attributable to customers in the United Kingdom ('UK') and GBP350 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 GBP6,479 million located in the UK and GBP367 million located in the rest of the world.

 
                                                                                              Unallocated 
                                           UK Heritage  UK Open  Europe  Management Services        Group  Total 
2017                                              GBPm     GBPm    GBPm                 GBPm         GBPm   GBPm 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
Revenue from external customers: 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
      Gross premiums written                     1,132      165       -                    -            -  1,297 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
      Less: premiums ceded to reinsurers         (356)        -       -                    -            -  (356) 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
Net premiums written                               776      165       -                    -            -    941 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
 
Fees and commissions                               171        2       -                    -            -    173 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  -----

Income from other segments                           -        -       -                  338        (338)      - 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  ----- 
Total segmental revenue                            947      167       -                  338        (338)  1,114 
-----------------------------------------  -----------  -------  ------  -------------------  -----------  -----

Predominantly all external revenue presented for 2017 is attributable to customers in the UK. Additionally, predominantly all non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) for 2017 were located in the UK.

B2. Investment return variances and economic assumption changes

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

B2.1 Calculation of the long-term investment return

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

The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15 year duration plus 10bps at the start of the year. A risk premium of 350bps is added to the risk-free yield for equities (2017: 350bps), 250bps for properties (2017: 250bps), 150bps for other fixed interest assets (2017: 150bps) and 50bps for gilts (2017: 50bps).

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

 
                       2018  2017 
                          %     % 
---------------------  ----  ---- 
Equities                5.2   5.0 
---------------------  ----  ---- 
Properties              4.2   4.0 
---------------------  ----  ---- 
Gilts                   2.2   2.0 
---------------------  ----  ---- 
Other fixed interest    3.2   3.0 
---------------------  ----  ----

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:

 
                                                                                      2018   2017 
                                                                                      GBPm   GBPm 
-----------------------------------------------------------------------------------  -----  ----- 
Investment return variances and economic assumption changes on long--term business     283    (6) 
-----------------------------------------------------------------------------------  -----  -----

The net investment return variances and economic assumption changes on long term business of GBP283 million (2017: GBP6 million adverse) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets, together with the impact of gains on hedging positions held by the life funds as a result of declining equity markets in the year. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.

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:

 
                                                         2018   2017 
                                                         GBPm   GBPm 
------------------------------------------------------  -----  ----- 
Variances on owners' funds of subsidiary undertakings   (193)   (87) 
------------------------------------------------------  -----  -----

The adverse variance on owners' funds of GBP193 million (2017: GBP87 million negative) is principally driven by realised losses on derivative instruments entered into by the holding companies to hedge the Group's exposure to equity risk arising from the Group's acquisition of Standard Life Assurance. Losses of GBP143 million were incurred on these instruments, together with option premiums of GBP22 million.

The adverse variance on owners' funds for the year ended 31 December 2017 of GBP87 million was principally driven by interest rate swaption positions held in the life companies' shareholder funds. Such positions were held to hedge the impact of interest rate risk on the Group's regulatory capital position. With swap yields remaining relatively stable during 2017, option value associated with these contracts fell due to expected option expiry and reduced volatility.

B3. Earnings per share

 
The Group calculates its basic earnings per share based on the present shares in issue using 
 the earnings attributable to ordinary equity holders of the parent, divided by the weighted 
 average number of ordinary shares in issue during the year. 
 Diluted earnings per share are calculated based on the potential future shares in issue assuming 
 the conversion of all potentially dilutive ordinary shares. The weighted average number of 
 ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted 
 to employees and warrants. 
-------------------------------------------------------------------------------------------------

Following the completion of the rights issue in July 2018 the earnings per share calculations, for all periods up to the date the rights issue shares were issued, have been adjusted for the bonus element of the rights issue. The bonus factor used was 1.11. Further details of the rights issue are included in note D1.

B3.1 Basic earnings per share

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

 
                                                                       2018   2017 
                                                                       GBPm   GBPm 
--------------------------------------------------------------------  -----  ----- 
Profit/(loss) for the period attributable to owners                     410   (27) 
--------------------------------------------------------------------  -----  ----- 
Share of result attributable to non-controlling interests              (31)      - 
--------------------------------------------------------------------  -----  ----- 
Coupon payable in respect of Tier 1 Notes, net of tax relief           (12)      - 
--------------------------------------------------------------------  -----  ----- 
Profit/(loss) attributable to ordinary equity holders of the parent     367   (27) 
--------------------------------------------------------------------  -----  -----

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

 
                                                                                                     2018      2017 
                                                                                                   Number    Number 
                                                                                                  million   million 
-----------------------------------------------------------------------------------------------  --------  -------- 
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue)        437       436 
-----------------------------------------------------------------------------------------------  --------  -------- 
Effect of ordinary shares issued                                                                      115         - 
-----------------------------------------------------------------------------------------------  --------  -------- 
Own shares held by the employee benefit trust                                                         (1)         - 
-----------------------------------------------------------------------------------------------  --------  -------- 
Weighted average number of ordinary shares                                                            551       436 
-----------------------------------------------------------------------------------------------  --------  --------

Basic earnings per share is as follows:

 
                                                                          2018    2017 
                                                                         pence   pence 
----------------------------------------------------------------------  ------  ------ 
Basic earnings per share (restated for bonus element of rights issue)     66.8   (6.3) 
----------------------------------------------------------------------  ------  ------

B3.2 Diluted earnings per share

The result attributable to ordinary equity holders of the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 551 million (2017 restated: 436 million). The Group's deferred bonus share scheme and sharesave share-based schemes increased the weighted average number of shares on a diluted basis by 375,020 shares for the year ended 31 December 2018. As losses have an anti-dilutive effect, none of the share-based awards had a dilutive effect for the year ended 31 December 2017.

Diluted earnings per share is as follows:

 
                                                                            2018    2017 
                                                                           pence   pence 
------------------------------------------------------------------------  ------  ------ 
Diluted earnings per share (restated for bonus element of rights issue)     66.7   (6.3) 
------------------------------------------------------------------------  ------  ------

B4. Dividends

 
Final dividends on ordinary shares are recognised as a liability and deducted from equity 
 when they are approved by the Group's owners. Interim dividends are deducted from equity when 
 they are paid. 
 Prior to the creation of the new UK-registered holding company (see note A1), dividends were 
 charged within equity against the share premium account, as permitted by Cayman Islands Companies 
 Law. From the date of the scheme of arrangement, dividends will be charged to retained earnings 
 in accordance with the UK Companies Act 2006. 
 Dividends for the year that are approved after the reporting period are dealt with as an event 
 after the reporting period. 
 Declared dividends are those that are appropriately authorised and are no longer at the discretion 
 of the entity. 
--------------------------------------------------------------------------------------------------- 
 
 
                                       2018   2017 
                                       GBPm   GBPm 
------------------------------------  -----  ----- 
Dividends declared and paid in 2018     262    193 
------------------------------------  -----  -----

On 14 March 2018, the Board recommended a final dividend of 25.1p per share in respect of the year ended 31 December 2017. The dividend was approved at the Group's Annual General Meeting, which was held on 2 May 2018. The dividend amounted to GBP99 million and was paid on 4 May 2018.

On 22 August 2018, the Board declared an interim dividend of 22.6p per share for the half year ended 30 June 2018. The dividend amounted to GBP163 million and was paid on 1 October 2018.

C. Other Income Statement notes

C1. Fees and commissions

 
Fees related to the provision of investment management services and administration services 
 are recognised as services are provided. Front end fees, which are charged at the inception 
 of service contracts, are deferred as a liability and recognised over the life of the contract. 
 The table below details the 'Disaggregation of Revenue' disclosures required by IFRS15 Revenue 
 from contracts with customers. 
------------------------------------------------------------------------------------------------ 
 
 
                                                          UK     UK 
                                                    Heritage   Open  Europe  Total 
2018                                                    GBPm   GBPm    GBPm   GBPm 
-------------------------------------------------  ---------  -----  ------  ----- 
Fee income from investment contracts without DPF         271     84      25    380 
-------------------------------------------------  ---------  -----  ------  ----- 
Initial fees deferred during the year                      -      -     (3)    (3) 
-------------------------------------------------  ---------  -----  ------  ----- 
Revenue from investment contracts without DPF            271     84      22    377 
-------------------------------------------------  ---------  -----  ------  ----- 
Other revenue from contracts with customers                1      7       -      8 
-------------------------------------------------  ---------  -----  ------  ----- 
Fees and commissions                                     272     91      22    385 
-------------------------------------------------  ---------  -----  ------  ----- 
 
 
                                                          UK     UK 
                                                    Heritage   Open  Europe  Total 
2017                                                    GBPm   GBPm    GBPm   GBPm 
-------------------------------------------------  ---------  -----  ------  ----- 
Fee income from investment contracts without DPF         171      -       -    171 
-------------------------------------------------  ---------  -----  ------  ----- 
Revenue from investment contracts 
 without DPF                                             171      -       -    171 
-------------------------------------------------  ---------  -----  ------  ----- 
Other revenue from contracts with customers                -      2       -      2 
-------------------------------------------------  ---------  -----  ------  ----- 
Fees and commissions                                     171      2       -    173 
-------------------------------------------------  ---------  -----  ------  -----

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, 
 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. 
---------------------------------------------------------------------------------------------------- 
 
 
                                                                                                  2018   2017 
                                                                                                  GBPm   GBPm 
--------------------------------------------------------------------------------------------  --------  ----- 
Investment income

--------------------------------------------------------------------------------------------  --------  ----- 
      Interest income on loans and deposits at amortised cost                                       10      1 
--------------------------------------------------------------------------------------------  --------  ----- 
      Interest income on financial assets designated at FVTPL on initial recognition             1,260    972 
--------------------------------------------------------------------------------------------  --------  ----- 
      Dividend income                                                                            1,936  1,073 
--------------------------------------------------------------------------------------------  --------  ----- 
      Rental income                                                                                108     23 
--------------------------------------------------------------------------------------------  --------  ----- 
      Net interest (expense)/income on Group defined benefit pension scheme liability/asset        (6)   (11) 
--------------------------------------------------------------------------------------------  --------  ----- 
                                                                                                 3,308  2,058 
--------------------------------------------------------------------------------------------  --------  ----- 
 
Fair value gains 
--------------------------------------------------------------------------------------------  --------  ----- 
      Financial assets and financial liabilities at FVTPL: 
--------------------------------------------------------------------------------------------  --------  ----- 
       Designated upon initial recognition                                                    (13,016)  2,754 
--------------------------------------------------------------------------------------------  --------  ----- 
       Held for trading - derivatives                                                              126    165 
--------------------------------------------------------------------------------------------  --------  ----- 
      Investment property                                                                         (18)      9 
--------------------------------------------------------------------------------------------  --------  ----- 
                                                                                              (12,908)  2,928 
--------------------------------------------------------------------------------------------  --------  ----- 
Net investment income                                                                          (9,600)  4,986 
--------------------------------------------------------------------------------------------  --------  -----

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. 
---------------------------------------------------------------------------------------------------- 
 
 
                                                                                         2017 - 
                                                                                       restated 
                                                                           2018   (see note A1) 
                                                                           GBPm            GBPm 
------------------------------------------------------------------------  -----  -------------- 
Employee costs                                                              188             128 
------------------------------------------------------------------------  -----  -------------- 
Outsourcer expenses                                                         202             129 
------------------------------------------------------------------------  -----  -------------- 
Professional fees                                                            97              39 
------------------------------------------------------------------------  -----  -------------- 
Commission expenses                                                          63              12 
------------------------------------------------------------------------  -----  -------------- 
Office and IT costs                                                          74              34 
------------------------------------------------------------------------  -----  -------------- 
Investment management expenses and transaction costs                        263             160 
------------------------------------------------------------------------  -----  -------------- 
Direct costs of life companies                                                2               2 
------------------------------------------------------------------------  -----  -------------- 
Direct costs of collective investment schemes                                14               7 
------------------------------------------------------------------------  -----  -------------- 
Pension service costs                                                        57               1 
------------------------------------------------------------------------  -----  -------------- 
Pension administrative expenses                                               6               4 
------------------------------------------------------------------------  -----  -------------- 
Advertising and sponsorship                                                  59              43 
------------------------------------------------------------------------  -----  -------------- 
Movement in PA(GI) provision, net of reimbursement (see note G1)            (2)            (18) 
------------------------------------------------------------------------  -----  -------------- 
Movement in restructuring and integration costs provision (see note G1)       -              21 
------------------------------------------------------------------------  -----  -------------- 
Premium paid on part redemption of the GBP300 million senior bond             -              25 
------------------------------------------------------------------------  -----  -------------- 
Stamp duty payable on acquisition of Standard Life Assurance businesses      15               - 
------------------------------------------------------------------------  -----  -------------- 
Other                                                                        32              15 
------------------------------------------------------------------------  -----  -------------- 
                                                                          1,070             602 
------------------------------------------------------------------------  -----  -------------- 
Acquisition costs deferred during the year                                 (15)             (6) 
------------------------------------------------------------------------  -----  -------------- 
Amortisation of deferred acquisition costs                                    1               - 
------------------------------------------------------------------------  -----  -------------- 
Total administrative expenses                                             1,056             596 
------------------------------------------------------------------------  -----  --------------

Employee costs comprise:

 
                                 2018   2017 
                                 GBPm   GBPm 
------------------------------  -----  ----- 
Wages and salaries                170    115 
------------------------------  -----  ----- 
Social security contributions      18     13 
------------------------------  -----  ----- 
                                  188    128 
------------------------------  -----  ----- 
 
 
                                        2018     2017 
                                      Number   Number 
-----------------------------------  -------  ------- 
Average number of persons employed     2,034    1,304 
-----------------------------------  -------  -------

C4. Auditor's remuneration

 
During the year the Group obtained the following services from its auditor at costs as detailed 
 in the table below. 
----------------------------------------------------------------------------------------------- 
 
 
                                                  2018   2017 
                                                  GBPm   GBPm 
-----------------------------------------------  -----  ----- 
Audit of the consolidated financial statements     2.0    0.7 
-----------------------------------------------  -----  ----- 
Audit of the Company's subsidiaries                5.2    3.5 
-----------------------------------------------  -----  ----- 
                                                   7.2    4.2 
-----------------------------------------------  -----  ----- 
Audit related assurance services                   0.7    0.5 
-----------------------------------------------  -----  ----- 
Reporting accountant assurance services            0.2    0.1 
-----------------------------------------------  -----  ----- 
Total fee for assurance services                   8.1    4.8 
-----------------------------------------------  -----  ----- 
 
Corporate finance services                         3.7    0.7 
-----------------------------------------------  -----  ----- 
Tax services fees                                  0.1      - 
-----------------------------------------------  -----  ----- 
Other non-audit services                           0.3    0.5 
-----------------------------------------------  -----  ----- 
Total fees for other services                      4.1    1.2 
-----------------------------------------------  -----  ----- 
 
Total auditor's remuneration                      12.2    6.0 
-----------------------------------------------  -----  -----

No services were provided by the Company's auditors to the Group's pension schemes in either 2018 or 2017.

Audit of the consolidated financial statements includes certain amounts in respect of the audit of the acquisition balance sheet of the acquired Standard Life Assurance businesses together with amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor.

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 2018, this includes public reporting associated with the issuance of equity as part of the acquisition of the Standard Life Assurance businesses and issuance of the Group's Tier 1 Notes. In 2017, this included assurance reporting on historical information included within investment circulars.

Corporate finance services fees were GBP3.7 million (2017: GBP0.7 million). These fees principally relate to services provided in connection with the acquisition of the Standard Life Assurance businesses and the Premium Listing of the Company undertaken as part of the Group's on-shoring activities. GBP1.6 million of the fees relates to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of GBP2.0 million relates to the provision of assurance to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the acquisition and the Premium Listing. The 2017 balance reflects fees in respect of the provision of assurance services to the Board and sponsoring banks in support of disclosures made in public transaction documentation relating to debt issuances undertaken in the year.

Tax services fees of GBP0.1 million (2017: GBPnil) principally relates to services provided to Standard Life Assurance for which the Group's external auditor was engaged prior to the completion of the acquisition and their appointment as auditors of those entities. All such services were terminated within a period of three months following completion of the acquisition, as permitted under the Financial Reporting Committee's Ethical Standards.

Other non-audit services of GBP0.3 million (2017: GBP0.5 million) also relate to services provided to Standard Life Assurance where the engagement occurred prior to completion of the acquisition and which were terminated within the three month grace period. The 2017 fees for other non-audit services were primarily in respect of assurance provided over the review of Abbey Life past business practices undertaken at the request of the regulator.

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 68 to 71.

C5. Finance costs

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

This note analyses the interest costs on the Group's borrowings which are described in note E5.

 
                                                    2018   2017 
                                                    GBPm   GBPm 
-------------------------------------------------  -----  ----- 
Interest expense 
-------------------------------------------------  -----  ----- 
      On financial liabilities at amortised cost     120    118 
-------------------------------------------------  -----  ----- 
      On financial liabilities at FVTPL               22     14 
-------------------------------------------------  -----  ----- 
                                                     142    132 
-------------------------------------------------  -----  ----- 
Attributable to: 
-------------------------------------------------  -----  ----- 
- policyholders                                       28     28 
-------------------------------------------------  -----  ----- 
- owners                                             114    104 
-------------------------------------------------  -----  ----- 
                                                     142    132 
-------------------------------------------------  -----  -----

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 (credit)/charge

 
                                                           2018   2017 
                                                           GBPm   GBPm 
--------------------------------------------------------  -----  ----- 
Current tax: 
--------------------------------------------------------  -----  ----- 
      UK corporation tax                                     83     13 
--------------------------------------------------------  -----  ----- 
      Overseas tax                                           20     21 
--------------------------------------------------------  -----  ----- 
                                                            103     34 
--------------------------------------------------------  -----  ----- 
Adjustment in respect of prior years                       (54)    (9) 
--------------------------------------------------------  -----  ----- 
Total current tax charge                                     49     25 
--------------------------------------------------------  -----  ----- 
Deferred tax: 
--------------------------------------------------------  -----  ----- 
      Origination and reversal of temporary differences   (195)    (1) 
--------------------------------------------------------  -----  ----- 
      Change in the rate of UK corporation tax              (4)      4 
--------------------------------------------------------  -----  ----- 
      Write-up of deferred tax assets                       (1)    (8) 
--------------------------------------------------------  -----  ----- 
Total deferred tax credit                                 (200)    (5) 
--------------------------------------------------------  -----  ----- 
Total tax (credit)/charge                                 (151)     20 
--------------------------------------------------------  -----  ----- 
Attributable to: 
--------------------------------------------------------  -----  ----- 
- policyholders                                           (211)     21 
--------------------------------------------------------  -----  ----- 
- owners                                                     60    (1) 
--------------------------------------------------------  -----  ----- 
Total tax (credit)/charge                                 (151)     20 
--------------------------------------------------------  -----  -----

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 credit attributable to policyholder earnings was GBP211 million (2017: GBP21 million charge).

C6.2 Tax charged/(credited) to other comprehensive income

 
                                                           2018   2017 
                                                           GBPm   GBPm 
--------------------------------------------------------  -----  ----- 
Current tax credit on share schemes                           -    (1) 
--------------------------------------------------------  -----  ----- 
Deferred tax charge/(credit) on defined benefit schemes       8    (2) 
--------------------------------------------------------  -----  ----- 
Deferred tax charge on share schemes                          2      - 
--------------------------------------------------------  -----  ----- 
                                                             10    (3) 
--------------------------------------------------------  -----  -----

C6.3 Reconciliation of tax (credit)/charge

 
                                                                                2018   2017 
                                                                                GBPm   GBPm 
-----------------------------------------------------------------------------  -----  ----- 
Profit/(loss) before tax                                                         259    (7) 
-----------------------------------------------------------------------------  -----  ----- 
Policyholder tax credit/(charge)                                                 211   (21) 
-----------------------------------------------------------------------------  -----  ----- 
Profit/(loss) before the tax attributable to owners                              470   (28) 
-----------------------------------------------------------------------------  -----  ----- 
 
Tax charge/(credit) at standard UK rate of 19.0% (2017: 19.25%)(1)                89    (5) 
-----------------------------------------------------------------------------  -----  ----- 
Non-taxable income and gains and losses(2)                                      (31)   (16) 
-----------------------------------------------------------------------------  -----  ----- 
Disallowable expenses(3)                                                          21      1 
-----------------------------------------------------------------------------  -----  ----- 
Prior year tax credit for shareholders (4)                                       (5)    (7) 
-----------------------------------------------------------------------------  -----  ----- 
Movement on acquired in-force amortisation at less than 19.0% (2017: 19.25%)       -      3 
-----------------------------------------------------------------------------  -----  ----- 
Profits taxed at rates other than 19.0% (2017: 19.25%)(5)                       (14)      2 
-----------------------------------------------------------------------------  -----  ----- 
Recognition of previously unrecognised deferred tax assets(6)                      -    (2) 
-----------------------------------------------------------------------------  -----  ----- 
Deferred tax rate change(7)                                                      (4)      4 
-----------------------------------------------------------------------------  -----  ----- 
Current year losses not valued                                                     -     15 
-----------------------------------------------------------------------------  -----  ----- 
Other                                                                              4      4 
-----------------------------------------------------------------------------  -----  ----- 
Owners' tax charge/(credit)                                                       60    (1) 
-----------------------------------------------------------------------------  -----  ----- 
Policyholder tax (credit)/charge                                               (211)     21 
-----------------------------------------------------------------------------  -----  ----- 
Total tax (credit)/charge for the period                                       (151)     20 
-----------------------------------------------------------------------------  -----  -----

1 Old PGH became tax resident in the UK on 31 January 2018. As the majority of the Group's business operated predominately in the UK prior to this date, the reconciliation of the tax (credit)/charge in the comparative period was completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% previously applicable to Old PGH.

2 Includes non-taxable dividends and gains, non-taxable pension scheme items, and non-taxable gain on the acquisition of the Standard Life Assurance businesses.

3 Included within disallowable deductions is a consolidation adjustment on the PGL Pension scheme 'buy-in' agreement of GBP6 million and costs in relation to projects of GBP14 million.

4 The prior year credit relates to the impact of reaching agreement with HMRC in respect of the Group's prior year tax returns.

5 This predominately relates to IFRS transitional adjustments which are being recognised at the full shareholder rate rather than marginal policyholder tax rates.

6 Represents tax losses recognised in 2017 which have now reversed.

7 Represents the utilisation of brought forward tax losses from 2017 in 2018 at the current tax rate of 19% rather than the longer term rate of 17%.

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. 
-------------------------------------------------------------------------------------------- 
 
 
                                                                                                                  2017 
                                                                                                    2018   Restated(1) 
                                                                                                    GBPm          GBPm 
-------------------------------------------------------------------------------------------------  -----  ------------ 
Issued and fully paid: 
-------------------------------------------------------------------------------------------------  -----  ------------ 
      721.2 million ordinary shares of GBP0.10 each (2017: 393.2 million ordinary shares of 
       GBP0.10 
       each - restated)                                                                               72            39 
-------------------------------------------------------------------------------------------------  -----  ------------

1 Comparative figures have been restated for the scheme of arrangement as detailed in note A1.

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:

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

On 10 July 2018, the Group issued 183,581,978 shares following a rights issue undertaken in association with the acquisition of the Standard Life Assurance businesses where 7 rights issue shares were issued at 518 pence per new share for every 15 existing Old PGH shares held. The rights issue raised GBP951 million and proceeds, net of deduction of commission and expenses, were GBP934 million.

On 31 August 2018, the Group issued 144,114,450 shares to SLA plc, giving them a 19.99% equity stake in the Group valued at GBP1,023 million, based on the share price at that date.

During the year, 270,142 shares were issued at a premium of GBP2 million in order to satisfy obligations to employees under the Group's sharesave schemes (see note I1).

 
2017 - restated(1)                                Number         GBP 
-------------------------------------------  -----------  ---------- 
Shares in issue at 1 January                 392,849,817  39,284,982 
-------------------------------------------  -----------  ---------- 
Other ordinary shares issued in the period       382,827      38,282 
-------------------------------------------  -----------  ---------- 
Shares in issue at 31 December               393,232,644  39,323,264 
-------------------------------------------  -----------  ----------

1 Comparative figures have been restated for the scheme of arrangement as detailed in note A1.

During 2017, 382,827 shares were issued at a premium of GBP2 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.

 
                                                  2018   2017 
                                                  GBPm   GBPm 
-----------------------------------------------  -----  ----- 
At 1 January                                         2      7 
-----------------------------------------------  -----  ----- 
Shares acquired by the EBT in year                   8      4 
-----------------------------------------------  -----  ----- 
Shares awarded to employees by the EBT in year     (4)    (9) 
-----------------------------------------------  -----  ----- 
At 31 December                                       6      2 
-----------------------------------------------  -----  -----

During the year 518,322 (2017: 1,217,505) shares were awarded to employees by the EBT and 1,188,435 (2017: 445,560) shares were purchased. The number of shares held by the EBT at 31 December 2018 was 990,802 (2017: 320,689).

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

D3. Tier 1 Notes

 
The Fixed Rate Reset Perpetual Restricted Tier 1 Write-Down Notes ('Tier 1 Notes') meet the 
 definition of equity and accordingly are shown as a separate category within equity at the 
 proceeds of issue. The coupons on the instruments are recognised as distributions on the date 
 of payment and are charged directly to the statement of consolidated changes in equity. 
---------------------------------------------------------------------------------------------- 
 
 
                               Tier 1 Notes 
                                       GBPm 
-----------------------------  ------------ 
At 1 January 2018                         - 
-----------------------------  ------------ 
Issue of notes in the period            494 
-----------------------------  ------------ 
At 31 December 2018                     494 
-----------------------------  ------------

On 26 April 2018, Old PGH issued GBP500 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.

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

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

The Tier 1 Notes may be redeemed at par on the First Call Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Tier 1 Notes. In respect of any redemption or purchase of the Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA. Furthermore, on occurrence of a trigger event, linked to the Solvency II capital position and as documented in the terms of the Tier 1 Notes, the Tier 1 Notes will be subject to a permanent write-down in value to zero.

D4. Non-controlling interests

 
Non-controlling interests are stated at the share of net assets attributed to the non-controlling 
 interest holder at the time of acquisition, adjusted for the relevant share of subsequent 
 changes in equity. 
------------------------------------------------------------------------------------------------- 
 
 
                                                                                                Standard Life 
                                                                                               Private Equity 
                                                                                                    Trust plc 
                                                                                                         GBPm 
--------------------------------------------------------------------------------------------  --------------- 
At 1 January 2018                                                                                           - 
--------------------------------------------------------------------------------------------  --------------- 
Non-controlling interests recognised on acquisition of the Standard Life Assurance business 
 (see note H2)                                                                                            265 
--------------------------------------------------------------------------------------------  --------------- 
Profit for the year                                                                                        31 
--------------------------------------------------------------------------------------------  --------------- 
Dividends paid                                                                                            (2) 
--------------------------------------------------------------------------------------------  --------------- 
At 31 December 2018                                                                                       294 
--------------------------------------------------------------------------------------------  ---------------

The non-controlling interests of GBP265 million recognised on acquisition of the Standard Life Assurance businesses reflects third party ownership of Standard Life Private Equity Trust ('SLPET') determined at the fair 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 2018, the Group held 55.2% of the issued share capital of SLPET.

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:

 
                                    2018 
SLPET                               GBPm 
---------------------------------  ----- 
Statement of financial position: 
---------------------------------  ----- 
Investments                          271 
---------------------------------  ----- 
Other assets                          23 
---------------------------------  ----- 
Total liabilities                      - 
---------------------------------  ----- 
Income statement: 
---------------------------------  ----- 
Revenue                               33 
---------------------------------  ----- 
Profit after tax                      31 
---------------------------------  ----- 
Comprehensive income                  31 
---------------------------------  ----- 
Cash flows: 
---------------------------------  ----- 
Net decrease in cash equivalents       3 
---------------------------------  -----

E. Financial assets & liabilities

E1. Fair values

Financial assets
Purchases and sales of financial assets are recognised on the trade date, which is the date
that the Group commits to purchase or sell the asset.
The majority of the Group's loans and deposits are designated as loans and receivables and
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. The
Group holds a portfolio of loans that are designated at FVTPL.
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, fixed and variable rate income securities, collective investment schemes and certain

 loans and deposits 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 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 value of financial instruments traded in active markets such as publicly traded securities 
 and derivatives are based on quoted market prices at the period end. The quoted market price 
 used for financial assets is the applicable bid price on the period end date. The fair value 
 of investments that are not traded in an active market is determined using valuation techniques 
 such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models 
 are used, inputs are based on market-related data at the period end. Where discounted cash 
 flow techniques are used, estimated future cash flows are based on contractual cash flows 
 using current market conditions and market calibrated discount rates and interest rate assumptions 
 for similar instruments. 
 For units in unit trusts and shares in open-ended investment companies, fair value is determined 
 by reference to published bid-values. The fair value of receivables and floating rate and 
 overnight deposits with credit institutions is their carrying value. The fair value of fixed 
 interest-bearing deposits is estimated using discounted cash flow techniques. 
Associates 
 Investments in associates that are held for investment purposes are accounted for under IAS 
 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in 
 Associates and Joint Ventures. These are measured at fair value through profit or loss. There 
 is no investment in associates which are of a strategic nature. 
 Derecognition of financial assets 
 A financial asset (or part of a group of similar financial assets) is derecognised where: 
  *    The rights to receive cash flows from the asset have 
       expired; 
 
 
  *    The Company retains the right to receive cash flows 
       from the assets, but has assumed an obligation to pay 
       them in full without material delay to a third party 
       under a 'pass-through' arrangement; or 
 
 
  *    The Company has transferred its rights to receive 
       cash flows from the asset and has either transferred 
       substantially all the risks and rewards of the asset, 
       or has neither transferred nor retained substantially 
       all the risks and rewards of the asset, but has 
       transferred control of the asset. 
Financial liabilities 
 On initial recognition, financial liabilities are recognised when due and measured at the 
 fair value of the consideration received less directly attributable transaction costs (with 
 the exception of liabilities at FVTPL for which all transaction costs are expensed). 
 Subsequent to initial recognition, financial liabilities (except for liabilities under investment 
 contracts without DPF and other liabilities designated at FVTPL) are measured at amortised 
 cost using the effective interest method. 
 Financial liabilities are designated upon initial recognition at FVTPL and where doing so 
 results in more meaningful information because either: 
  *    it eliminates or significantly reduces accounting 
       mismatches that would otherwise arise from measuring 
       assets or liabilities or recognising the gains and 
       losses on them on different bases; or 
 
 
  *    a group of financial assets, financial liabilities or 
       both is managed and its performance is evaluated and 
       managed on a fair value basis, in accordance with a 
       documented risk management or investment strategy, 
       and information about the investments is provided 
       internally on that basis to the Group's key 
       management personnel. 
Investment contracts without DPF 
 Contracts under which the transfer of insurance risk to the Group from the policyholder is 
 not significant are classified as investment contracts and accounted for as financial liabilities. 
 Receipts and payments on investment contracts without DPF are accounted for using deposit 
 accounting, under which the amounts collected and paid out are recognised in the statement 
 of consolidated financial position as an adjustment to the liability to the policyholder. 
 The valuation of liabilities on unit-linked contracts is held at the fair value of the related 
 assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional 
 amount to cover the present value of the excess of future policy costs over future charges. 
 Movements in the fair value of investment contracts without DPF are included in the 'change 
 in investment contract liabilities' in the consolidated income statement. 
 Investment contract policyholders are charged for policy administration services, investment 
 management services, surrenders and other contract fees. These fees are recognised as revenue 
 over the period in which the related services are performed. If the fees are for services 
 provided in future periods, then they are deferred and recognised over those periods. 'Front 
 end' fees are charged on some non-participating investment contracts. Where the non-participating 
 investment contract is measured at fair value, such fees which relate to the provision of 
 investment management services are deferred and recognised as the services are provided. 
Deposits from reinsurers 
 It is the Group's practice to obtain collateral to cover certain reinsurance transactions, 
 usually in the form of cash or marketable securities. Where cash collateral is available to 
 the Group for investment purposes, it is recognised as a 'financial asset' and the collateral 
 repayable is recognised as 'deposits received from reinsurers' in the statement of consolidated 
 financial position. 
Net asset value attributable to unitholders 
 The net asset value attributable to unitholders represents the non-controlling interest in 
 collective investment schemes which are consolidated by the Group. This interest is classified 
 at FVTPL and measured at fair value, which is equal to the bid value of the number of units 
 of the collective investment scheme not owned by the Group. 
Obligations for repayment of collateral received 
 It is the Group's practice to obtain collateral in stock lending and derivative transactions, 
 usually in the form of cash or marketable securities. Where cash collateral is available to 
 the Group for investment purposes, it is recognised as a 'financial asset' and the collateral 
 repayable is recognised as 'obligations for repayment of collateral received' in the statement 
 of consolidated financial position. The 'obligations for repayment of collateral received' 
 are measured at amortised cost, which in the case of cash is equivalent to the fair value 
 of the consideration received. 
Derecognition of financial liabilities 
 A financial liability is derecognised when the obligation under the liability is discharged 
 or cancelled or expires. 
Offsetting financial assets and financial liabilities 
 Financial assets and liabilities are offset and the net amount reported in the statement of 
 financial position only when there is a legally enforceable right to offset the recognised 
 amounts and there is an intention to settle on a net basis, or to realise the asset and settle 
 the liability simultaneously. When financial assets and liabilities are offset any related 
 interest income and expense is offset in the income statement. 
Hedge accounting 
 The Group designates certain derivatives as hedging instruments in order to effect cash flow 
 hedges. At the inception of the hedge relationship, the Group documents the relationship between 
 the hedging instrument and the hedged item, along with its risk management objectives and 
 its strategy for undertaking various hedge transactions. Furthermore, at the inception of 
 the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly 
 effective in offsetting changes in fair values or cash flows of the hedged item attributable 
 to the hedged risk. Note E3 sets out details of the fair values of the derivative instruments 
 used for hedging purposes. 
 Where a cash flow hedging relationship exists, the effective portion of changes in the fair 
 value of derivatives that are designated and qualify as cash flow hedges is recognised in 
 other comprehensive income and accumulated under the heading of cash flow hedging reserve. 
 The gain or loss relating to the ineffective portion is recognised immediately in profit or 
 loss, and is included in net investment income. 
 Amounts previously recognised in other comprehensive income and accumulated in equity are 
 reclassified to profit or loss in the periods when the hedged item affects profit or loss, 
 in the same line as the recognised hedged item. 
 Hedge accounting is discontinued when the Group revokes the hedging relationship, when the

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

The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2018:

 
                                                                       Carrying value 
--------------------------------------------------------  -----------------------------------------  ---------- 
                                                                   Amounts due for settlement after 
                                                            Total                         12 months  Fair value 
2018                                                         GBPm                              GBPm        GBPm 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Financial assets measured at carrying and fair values 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Financial assets at fair value through profit or loss: 
--------------------------------------------------------  -------  --------------------------------  ---------- 
      Held for trading - derivatives                        3,798                             3,608       3,798 
--------------------------------------------------------  -------  --------------------------------  ---------- 
      Designated upon initial recognition: 
--------------------------------------------------------  -------  --------------------------------  ---------- 
       Loans and deposits                                   3,189                             3,119       3,189 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Equities(1)                                                52,716                                 -      52,716 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Investment in associate(1) (see note H3)                      496                                 -         496 
--------------------------------------------------------  -------  --------------------------------  ---------- 
       Fixed and variable rate income securities           67,932                            62,128      67,932 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Collective investment schemes(1)                           70,606                                 -      70,606 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Reinsurers' share of investment contract liabilities(1)     5,417                                 -       5,417 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Financial assets measured at amortised cost: 
--------------------------------------------------------  -------  --------------------------------  ---------- 
      Loans and deposits at amortised cost                    423                                77         423 
--------------------------------------------------------  -------  --------------------------------  ---------- 
Total financial assets(2)                                 204,577                                       204,577 
--------------------------------------------------------  -------  --------------------------------  ----------

Following application of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments (see note A4) 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.

 
                                                                                          2018 
                                                                                          GBPm 
-------------------------------------------------------------------------------------  ------- 
Financial assets with contractual cash flows that are SPPI 
 excluding those held for trading or managed on a fair value basis(3)                      423 
-------------------------------------------------------------------------------------  ------- 
All other financial assets that are measured at fair value through profit or loss(4)   204,154 
-------------------------------------------------------------------------------------  ------- 
Total financial assets                                                                 204,577 
-------------------------------------------------------------------------------------  ------- 
 
 
                                                                           Carrying value 
------------------------------------------------------------  -----------------------------------------  ---------- 
                                                                       Amounts due for settlement after 
                                                                Total                         12 months  Fair value 
2018                                                             GBPm                              GBPm        GBPm 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Financial liabilities measured at carrying and fair values 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Financial liabilities at fair value through profit or loss: 
------------------------------------------------------------  -------  --------------------------------  ---------- 
      Held for trading - derivatives                            1,093                               936       1,093 
------------------------------------------------------------  -------  --------------------------------  ---------- 
      Designated upon initial recognition: 
------------------------------------------------------------  -------  --------------------------------  ---------- 
       Borrowings                                                 127                               113         127 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Net asset value attributable to unitholders(1)                  2,659                                 -       2,659 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Investment contract liabilities(1)                            114,463                                 -     114,463 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Financial liabilities measured at amortised cost: 
------------------------------------------------------------  -------  --------------------------------  ---------- 
      Borrowings                                                2,059                             2,048       2,011 
------------------------------------------------------------  -------  --------------------------------  ---------- 
      Deposits received from reinsurers                         4,438                             4,077       4,438 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Obligations for repayment of collateral received(5)             2,645                                 -           - 
------------------------------------------------------------  -------  --------------------------------  ---------- 
Total financial liabilities                                   127,484                                       124,791 
------------------------------------------------------------  -------  --------------------------------  ----------

1 These assets and liabilities have no expected settlement date.

2 Total financial assets includes GBP1,063 million (2017: GBP1,115 million) of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement.

See note G6.2 for further details.

3 Financial assets that are SPPI are all short-term deposits with highly rated external institutions.

4 The change in fair value during 2018 of all other financial assets that are fair value through profit or loss is a GBP12,962 million loss.

5 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the

value of the consideration received and therefore no fair value has been disclosed.

 
                                                                       Carrying value 
--------------------------------------------------------  ----------------------------------------  ---------- 
                                                                  Amounts due for settlement after 
                                                           Total                         12 months  Fair value 
2017                                                        GBPm                              GBPm        GBPm 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Financial assets measured at carrying and fair values 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Financial assets at fair value through profit or loss: 
--------------------------------------------------------  ------  --------------------------------  ---------- 
      Held for trading - derivatives                       2,760                             2,613       2,760 
--------------------------------------------------------  ------  --------------------------------  ---------- 
      Designated upon initial recognition: 
--------------------------------------------------------  ------  --------------------------------  ---------- 
       Loans and deposits                                  1,444                             1,424       1,444 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Equities(1)                                               17,234                                 -      17,234 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Investment in associate(1)                                   550                                 -         550 
--------------------------------------------------------  ------  --------------------------------  ---------- 
       Fixed and variable rate income securities          26,998                            26,069      26,998 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Collective investment schemes(1)                          18,901                                 -      18,901 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Reinsurers' share of investment contract liabilities(1)    6,085                                 -       6,085 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Financial assets measured at amortised cost: 
--------------------------------------------------------  ------  --------------------------------  ---------- 
      Loans and deposits at amortised cost                   368                                13         368 
--------------------------------------------------------  ------  --------------------------------  ---------- 
Total financial assets(2)                                 74,340                                        74,340 
--------------------------------------------------------  ------  --------------------------------  ---------- 
 
 
                                                                           Carrying value 
------------------------------------------------------------  ----------------------------------------  ---------- 
                                                                      Amounts due for settlement after 
                                                               Total                         12 months  Fair value 
                                                                GBPm                              GBPm        GBPm 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Financial liabilities measured at carrying and fair values 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Financial liabilities at fair value through profit or loss: 
------------------------------------------------------------  ------  --------------------------------  ---------- 
      Held for trading - derivatives                           1,242                             1,170       1,242 
------------------------------------------------------------  ------  --------------------------------  ---------- 
      Designated upon initial recognition: 
------------------------------------------------------------  ------  --------------------------------  ---------- 
       Borrowings                                                182                               143         182 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Net asset value attributable to unitholders(1)                   840                                 -         840 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Investment contract liabilities(1)                            26,733                                 -      26,733 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Financial liabilities measured at amortised cost: 
------------------------------------------------------------  ------  --------------------------------  ---------- 
      Borrowings                                               1,596                             1,584       1,812 
------------------------------------------------------------  ------  --------------------------------  ---------- 
      Deposits received from reinsurers                          368                               339         368 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Obligations for repayment of collateral received(3)            1,961                                 -           - 
------------------------------------------------------------  ------  --------------------------------  ---------- 
Total financial liabilities                                   32,922                                        31,177 
------------------------------------------------------------  ------  --------------------------------  ----------

1 These assets and liabilities have no expected settlement date.

2 Total financial assets includes GBP1,115 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G6.2 for further details.

3 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.

Fair value hierarchy information for non-financial assets measured at fair value is included in note G8 for property held at valuation and in note G9 for investment property.

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 are 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. 
--------------------------------------------------------------------------------------------------

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.

 
                                                                                            Total fair 
                                                                 Level 1  Level 2  Level 3       value 
2018                                                                GBPm     GBPm     GBPm        GBPm 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets measured at fair value 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Derivatives                                                          348    3,288      162       3,798 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets designated at FVTPL upon initial recognition: 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Loans and deposits                                               -        -    3,189       3,189 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Equities                                                    51,347        -    1,369      52,716 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Investment in associate                                        496        -        -         496 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Fixed and variable rate income securities                   39,540   27,175    1,217      67,932 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Collective investment schemes                               68,594    1,219      793      70,606 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Reinsurers' share of investment contract liabilities             -    5,417        -       5,417 
---------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                 159,977   33,811    6,568     200,356 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial assets measured at fair value                    160,325   37,099    6,730     204,154 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets for which fair values are disclosed 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Loans and deposits at amortised cost                                   -      423        -         423 
---------------------------------------------------------------  -------  -------  -------  ---------- 
 
                                                                 160,325   37,522    6,730     204,577 
---------------------------------------------------------------  -------  -------  -------  ---------- 
 
 
                                                                                                 Total fair 
                                                                      Level 1  Level 2  Level 3       value 
2018                                                                     GBPm     GBPm     GBPm        GBPm 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities measured at fair value 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Derivatives                                                                73      911      109       1,093 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities designated at FVTPL upon initial recognition: 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Borrowings                                                            -        -      127         127 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Net asset value attributable to unit-holders                      2,659        -        -       2,659 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Investment contract liabilities                                       -  114,463        -     114,463 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                        2,659  114,463      127     117,249 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial liabilities measured at fair value                      2,732  115,374      236     118,342 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities for which fair values are disclosed 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Borrowings at amortised cost                                                -    1,752      259       2,011 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Deposits received from reinsurers                                           -    4,438        -       4,438 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial liabilities for which fair values are disclosed             -    6,190      259       6,449 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                        2,732  121,564      495     124,791 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
 
 
                                                                                            Total fair 
                                                                 Level 1  Level 2  Level 3       value 
2017                                                                GBPm     GBPm     GBPm        GBPm 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets measured at fair value 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Derivatives                                                           28    2,588      144       2,760 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets designated at FVTPL upon initial recognition: 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Loans and deposits                                               -        -    1,444       1,444 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Equities                                                    16,621        6      607      17,234 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Investment in associate                                        550        -        -         550 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Fixed and variable rate income securities                   19,194    7,393      411      26,998 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Collective investment schemes                               17,923      929       49      18,901 
---------------------------------------------------------------  -------  -------  -------  ---------- 
      Reinsurers' share of investment contract liabilities             -    6,085        -       6,085 
---------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                  54,288   14,413    2,511      71,212 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial assets measured at fair value                     54,316   17,001    2,655      73,972 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Financial assets for which fair values are disclosed 
---------------------------------------------------------------  -------  -------  -------  ---------- 
Loans and receivables at amortised cost                                -      368        -         368 
---------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                  54,316   17,369    2,655      74,340 
---------------------------------------------------------------  -------  -------  -------  ----------

                                                                                                 Total fair 
                                                                      Level 1  Level 2  Level 3       value 
2017                                                                     GBPm     GBPm     GBPm        GBPm 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities measured at fair value 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Derivatives                                                                39    1,103      100       1,242 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities designated at FVTPL upon initial recognition: 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Borrowings                                                            -        -      182         182 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Net asset value attributable to unitholders                         840        -        -         840 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
      Investment contract liabilities                                       -   26,733        -      26,733 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                          840   26,733      182      27,755 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial liabilities measured at fair value                        879   27,836      282      28,997 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Financial liabilities for which fair values are disclosed 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Borrowings at amortised cost                                                -    1,521      291       1,812 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Deposits received from reinsurers                                           -      368        -         368 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
Total financial liabilities for which fair values are disclosed             -    1,889      291       2,180 
--------------------------------------------------------------------  -------  -------  -------  ---------- 
                                                                          879   29,725      573      31,177 
--------------------------------------------------------------------  -------  -------  -------  ----------

E2.3 Level 3 financial instrument sensitivities

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

Fixed and variable rate income securities categorised as Level 3 investments are predominately valued using broker quotes with the exception of unquoted corporate bonds. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly. These assets are typically held to back investment contract liabilities and participating investments contracts and therefore fair value movements in such financial assets will typically be offset by corresponding movements in liabilities.

Fixed and variable rate income securities

The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of GBP1,167 million (2017: GBP301 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 GBP50 million (2017: an increase of 25bps would decrease the value by GBP8 million) and a decrease of 35bps would increase the value by GBP52 million (2017: a decrease of 25bps would increase the value by GBP9 million).

Loans and deposits

Included within loans and deposits are investments in equity release mortgages with a value of GBP2,020 million (2017: GBP1,255 million). The loans are valued using a discounted cash flow model and a Black Scholes model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property.

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

Cash flows are discounted using a risk free curve plus a spread determined at inception based on the purchase price. This is monitored against prevailing market conditions to determine whether updates are required. To date, no updates to the spread have been necessary.

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.

In order to benefit from the matching adjustment, the equity release mortgage loans are securitised into tranches of fixed rate and junior loan notes via special purpose vehicles in the Group.

The significant sensitivities arise from movements in the yield curve, inflation rate and house prices. An increase of 100bps in the yield curve would decrease the value by GBP183 million (2017: GBP108 million) and a decrease of 100bps would increase the value by GBP205 million (2017: GBP118 million). An increase of 1% in the inflation rate would increase the value by GBP11 million (2017: GBP7 million) and a decrease of 1% would decrease the value by GBP21 million (2017: GBP14 million).

An increase of 10% in house prices would increase the value by GBP6 million (2017: GBP3 million) and a decrease of 10% would decrease the value by GBP14 million (2017: GBP9 million).

Also included within loans and deposits are investments in commercial real estate loans of GBP449 million (2017: GBP77 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 GBP7 million (2017: an increase of 100bps would decrease the value by GBP5 million) and a decrease of 35bps would increase the value by GBP8 million (2017: a decrease of 100bps would increase the value by GBP5 million).

Also included within loans and deposits are income strips with a value of GBP654 million (2017: nil). 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 GBP1). 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 GBP70 million and a decrease of 35bps would increase the value by GBP79 million.

Borrowings

Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of GBP114 million (2017: GBP131 million), measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would increase the value by GBP2 million (2017: GBP3 million) and a decrease of 1% would decrease the value by GBP2 million (2017: GBP3 million). An increase of 1% in the house price inflation rate would decrease the value by GBP2 million (2017: GBP3 million) and a decrease of 1% would increase the value by GBP1 million (2017: GBP3 million).

Corporate transactions

Included within financial assets and liabilities are related loans and deposits of GBP66 million (2017: GBP112 million), borrowings of GBP13 million (2017: GBP51 million) and derivative liabilities of GBP13 million (2017: GBP21 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 2018, the net of these balances was an asset of GBP40 million (2017: asset of GBP40 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 GBP2 million (2017: GBP3 million) and a decrease of 100bps would increase the aggregate value by GBP2 million (2017: GBP3 million).

Also included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of GBP162 million (2017: GBP144 million) and GBP96 million (2017: GBP77 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 GBP16 million (2017: GBP13 million) and a decrease of 100bps would increase the net value by GBP22 million (2017: GBP17 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by GBP13 million (2017: GBP10 million) and a decrease of 1% would decrease the value by GBP15 million (2017: GBP10 million).

Derivatives

Included within derivative liabilities are forward local authority loans and forward private placements with a value of GBPnil. 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 GBP16 million and a decrease of 35bps would increase the value by GBP17million.

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

 
                                                                        From         From 
                                                                  Level 1 to   Level 2 to 
                                                                     Level 2      Level 1 
2018                                                                    GBPm         GBPm 
---------------------------------------------------------------  -----------  ----------- 
Financial assets measured at fair value 
---------------------------------------------------------------  -----------  ----------- 
Financial assets designated at FVTPL upon initial recognition: 
---------------------------------------------------------------  -----------  ----------- 
      Fixed and variable rate income securities                           86          162 
---------------------------------------------------------------  -----------  ----------- 
 
 
                                                                             From         From 
                                                                       Level 1 to   Level 2 to 
                                                                          Level 2      Level 1 
2017                                                                         GBPm         GBPm 
--------------------------------------------------------------------  -----------  ----------- 
Financial assets measured at fair value 
--------------------------------------------------------------------  -----------  ----------- 
Financial assets designated at FVTPL upon initial recognition: 
--------------------------------------------------------------------  -----------  ----------- 
      Derivatives                                                               -            6 
--------------------------------------------------------------------  -----------  ----------- 
      Fixed and variable rate income securities                                 5          138 
--------------------------------------------------------------------  -----------  ----------- 
      Collective investment schemes                                            23            - 
--------------------------------------------------------------------  -----------  ----------- 
 
Financial Liabilities measured at fair value 
--------------------------------------------------------------------  -----------  ----------- 
Financial Liabilities designated at FVTPL upon initial recognition: 
--------------------------------------------------------------------  -----------  ----------- 
      Derivatives                                                               -            3 
--------------------------------------------------------------------  -----------  -----------

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

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

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

 
                                                                                                            Unrealised 
                                       Net gains/                                                       gains/(losses) 
                                      (losses) in       Effect of         Transfers to              At       on assets 
                               At          income   acquisitions/              Level 1     31 December     held at end 
                   1 January 2018       statement       purchases  Sales   and Level 2            2018       of period 
2018                         GBPm            GBPm            GBPm   GBPm          GBPm            GBPm            GBPm 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Financial assets 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Derivatives                   144              18               -      -             -             162              18 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Financial assets 
designated at 
FVTPL upon 
initial 
recognition: 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
      Loans and 
       deposits             1,444              56           1,833  (144)             -           3,189              66 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
      Equities                607             205             839  (282)             -           1,369             147 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
      Fixed and 
       variable 
       rate 
       income 
       securities             411            (40)             884   (30)           (8)           1,217            (31) 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
      Collective 
       investment 
       schemes                 49            (51)             802    (7)             -             793            (47) 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
                            2,511             170           4,358  (463)           (8)           6,568             135 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
 
                            2,655             188           4,358  (463)           (8)           6,730             153 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
 
 
                                                                                                            Unrealised 
                                                                                                             losses on 
                                    Net losses in       Effect of         Transfers to              At     liabilities 
                               At          income   acquisitions/              Level 1     31 December     held at end 
                   1 January 2018       statement       purchases  Sales   and Level 2            2018       of period 
2018                         GBPm            GBPm            GBPm   GBPm          GBPm            GBPm            GBPm 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Financial 
liabilities 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Derivatives                   100              11               -      -           (2)             109              11 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
Financial 
liabilities 
designated at 
FVTPL upon 
initial 
recognition: 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  --------------

      Borrowings              182               2               -   (57)             -             127               2 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  -------------- 
 
                              282              13               -   (57)           (2)             236              13 
-----------------  --------------  --------------  --------------  -----  ------------  --------------  --------------

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

 
                                                                                                            Unrealised 
                                 Net gains/                                                             gains/(losses) 
                            At  (losses) in                       Transfers  Transfers to           At       on assets 
                     1 January       income                    from Level 1       Level 1  31 December     held at end 
                          2017    statement  Purchases  Sales   and Level 2   and Level 2         2017       of period 
2017                      GBPm         GBPm       GBPm   GBPm          GBPm          GBPm         GBPm            GBPm 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
Financial assets 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
Derivatives                 53           98          -    (7)             -             -          144              93 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
Financial assets 
designated at 
FVTPL upon 
initial 
recognition: 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
      Loans and 
       deposits            812        (223)        937   (82)             -             -        1,444           (223) 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
      Equities             671           55         53  (171)             -           (1)          607              50 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
      Investment 
      in joint 
      venture 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
      Fixed and 
       variable 
       rate 
       income 
       securities          146            8        281   (18)                         (6)          411               5 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
Collective 
 investment 
 schemes                    89         (18)          5   (46)            19             -           49             (4) 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
                         1,718        (178)      1,276  (317)            19           (7)        2,511           (172) 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
                         1,771         (80)      1,276  (324)            19           (7)        2,655            (79) 
-----------------  -----------  -----------  ---------  -----  ------------  ------------  -----------  -------------- 
 
 
                                                                                                            Unrealised 
                                                                                                              gains on 
                                                                      Transfers    Transfers               liabilities 
                            At   Net gains                                 from           to           At  held at end 
                     1 January   in income                   Sales      Level 1      Level 1  31 December 
                          2017   statement  Purchases  /repayments  and Level 2  and Level 2         2017    of period 
2017                      GBPm        GBPm       GBPm         GBPm         GBPm         GBPm         GBPm         GBPm 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  ----------- 
Financial 
liabilities 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  ----------- 
Derivatives                272       (172)          -            -            -            -          100        (172) 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  ----------- 
Financial 
liabilities 
designated at 
FVTPL upon 
initial 
recognition: 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  ----------- 
      Borrowings           270        (23)          -         (65)            -            -          182         (23) 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  ----------- 
 
                           542       (195)          -         (65)            -            -          282        (195) 
-----------------  -----------  ----------  ---------  -----------  -----------  -----------  -----------  -----------

During 2017, updates to the Group's observations, in particular with regard to the nature and liquidity of underlying assets held within a collective investment scheme, resulted in a net transfer from Levels 1 and 2 to Level 3.

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  Liabilities  Assets 
                              2018         2018    2017  Liabilities 2017 
                              GBPm         GBPm    GBPm              GBPm 
--------------------------  ------  -----------  ------  ---------------- 
Forward currency                60           79      58                21 
--------------------------  ------  -----------  ------  ---------------- 
Credit default options          13           17       -                 1 
--------------------------  ------  -----------  ------  ---------------- 
Contract for differences         1            2       1                 - 
--------------------------  ------  -----------  ------  ---------------- 
Interest rate swaps          1,959          695   2,212             1,032 
--------------------------  ------  -----------  ------  ---------------- 
Total return bond swaps         10            4      21                 1 
--------------------------  ------  -----------  ------  ---------------- 
Swaptions                      912            3     278                 - 
--------------------------  ------  -----------  ------  ---------------- 
Inflation swaps                 34           46      17                16 
--------------------------  ------  -----------  ------  ---------------- 
Equity options                 553           59       4                 - 
--------------------------  ------  -----------  ------  ---------------- 
Stock index futures             45           23       8                33 
--------------------------  ------  -----------  ------  ---------------- 
Fixed income futures            47           50      16                 6 
--------------------------  ------  -----------  ------  ---------------- 
Retrocession contracts           -           13       -                21 
--------------------------  ------  -----------  ------  ---------------- 
Longevity swap contracts       162           96     144                77 
--------------------------  ------  -----------  ------  ---------------- 
Currency futures                 -            3       1                 2 
--------------------------  ------  -----------  ------  ---------------- 
Foreign exchange options         2            -       -                 - 
--------------------------  ------  -----------  ------  ---------------- 
Total return equity swaps        -            3       -                32

--------------------------  ------  -----------  ------  ---------------- 
                             3,798        1,093   2,760             1,242 
--------------------------  ------  -----------  ------  ----------------

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 GBP162 million and derivative liabilities of GBP96 million have been recognised as at 31 December 2018 (2017: GBP144 million and GBP77 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 loans and deposits (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled GBP13 million at 31 December 2018 (2017: GBP21 million). A loan liability has been recognised in respect of financing obtained for the initial reinsurance premium (see note E5).

E3.3 Warrants over shares

On 2 September 2009, Old PGH issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one 'B' ordinary share at a price of GBP15 per share, subject to adjustment. Following the achievement of the Company's Premium Listing on 5 July 2010, the Lenders' warrants related to ordinary shares rather than 'B' ordinary shares.

On 23 August 2018, the Group redeemed and cancelled all outstanding warrants for GBP56,000. The carrying value of the warrants as at 31 December 2017 was GBP56,000.

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 2018 (2017: 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.

 
2018                                                                   Related amounts not offset 
----------------------------  ---------------------------  --------------------------------------------------  ------- 
                                 Gross and net amounts of 
                                     recognised financial   Financial instruments and                              Net 
                                                   assets    cash collateral received  Derivative liabilities   amount 
Financial assets                                     GBPm                        GBPm                    GBPm     GBPm 
----------------------------  ---------------------------  --------------------------  ----------------------  ------- 
OTC derivatives                                     3,435                       2,804                     455      176 
----------------------------  ---------------------------  --------------------------  ----------------------  ------- 
Exchange traded derivatives                           363                          34                       -      329 
----------------------------  ---------------------------  --------------------------  ----------------------  ------- 
Stock lending                                       2,417                       2,417                       -        - 
----------------------------  ---------------------------  --------------------------  ----------------------  ------- 
Total                                               6,215                       5,255                     455      505 
----------------------------  ---------------------------  --------------------------  ----------------------  ------- 
 
 
                                                                         Related amounts not offset 
----------------------------  --------------------------------  ---------------------------------------------  ------- 
                                      Gross and net amounts of     Financial instruments and cash  Derivative      Net 
                              recognised financial liabilities                collateral received      assets   amount 
Financial liabilities                                     GBPm                               GBPm        GBPm     GBPm 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
OTC derivatives                                          1,009                                554         455        - 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
Exchange traded derivatives                                 84                                  8           -       76 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
Total                                                    1,093                                562         455       76 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
 
 
                                                                                   Related amounts not offset 
----------------------------  --------------------------------  ---------------------------------------------  ------- 
                                      Gross and net amounts of 
                                          recognised financial   Financial instruments and cash    Derivative      Net 
2017                                                    assets              collateral received   liabilities   amount 
 Financial assets                                         GBPm                             GBPm          GBPm     GBPm 
----------------------------  --------------------------------  -------------------------------  ------------  ------- 
OTC derivatives                                          2,731                            2,089           562       80 
----------------------------  --------------------------------  -------------------------------  ------------  ------- 
Exchange traded derivatives                                 29                                -            17       12 
----------------------------  --------------------------------  -------------------------------  ------------  ------- 
Stock lending                                              578                              578             -        - 
----------------------------  --------------------------------  -------------------------------  ------------  ------- 
Total                                                    3,338                            2,667           579       92 
----------------------------  --------------------------------  -------------------------------  ------------  ------- 
 
 
                                                                                   Related amounts not offset 
----------------------------  --------------------------------  ---------------------------------------------  ------- 
                                      Gross and net amounts of     Financial instruments and cash  Derivative      Net 
                              recognised financial liabilities                collateral received      assets   amount 
Financial liabilities                                     GBPm                               GBPm        GBPm     GBPm

----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
OTC derivatives                                          1,193                                631         562        - 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
Exchange traded derivatives                                 50                                 18          17       15 
----------------------------  --------------------------------  ---------------------------------  ----------  ------- 
Total                                                    1,243                                649         579       15 
----------------------------  --------------------------------  ---------------------------------  ----------  -------

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 GBP374 million (2017: GBP466 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2018 are set out below.

 
                         OTC derivatives 
----------------------  ----------------- 
                            2018     2017 
                            GBPm     GBPm 
----------------------  --------  ------- 
Financial assets           2,619    1,961 
----------------------  --------  ------- 
Financial liabilities    (2,619)  (1,961) 
----------------------  --------  -------

The maximum exposure to credit risk in respect of OTC derivative assets is GBP3,435 million (2017: GBP2,731 million) of which credit risk of GBP3,259 million (2017: GBP2,651 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 GBP363 million (2017: GBP29 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 2018 in respect of OTC derivative liabilities of GBP1,009 million (2017: GBP1,193 million) amounted to GBP554 million (2017: GBP631 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 financial position amounts to GBP2,746 million (2017: GBP623 million).

The maximum exposure to credit risk in respect of stock lending transactions is GBP2,417 million (2017: GBP578 million) of which credit risk of GBP2,417 million (2017: GBP578 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 detailed 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 
----------------------------------------------------------  ----------------  ------------ 
                                                               2018     2017   2018   2017 
                                                               GBPm     GBPm   GBPm   GBPm 
----------------------------------------------------------  -------  -------  -----  ----- 
Limited recourse bonds 2022 7.59% (note a)                       45       56     50     66 
----------------------------------------------------------  -------  -------  -----  ----- 
Property Reversions loan (note b)                               114      131    114    131 
----------------------------------------------------------  -------  -------  -----  ----- 
Retrocession contracts (note c)                                  13       51     13     51 
----------------------------------------------------------  -------  -------  -----  ----- 
Total policyholder borrowings                                   172      238    177    248 
----------------------------------------------------------  -------  -------  -----  ----- 
 
GBP200 million 7.25% unsecured subordinated loan (note d)       186      177    209    225 
----------------------------------------------------------  -------  -------  -----  ----- 
GBP300 million senior unsecured bond (note e)                   121      121    132    137 
----------------------------------------------------------  -------  -------  -----  ----- 
GBP428 million Tier 3 subordinated notes (note h)               426      426    441    513 
----------------------------------------------------------  -------  -------  -----  ----- 
GBP450 million Tier 3 subordinated notes (note i)               448      448    447    481 
----------------------------------------------------------  -------  -------  -----  ----- 
US $500 million Tier 2 bonds (note j)                           390      368    342    390 
----------------------------------------------------------  -------  -------  -----  ----- 
EUR500 million Tier 2 bonds (note k)                            443        -    390      - 
----------------------------------------------------------  -------  -------  -----  ----- 
Total shareholder borrowings                                  2,014    1,540  1,961  1,746 
----------------------------------------------------------  -------  -------  -----  ----- 
 
Total borrowings                                              2,186    1,778  2,138  1,994 
----------------------------------------------------------  -------  -------  -----  ----- 
 
Amount due for settlement after 12 months                     2,174    1,727 
----------------------------------------------------------  -------  -------  -----  -----

a. In 1998, Mutual Securitisation plc raised GBP260 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 GBP140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The GBP120 million 7.59% class A2 limited recourse bonds with an outstanding principal of GBP48 million (2017: GBP60 million) have an average remaining life of 1 year and mature in 2022. Phoenix Life Assurance Limited ('PLAL') has provided collateral of GBP21 million (2017: GBP26 million) to provide security to the holders of the recourse bonds in issue. During 2018, repayments totalling GBP12 million were made (2017: GBP12 million).

b. The Property Reversions loan from Santander UK plc ('Santander') was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2018, repayments totalling GBP25 million were made (2017: GBP24 million). Note G9 contains details of the assets that support this loan.

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

d. Scottish Mutual Assurance Limited issued GBP200 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 GBP10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.

e. On 7 July 2014, the Group's financing subsidiary, PGH Capital plc ('PGHC'), issued a GBP300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% ('GBP300 million senior bond'). On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the GBP300 million senior bond. On 5 May 2017, Old PGH completed the purchase of GBP178 million of the GBP300 million senior bond at a premium of GBP25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date.

f. The Group has in place an unsecured revolving credit facility ('the facility'), maturing in June 2022. Old PGH drew down GBP295 million under the facility on 31 August 2018. Following the issuance of EUR500 million Tier 2 bond on 24 September 2018, the facility was fully repaid. The facility is undrawn as at 31 December 2018 (2017: undrawn). There are no mandatory or target amortisation payments associated with the facility but prepayments are permissible. The facility currently accrues interest at LIBOR plus 1.1%, a utilisation fee of between 0.1% and 0.4% is applicable dependent on the amount drawn. On 12 December 2018, the Company became an additional borrower and guarantor under the facility.

g. On 23 February 2018, Old PGH entered into an acquisition facility with an aggregate principal amount of GBP600 million. The acquisition facility has a termination date of 31 August 2019. The Group is entitled to request two six month extensions to the term of the facility (which would together extend the termination date to 31 August 2020). The interest period may be selected by the Group and the interest rate for the initial six month period is LIBOR plus a margin of 0.5%. On 12 December 2018, the Company became an additional borrower and guarantor under the acquisition facility.

h. On 23 January 2015, PGHC issued GBP428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of GBP3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange GBP32 million of these notes were held by Group companies. On 27 January 2017, GBP17 million of the GBP428 million subordinated notes held by Group companies were sold to third parties and a further GBP15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by GBP32 million. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the GBP428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer.

i. On 20 January 2017, PGHC issued GBP300 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 GBP300 million Tier 3 subordinated notes. On 5 May 2017, Old PGH completed the issue of a further GBP150 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 GBP2 million in excess of the principal amount. Fees associated with these notes of GBP5 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

j. On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of GBP2 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

k. On 24 September 2018, Old PGH issued EUR500 million Tier 2 notes due 2029 with a coupon of 4.375%. Fees associated with these notes of GBP7 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.

E5.2 Reconciliation of liabilities arising from financing

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. 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.

 
                           New borrowings,               Changes in fair       Movement in          Other 
                              net of costs  Repayments             value  foreign exchange   movements(1) 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
                                 Cash movements                        Non-cash movements 
                          ----------------------------  ------------------------------------------------- 
                  At Jan                                                                                   At 31 Dec 
                    2018                                                                                        2018 
                    GBPm              GBPm        GBPm              GBPm              GBPm           GBPm       GBPm 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
Limited recourse 
 bonds 2022 
 7.59%                56                 -        (12)                 -                 -              1         45 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
Property 
 Reversions loan     131                 -        (25)                 8                 -              -        114 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
Retrocession 
 contracts            51                 -        (32)               (6)                 -              -         13 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
GBP200 million 
 7.25% unsecured 
 subordinated 
 loan                177                 -           -                 -                 -              9        186 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
GBP300 million 
 senior 
 unsecured bond      121                 -           -                 -                 -              -        121 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
GBP900 million 
 unsecured 
 revolving 
 credit facility       -               295       (295)                 -                 -              -          - 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
GBP428 million 
 subordinated 
 notes               426                 -           -                 -                 -              -        426 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
GBP450 million 
 Tier 3 
 subordinated

 notes               448                 -           -                 -                 -              -        448 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
US $500 million 
 Tier 2 bonds        368                 -           -                 -                22              -        390 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
EUR500 million 
 Tier 2 notes          -               438           -                 -                 5              -        443 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  --------- 
                   1,778               733       (364)                 2                27             10      2,186 
----------------  ------  ----------------  ----------  ----------------  ----------------  -------------  ---------

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

 
                                                                                  Movement 
                          New borrowings,                 Changes in fair       in foreign          Other 
                             net of costs  Repayments(1)            value         exchange   movements(2) 
                  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
                                  Cash movements                        Non-cash movements 
                          ------------------------------  ----------------------------------------------- 
                  At Jan                                                                                   At 31 Dec 
                    2017                                                                                        2017 
                    GBPm             GBPm           GBPm             GBPm             GBPm           GBPm       GBPm 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
Limited recourse 
 bonds 2022 
 7.59%                65                -           (12)                -                -              3         56 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
Property 
 Reversions loan     183                -           (24)             (28)                -              -        131 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
Retrocession 
 contracts            87                -           (41)                5                -              -         51 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
GBP200 million 
 7.25% unsecured 
 subordinated 
 loan                167                -              -                -                -             10        177 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
GBP300 million 
 senior 
 unsecured bond      298                -          (178)                -                -              1        121 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
GBP900 million 
 unsecured 
 revolving 
 credit facility     843                -          (850)                -                -              7          - 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
GBP428 million 
 subordinated 
 notes               393               32              -                -                -              1        426 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
GBP450 million 
 Tier 3 
 subordinated 
 notes                 -              447              -                -                -              1        448 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
US $500 million 
 Tier 2 bonds          -              383              -                -             (15)              -        368 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  --------- 
                   2,036              862        (1,105)             (23)             (15)             23      1,778 
----------------  ------  ---------------  -------------  ---------------  ---------------  -------------  ---------

1 Repayment of shareholder borrowings in the statement of consolidated cash flows includes a premium of GBP25 million in excess of the principal amount on repayment of the GBP300 million senior unsecured bond.

2 Primarily comprises amortisation under the effective interest method applied to borrowings held at amortised cost.

E6. Risk Management - financial risk

This note forms one part of the risk management disclosures in the consolidated financial statements. The Group's management of insurance risk is detailed in note F4.

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

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

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

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

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

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

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

E6.2 Financial risk analysis

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

E6.2.1 Credit risk

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

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

-- credit risk which results from direct investment activities, including investments in fixed and variable rate income securities, derivatives counterparties, collective investment schemes and the placing of cash deposits; and

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

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

The impact of non-government fixed and variable rate income 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 GBP9,917 million (2017: GBP5,640 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 GBP496 million (2017: GBP225 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 GBP108 million (2017: GBP55 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 GBP100 million (2017: GBP53 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. The credit risk borne by the shareholder on with-profit policies is dependent on the extent to which the underlying insurance fund is relying on shareholder support.

Quality of credit assets

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

For financial assets that do not have credit ratings assigned by external rating agencies but where the Group has assigned an internal rating for use in managing and monitoring credit risk, the assets are classified as 'internally rated'. If a financial asset is neither rated by an external agency nor 'internally rated', it is classified as 'not rated':

 
                                                                               BB and 
                                                  AAA      AA       A     BBB   below  Non-rated3  Unit-linked   Total 
2018                                             GBPm    GBPm    GBPm    GBPm    GBPm        GBPm         GBPm    GBPm 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Loans and deposits(1)                               -     341     457      31       -       2,783            -   3,612 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Derivatives                                         -       5   2,092   1,032       -         659           10   3,798 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Fixed and variable rate income securities(2)    9,709  31,043  13,242  10,793   1,992         954          199  67,932 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Reinsurers' share of insurance contract 
 liabilities                                        -   6,227   1,292       -       -          45            -   7,564 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Reinsurers' share of investment contract 
 liabilities                                        -       -       -       -       -           -        5,417   5,417 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
Cash and cash equivalents                         327     947   1,836   1,265       -         450          101   4,926 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------ 
                                               10,036  38,563  18,919  13,121   1,992       4,891        5,727  93,249 
---------------------------------------------  ------  ------  ------  ------  ------  ----------  -----------  ------

1 For financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. GBP280 million of AA, GBP198 million of A, and GBP65 million of BBB loans and deposits are internally rated.

2 GBP39 million of AAA, GBP146 million of AA, GBP418 million of A, and GBP123 million of BBB fixed and variable rate income securities are internally rated.

3 Non-rated loans and deposits of GBP2,783 million (2017: GBP1,271 million) Includes equity release mortgages with a value of GBP2,020 million (2017: GBP1,255 million). Further details are set out in note E2.3.

 
                                                                                BB and 
                                                    AAA      AA       A    BBB   below  Non-rated  Unit-linked   Total 
2017                                               GBPm    GBPm    GBPm   GBPm    GBPm       GBPm         GBPm    GBPm 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Loans and deposits(1)                                 -      53     366     20       -      1,371            2   1,812 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Derivatives                                           -      41   1,942    557       -        210           10   2,760 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Fixed and variable rate income securities         3,867  12,853   5,571  3,586     360        546          215  26,998 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Reinsurers' share of insurance contract 
 liabilities                                          -   1,406   1,849      -       -         65            -   3,320 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Reinsurers' share of investment contract 
 liabilities                                          -       -       -      -       -          -        6,085   6,085 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
Cash and cash equivalents                             -     694   1,400    114       -          -           37   2,245 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------ 
                                                  3,867  15,047  11,128  4,277     360      2,192        6,349  43,220 
------------------------------------------------  -----  ------  ------  -----  ------  ---------  -----------  ------

1 As noted above for financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. GBP33 million of AAA, GBP218 million of AA, GBP103 million of A, GBP5 million of BBB and GBP1 million of BB and below of fixed and variable rate income securities are internally rated.

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 internally rated assets. 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. A variety of methods are used to validate the appropriateness of the internal credit ratings. The Internal Credit Rating Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.

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

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

Please refer to page 222 for additional life company asset disclosures which include the life companies' exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group's exposure to peripheral Eurozone debt continues to be relatively small compared to total assets.

Concentration of credit risk

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

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

Reinsurance

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

Collateral

The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly in respect of stock lending, certain reinsurance arrangements to provide security against the daily mark to model value of derivative financial instruments and as part of securities lending activity. 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 E4.1 for further information on collateral arrangements.

E6.2.2 Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class risk).

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

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

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

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

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

-- the constituents of market risk for the Group;

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

-- the asset allocation and portfolio limit structure;

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

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

-- control over hedging activities;

-- reporting of market risk exposures and activities; and

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

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

Interest rate 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.

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 fixed and variable rate income 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 GBP141 million (2017: GBP110 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 GBP211 million (2017: GBP196 million).

Equity, property and inflation 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. 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. 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.

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 GBP202 million (2017: GBP73 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 GBP197 million (2017: GBP71 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 GBP15 million (2017: GBP11 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 GBP7 million (2017: GBP5 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.

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.

Currency risk

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

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

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

The Group has hedged the currency risk on its foreign currency hybrid debt ($500 million Tier 2 bonds and EUR500 million Tier 2 bonds as set out in note E5) through cross currency interest rate swaps.

Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2018, since unhedged exposure to foreign currency was relatively low (2017: not considered significant).

E6.2.3 Financial soundness risk

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

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

Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. Tax risk is managed by maintaining an appropriately-staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required.

The Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks. These controls are subject to a regular review process. The Group's subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements.

Liquidity and funding risk is defined as the failure of the Group to maintain adequate levels of financial resources to enable it to meet its obligations as they fall due. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group's subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term cash flow requirements.

The Board of Phoenix Group Holdings plc has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that:

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

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

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

The Group's policy is to maintain sufficient liquid assets of suitable credit quality at all times including, where appropriate, by having access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances.

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 2017 and 2018, all unit trusts processed investments and realisations in a normal manner and have not imposed any restrictions or delays.

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

The following table provides a maturity analysis showing the remaining contractual maturities of the Group's undiscounted financial liabilities and associated interest. Liabilities under insurance 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:

 
                                                                                       Greater 
                                                                                          than 
                                              1 year or less or on demand  1-5 years   5 years  No fixed term    Total 
2018                                                                 GBPm       GBPm      GBPm           GBPm     GBPm 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Liabilities under insurance contracts                              15,511     22,049    53,651              -   91,211 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Investment contracts                                              114,463          -         -              -  114,463

--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Borrowings(1)                                                         105      1,189     1,500            114    2,908 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Deposits received from reinsurers(1)                                  361      1,371     2,767              -    4,499 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Derivatives(1)                                                        156        147     1,092              -    1,395 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Net asset value attributable to unitholders                         2,659          -         -              -    2,659 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Obligations for repayment of collateral 
 received                                                           2,645          -         -              -    2,645 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Reinsurance payables                                                   30          -         -              -       30 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Payables related to direct insurance 
 contracts                                                            902          -         -              -      902 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Accruals and deferred income                                          329          5         3              -      337 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
Other payables                                                        777         22        74              -      873 
--------------------------------------------  ---------------------------  ---------  --------  -------------  ------- 
 
 
                                                                                     Greater 
                                                   1 year or less or on                 than  No fixed 
                                                                 demand  1-5 years   5 years      term   Total 
2017                                                               GBPm       GBPm      GBPm      GBPm    GBPm 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Liabilities under insurance contracts                             4,739     12,169    27,527         -  44,435 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Investment contracts                                             26,733          -         -         -  26,733 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Borrowings(1)                                                       144      1,161       972       131   2,408 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Deposits received from reinsurers(1)                                 28         99       302         -     429 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Derivatives(1)                                                       72        153     1,283         -   1,508 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Net asset value attributable to unitholders                         840          -         -         -     840 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Obligations for repayment of collateral received                  1,961          -         -         -   1,961 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Reinsurance payables                                                 23          -         -         -      23 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Payables related to direct insurance contracts                      522          -         -         -     522 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Accruals and deferred income                                        179          -         -         -     179 
-------------------------------------------------  --------------------  ---------  --------  --------  ------ 
Other payables                                                      144          -         -         -     144 
-------------------------------------------------  --------------------  ---------  --------  --------  ------

1 These financial liabilities are disclosed at their undiscounted value and therefore differ to 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.

E6.3 Unit-linked contracts

For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.

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.

F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE

F1. Liabilities under insurance contracts

 
Classification of contracts 
 Contracts are classified as insurance contracts where the Group accepts significant insurance 
 risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain 
 event adversely affects the policyholder. 
 Contracts under which the transfer of insurance risk to the Group from the policyholder is 
 not significant are classified as investment contracts or derivatives and accounted for as 
 financial liabilities (see notes E1 and E3 respectively). 
 Some insurance and investment contracts contain a DPF. This feature entitles the policyholder 
 to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts 
 with a DPF are recognised, measured and presented as insurance contracts. 
Insurance contracts and investment contracts with DPF 
 Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding 
 claims provision or settled claims associated with the reinsured policy. 
Insurance liabilities 
 Insurance contract liabilities for non-participating business, other than unit-linked insurance 
 contracts, are calculated on the basis of current data and assumptions, using either a net 
 premium or gross premium method. Where a gross premium method is used, the liability includes 
 allowance for prudent lapses. Negative policy values are allowed for on individual policies: 
  *    where there are no guaranteed surrender values; or 
 
 
  *    in the periods where guaranteed surrender values do 
       not apply even though guaranteed surrender values are 
       applicable after a specified period of time. 
 
 
 For unit-linked insurance contract liabilities the provision is based on the fund value, together 
 with an allowance for any excess of future expenses over charges, where appropriate. 
 For participating business, the liabilities under insurance contracts and investment contracts 
 with DPF are calculated in accordance with the following methodology: 
  *    liabilities to policyholders arising from the 
       with-profit business are stated at the amount of the 
       realistic value of the liabilities, adjusted to 
       exclude the owners' share of projected future 
       bonuses; 
 
 
  *    acquisition costs are not deferred; and 
 
 
  *    reinsurance recoveries are measured on a basis that 
       is consistent with the valuation of the liability to 
       policyholders to which the reinsurance applies. 
 
 
 The With-Profit Benefit Reserve ('WPBR') for an individual contract is determined by either 
 a retrospective calculation of 'accumulated asset share' approach or by way of a prospective 
 'bonus reserve valuation' method. The cost of future policy-related liabilities is determined

using a market consistent approach, mainly based on a stochastic model calibrated to market
conditions at the end of the reporting period. Non-market related assumptions (for example,
persistency, mortality and expenses) are based on experience adjusted to take into account
of future trends.
The realistic liability for any contract is equal to the sum of the WPBR and the cost of future
policy--related liabilities.
Where policyholders have valuable guarantees, options or promises in respect of the with-profit
business, these costs are generally valued using a stochastic model.
In calculating the realistic liabilities, account is taken of the future management actions
consistent with those set out in the Principles and Practices of Financial Management ('PPFM').
Standard Life Assurance Limited ('SLAL'), a wholly-owned subsidiary of the Group, includes
the Heritage With Profits Fund ('HWPF'). In 2006, the Standard Life Assurance Company demutualised.
The demutualisation was governed by its Scheme of Demutualisation ('the Scheme'). Under the
Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company
were transferred to SLAL.
The Scheme of Demutualisation ('the Scheme') provides that certain defined cash flows (recourse
cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating
and non-participating, may be transferred out of that fund when they emerge, being transferred
to the Shareholder Fund ('SHF') or the Proprietary Business Fund ('PBF') of SLAL, and thus
accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers
are subject to certain constraints in order to protect policyholders. The Scheme also provides
for additional expenses to be charged by the PBF to the HWPF in respect of German branch business
in SLAL.
Under the realistic valuation, the discounted value of expected future cash flows on participating
contracts not reflected in the WPBR is included in the cost of future policy-related liabilities
(as a reduction where future cash flows are expected to be positive). The discounted value
of expected future cash flows on non-participating contracts not reflected in the measure
on non-participating liabilities is recognised as a separate asset (where future cash flows
are expected to be positive). The Scheme requirement to transfer future recourse cash flows
out of the HWPF is recognised as an addition to the cost of future policy-related liabilities.
The discounted value of expected future cash flows on non-participating contracts can be apportioned
between those included in the recourse cash flows and those retained in the HWPF for the benefit
of policyholders.
Applying the policy noted above for the HWPF:
* The value of participating investment contract
liabilities on the consolidated statement of
financial position is reduced by future expected (net
positive) cash flows arising on participating
contracts.

* Future expected cash flows on non-participating
contracts are not recognised as an asset of the HWPF
on the consolidated statement of financial position.
However, future expected cash flows on
non-participating contracts that are not recourse
cash flows under the Scheme are used to reduce the
value of participating insurance and participating
investment contract liabilities on the 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
G7).
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
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.
-------------------------------------------------------------------------------------------------------

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  Reinsurers'         Gross  Reinsurers' 
                                              liabilities        share   liabilities        share 
                                                     2018         2018          2017         2017 
                                                     GBPm         GBPm          GBPm         GBPm 
-------------------------------------------  ------------  -----------  ------------  ----------- 
Life assurance business: 
-------------------------------------------  ------------  -----------  ------------  ----------- 
Insurance contracts                                66,872        7,564        33,481        3,319 
-------------------------------------------  ------------  -----------  ------------  ----------- 
Investment contracts with DPF                      24,339            -        10,954            1 
-------------------------------------------  ------------  -----------  ------------  ----------- 
                                                   91,211        7,564        44,435        3,320 
-------------------------------------------  ------------  -----------  ------------  ----------- 
 
Amounts due for settlement after 12 months         75,700        6,801        39,697        2,996 
-------------------------------------------  ------------  -----------  ------------  ----------- 
 
 
                                                Gross  Reinsurers'                     Gross               Reinsurers' 
                                          liabilities        share               liabilities                     share 
                                                 2018         2018   2017 restated (note A1)   2017 restated (note A1) 
                                                 GBPm         GBPm                      GBPm                      GBPm 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
At 1 January                                   44,435        3,320                    45,807                     3,744 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
Premiums                                        2,645          481                     1,297                       356 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
Claims                                        (5,295)        (866)                   (4,064)                     (594) 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
Foreign exchange adjustments                       35            -                        20                       (1) 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
Acquisition of Standard Life Assurance 
 businesses (see note H2)                      51,487        4,264                         -                         - 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
Other changes in liabilities(1)               (2,096)          365                     1,375                     (185) 
---------------------------------------  ------------  -----------  ------------------------  ------------------------ 
At 31 December                                 91,211        7,564                    44,435                     3,320 
---------------------------------------  ------------  -----------  ------------------------  ------------------------

1 Other changes in liabilities principally comprise of changes in economic and non-economic assumptions and experience. Other changes in liabilities also includes the recognition of an additional GBP22 million (2017: GBPnil) of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision - SLAL.

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 GBPnil. 
 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. 
------------------------------------------------------------------------------------------------------- 
 
 
                                                        2018   2017 
                                                        GBPm   GBPm 
-----------------------------------------------------  -----  ----- 
At 1 January                                             925    879 
-----------------------------------------------------  -----  ----- 
Transfer (to)/from consolidated income statement        (88)     46 
-----------------------------------------------------  -----  ----- 
Acquisition of Standard Life Assurance (see note H2)     525      - 
-----------------------------------------------------  -----  ----- 
Foreign exchange movements                               (4)      - 
-----------------------------------------------------  -----  ----- 
At 31 December                                         1,358    925 
-----------------------------------------------------  -----  -----

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 GBP481 million (2017: GBP356 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 GBP3,253 million (2017: GBP3,640 million).

Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as 'Deposits received from reinsurers'. Where there is interest payable on such collateral, it is recognised within 'Net income under arrangements with reinsurers' (see F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2018 are set out below.

 
                         Reinsurance transactions 
----------------------  -------------------------- 
                                2018          2017 
                                GBPm          GBPm 
----------------------  ------------  ------------ 
Financial assets                 373           368 
----------------------  ------------  ------------ 
Financial liabilities            373           368 
----------------------  ------------  ------------

F3.3 Net income under arrangements with reinsurers

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

 
                                                 2018   2017 
                                                 GBPm   GBPm

----------------------------------------------  -----  ----- 
Interest payable on deposits 
 from reinsurers                                 (11)      - 
----------------------------------------------  -----  ----- 
Premium adjustments                                13      - 
----------------------------------------------  -----  ----- 
Net income under arrangements with reinsurers       2      - 
----------------------------------------------  -----  -----

F4. Risk Management - Insurance risk

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

Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The contracts for the Life businesses include the following sources of insurance risk:

 
Mortality  higher than expected number of death claims on assurance products and occurrence of one or 
            more large claims; 
---------  ------------------------------------------------------------------------------------------------ 
Longevity  faster than expected improvements in life expectancy on immediate and deferred annuity products; 
---------  ------------------------------------------------------------------------------------------------ 
Morbidity  higher than expected number of serious illness claims or more sickness claims which last longer 
            on income protection policies; 
---------  ------------------------------------------------------------------------------------------------ 
Expenses   policies cost more to administer than expected; 
---------  ------------------------------------------------------------------------------------------------ 
Lapses     the numbers of policies terminating early is different to that expected in a way which increases 
            expected claims costs or expenses or reduces future profits; 
---------  ------------------------------------------------------------------------------------------------ 
Options    unanticipated changes in policyholder option exercise rates giving rise to increased claims 
            costs; and 
---------  ------------------------------------------------------------------------------------------------ 
Pricing    inadequate or inappropriate pricing of new business. 
---------  ------------------------------------------------------------------------------------------------

Objectives and policies for mitigating insurance risk

The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance.

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

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

The Group's longevity risk exposures have increased as a result of the Bulk Purchase Annuity deals it has successfully acquired, however the vast majority of these exposures are reinsured to third parties.

Sensitivities

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

A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of GBP54 million (2017: GBP34 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 GBP54 million (2017: GBP34 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 GBP265 million (2017: GBP137 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 GBP273 million (2017: GBP138 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 GBP27 million (2017: GBP40 million(1) ).

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 GBP26 million (2017: GBP31 million(1) ).

1 The 2017 comparative has been restated as the Group now applies a 10% sensitivity for calculating lapse rate sensitivities for consistency with the stress and scenario testing monitored by the Group on an ongoing basis (2017: 25%).

F4.1 Assumptions

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

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

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

Discount rates

The Group discounts participating and non-participating insurance contract liabilities at a risk-free rate derived from the swap yield curve, plus an illiquidity premium of 10bps.

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

Expense inflation

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

For the Standard Life Assurance businesses, the assumptions for future policy expense levels are determined from the most recent expense analyses. No allowance is made for potential future expense improvement. The assumed expense level incorporates an annual inflation allowance determined by reference to RPI.

Mortality and longevity rates

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

Lapse and surrender rates (persistency)

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

Discretionary participating bonus rate

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

Policyholder options and guarantees

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

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

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

Some pensions contracts include guaranteed annuity options (see deferred annuities in note F4.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are GBP1,865 million (2017: GBP1,965 million) and GBP93 million (2017: GBP131 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 GBP298 million (2017: GBP334 million) and GBP7 million (2017: GBP48 million) respectively.

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

Demographic prudence margin

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

Assumption changes

During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the Enlarged Group. The impact of material changes during the year was as follows:

 
                                      (Decrease)/    (Decrease)/ 
                                         increase       increase 
                                     in insurance   in insurance 
                                      liabilities    liabilities 
                                             2018           2017 
                                             GBPm           GBPm 
----------------------------------  -------------  ------------- 
Change in longevity assumptions             (168)          (148) 
----------------------------------  -------------  ------------- 
Change in persistency assumptions            (12)            120 
----------------------------------  -------------  ------------- 
Change in mortality assumptions              (16)             15 
----------------------------------  -------------  ------------- 
Change in expenses assumptions               (28)           (79) 
----------------------------------  -------------  -------------

2018:

The GBP168 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2017 projection tables.

The GBP12 million and GBP16 million positive impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The GBP28 million positive impact of changes in expense assumptions principally reflects updated investment expenses in light of updates made to the asset mix and to reflect changes to agreements with the Group's external funds managers.

2017:

The GBP148 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2016 projection tables.

The GBP120 million adverse impact of changes in persistency assumptions is principally driven by the strengthening of actuarial assumptions to reflect the impact of the continued low interest rate environment on the Group's expectations of persistency for products with variable guarantees.

The GBP79m million positive impact of changes in expense assumptions includes the impact of expense synergies arising from integration of the acquired Abbey Life business, together with the impact of revisions to the life expense agreements between the life and management services companies.

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.

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

------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Unit-linked                       9,440                    1,021                   44                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Other                             (184)                        9                 (84)                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
                                       66,872                   24,339                7,564                        - 
------------------------  -------------------  -----------------------  -------------------  -----------------------

1 GBP4,605 million (2017: GBP3,770 million) of liabilities are subject to longevity swap arrangements.

 
                                             Gross                                      Reinsurance 
------------------------  --------------------------------------------  -------------------------------------------- 
                                                  Investment contracts                          Investment contracts 
                          Insurance contracts                 with DPF  Insurance contracts                 with DPF 
2017                                     GBPm                     GBPm                 GBPm                     GBPm 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
With-profit funds: 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
Pensions: 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Deferred annuities 
       - with guarantees                7,458                       78                  665                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Deferred annuities 
       - without 
       guarantees                       1,234                        -                    -                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Immediate 
       annuities                        1,029                        -                  699                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Unitised 
       with-profit                      4,244                    8,936                    -                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
Total pensions                         13,965                    9,014                1,364                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
 
Life: 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Immediate 
       annuities                            8                        -                    4                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Unitised 
       with-profit                        761                      804                    2                        1 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Life with-profit                  2,509                        -                   18                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
Total life                              3,278                      804                   24                        1 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
 
Other                                   1,344                        -                   77                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
 
Non-profit funds: 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Deferred annuities 
       - without 
       guarantees                         121                        -                    -                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Immediate 
       annuities                       11,303                        -                1,854                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Protection                          289                        -                   61                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Unit-linked                       3,420                    1,136                   66                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
      Other                             (239)                        -                (127)                        - 
------------------------  -------------------  -----------------------  -------------------  ----------------------- 
                                       33,481                   10,954                3,319                        1 
------------------------  -------------------  -----------------------  -------------------  -----------------------

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 GBPnil 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. 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. 
------------------------------------------------------------------------------------------------- 
 
 
                                                                      FCA                       Transfer 
                                                                 thematic                      of policy 
                   Leasehold     Staff       Known      PA(GI)    reviews  Restructuring  administration 
                  properties   related   incidents   provision  provision      provision       provision  Other  Total 
2018                    GBPm      GBPm        GBPm        GBPm       GBPm           GBPm            GBPm   GBPm   GBPm 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
At 1 January               5        10           1          40         54             17               -      7    134 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
Additions in the 
 year                      1         -           2           -          -              -              76     25    104 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
Acquisition of 
 Standard Life 
 Assurance 
 during the year 
 (see note H2.1)           -         7          37           -        225              -               -      -    269 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
Utilised during 
 the year                  -       (1)         (5)        (15)       (54)           (13)             (3)    (7)   (98) 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
Released during 
 the year                (1)       (1)         (2)         (8)       (17)              -               -    (3)   (32) 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  ----- 
At 31 December             5        15          33          17        208              4              73     22    377 
----------------  ----------  --------  ----------  ----------  ---------  -------------  --------------  -----  -----

Leasehold properties

The leasehold properties provision includes a GBP3 million (2017: GBP3 million) dilapidations provision in respect of obligations under operating leases. In addition, a provision has been made for GBP2 million (2017: GBP2 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 GBP5 million (2017: GBP6 million), private medical and other insurance costs for former employees of GBP9 million (2017: GBP2 million).

Known incidents

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

On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of the areas described above were recognised at GBP37 million on a fair value basis. GBP5 million of this balance has been utilised since the acquisition date, with the remainder expected to be utilised in 2019.

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 GBP17 million (2017: GBP40 million) represents the Group's best estimate of the likely future costs. However, this is subject to a number of risks and uncertainties including volumes of future complaints, the rates by which those complaints are upheld and the average redress value.

At 31 December 2018, a reimbursement asset of GBP8 million (2017: GBP32 million) has been recognised in other receivables in connection with the Group's exposure to these complaints. This represents recoveries due from third parties under contractual arrangements. Recoveries of GBP18 million (2017: GBP7 million) have been received during the year.

FCA thematic reviews provision - Abbey Life

On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life was subject to additional investigations. Specifically, the FCA explored whether remedial and/or disciplinary action was necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life was investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review.

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

On 14 December 2018, the Group was informed by the FCA that it had closed its investigation into Abbey Life following completion of the thematic review into the fair treatment of long-standing customers in the life insurance sector, having found that the conduct of Abbey Life did not warrant enforcement action. Accordingly, GBP10 million of the provision remaining at 1 January 2018 has been released during the year.

In respect of the non-advised annuity sales, GBP10 million of the provision was utilised and GBP7 million was released during the year.

Under the terms of the Abbey Life acquisition, Deutsche Bank provided Phoenix Life Holding Limited ('PLHL') with an indemnity, with a duration of up to eight years, in respect of exposures that may arise in Abbey Life as a result of the FCA's final thematic review findings. The maximum amount that can be claimed under the indemnity is GBP175 million and it applies to all regulatory fines and to 80% to 90% of the costs of customer remediation. The indemnity would be expected to mitigate any additional costs not covered by the existing provision, arising in the event of a crystallisation of exposures deemed not to trigger the recognition of a provision based on current information, or a deterioration in management's estimate of the liabilities associated with present obligations. At 31 December 2018, a reimbursement asset of GBP14 million (2017: GBP23 million) has been recognised in other receivables under this indemnity. Recoveries of GBP9 million have been received during the year.

FCA thematic reviews provision - SLAL

Standard Life Assurance was also a participant in the thematic review of non-advised annuity sales issued by the FCA on 14 October 2016.

On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of past practices in the area described above were assessed. As a result, it was determined appropriate to recognise a provision of GBP225 million in respect of SLAL on a fair value basis in this regard. Any resultant outflow of economic benefits is subject to uncertainty given the absence of final findings from the FCA review procedures, which would determine the extent to which the FCA may require SLAL to carry out remediation activities or impose financial penalties.

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 GBP225 million, such amounts will be recoverable under the deed of indemnity and related caps up to a maximum of GBP155 million. To the extent that total costs are less than GBP225 million, Old PGH is required to pay the balance to SLA plc, together with any interest that may have accrued on such sum.

Of the GBP225 million recognised upon acquisition, GBP44 million has been utilised since the acquisition date, and GBP181 million remains as at 31 December 2018.

Restructuring provision

Following the acquisition of AXA Wealth in 2016, the Group commenced the restructuring of these businesses to align their operating model with that of the other Group companies. These activities involved separation and integration activities associated with the exiting of interim services agreements entered into with the vendor, and costs involved with implementing the Group's preferred outsourcer model. A provision of GBP30 million was recognised in 2016, of which GBP17 million was utilised during 2017, and a further GBP8 million during 2018.

Following the acquisition of Abbey Life on 30 December 2016, a similar restructuring provision of GBP13 million was recognised in 2017 in respect of committed Abbey Life integration activities. During 2017, GBP8 million of this provision was utilised with the remaining GBP5 million utilised during 2018.

Transfer of policy administration

A large majority 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 policies will be transferred to Diligenta by 31 December 2021.

A provision of GBP76 million has been recognised for the expected cost of the platform migration. During 2018, GBP3 million of this provision was utilised, with the remaining GBP73 million expected to be utilised within three years.

Other provisions

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

G2. 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. 
--------------------------------------------------------------------------------------------------- 
 
 
                            2018   2017 
                            GBPm   GBPm 
-------------------------  -----  ----- 
Current tax: 
-------------------------  -----  ----- 
Current tax receivable       145     47 
-------------------------  -----  ----- 
Current tax payable         (20)    (5) 
-------------------------  -----  ----- 
 
Deferred tax: 
-------------------------  -----  ----- 
Deferred tax liabilities   (843)  (366) 
-------------------------  -----  -----

Movement in deferred tax assets/(liabilities)

 
                                            Recognised in              Recognised          Acquisition of 
                                      consolidated income  in other comprehensive           Standard Life 
                        1 January               statement                  income    Assurance businesses  31 December 
2018                         GBPm                    GBPm                    GBPm                    GBPm         GBPm 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Trading losses                 48                    (36)                       -                       1           13 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Expenses and deferred 
 acquisition costs 
 carried forward               24                      20                       -                       6           50 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Provisions and other 
 temporary differences          8                       3                     (2)                       -            9 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Non-refundable pension 
 scheme surplus              (13)                       3                     (3)                       -         (13) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Committed future 
 pension contributions         25                     (2)                     (5)                       -           18 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Pension scheme deficit         12                       1                       -                       -           13 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Accelerated capital 
 allowances                     9                     (2)                       -                       -            7 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Unpaid interest                16                    (16)                       -                       -            -

----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Acquired in-force 
 business                   (341)                      33                       -                   (502)        (810) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Customer relationships       (33)                       3                       -                     (7)         (37) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Unrealised gains             (81)                     188                       -                   (167)         (60) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
IFRS transitional 
 adjustments                 (40)                       8                       -                       -         (32) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
Other                           -                     (3)                       -                       2          (1) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
                            (366)                     200                    (10)                   (667)        (843) 
----------------------  ---------  ----------------------  ----------------------  ----------------------  ----------- 
 
 
                                       Recognised in consolidated                  Recognised 
                                                           income      in other comprehensive       Other 
                            1 January                   statement                      income   movements  31 December 
2017                             GBPm                        GBPm                        GBPm        GBPm         GBPm 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Trading losses                     23                          25                           -           -           48 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Expenses and deferred 
 acquisition costs carried 
 forward                            3                          21                           -           -           24 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Provisions and other 
 temporary differences             23                        (20)                           -           5            8 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Non-refundable pension 
 scheme surplus                  (13)                           -                           -           -         (13) 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Committed future pension 
 contributions                     34                        (10)                           1           -           25 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Pension scheme deficit             15                         (4)                           1           -           12 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Accelerated capital 
 allowances                         7                           2                           -           -            9 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Unpaid interest                    16                           -                           -           -           16 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Acquired in-force business      (364)                          23                           -           -        (341) 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Customer relationships           (37)                           4                           -           -         (33) 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
Unrealised gains                 (37)                        (44)                           -           -         (81) 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
IFRS transitional 
 adjustments                     (48)                           8                           -           -         (40) 
--------------------------  ---------  --------------------------  --------------------------  ----------  ----------- 
                                (378)                           5                           2           5        (366) 
--------------------------  ---------  --------------------------  --------------------------  ----------  -----------

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

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

 
                                                               2018   2017 
                                                               GBPm   GBPm 
------------------------------------------------------------  -----  ----- 
Deferred tax assets have not been recognised in respect of: 
------------------------------------------------------------  -----  ----- 
      Tax losses carried forward                                 53     37 
------------------------------------------------------------  -----  ----- 
Deferred tax assets not recognised on capital losses(1)          21     16 
------------------------------------------------------------  -----  -----

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

On 29 March 2017, the UK Government triggered Article 50 initiating a two-year process for leaving the EU. There is some uncertainty about how the existing tax legislation will apply after the UK's exit. No changes are required to the measurement of tax in these consolidated financial statements but this will be monitored and reassessed at each reporting period as negotiations continue.

G3. Payables related to direct insurance contracts

 
Payables related to direct insurance contracts 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. 
--------------------------------------------------------------------------------------------- 
 
 
                                                  2018   2017 
                                                  GBPm   GBPm 
-----------------------------------------------  -----  ----- 
Payables related to direct insurance contracts     902    522 
-----------------------------------------------  -----  ----- 
 
Amount due for settlement after 12 months            -      - 
-----------------------------------------------  -----  -----

G4. Accruals and deferred income

 
This note analyses the Group's accruals and deferred income at the end of the year. 
----------------------------------------------------------------------------------- 
 
 
                                             2018   2017 
                                             GBPm   GBPm 
------------------------------------------  -----  ----- 
Accruals and deferred income                  337    179 
------------------------------------------  -----  ----- 
 
Amount due for settlement after 12 months       9      - 
------------------------------------------  -----  -----

G5. 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. 
------------------------------------------------------------------------------------------ 
 
 
                                             2018   2017 
                                             GBPm   GBPm 
------------------------------------------  -----  ----- 
Investment broker balances                    199     76 
------------------------------------------  -----  ----- 
Property related payables                     117      - 
------------------------------------------  -----  ----- 
Investment management fees                     39      1 
------------------------------------------  -----  ----- 
Other payables                                518     67 
------------------------------------------  -----  ----- 
                                              873    144 
------------------------------------------  -----  ----- 
 
Amount due for settlement after 12 months      97      - 
------------------------------------------  -----  -----

G6. Pension schemes

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

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

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

 
                                                                                                2018   2017 
                                                                                                GBPm   GBPm 
---------------------------------------------------------------------------------------------  -----  ----- 
Pearl Group Staff Pension Scheme 
---------------------------------------------------------------------------------------------  -----  ----- 
Economic surplus                                                                                 449    572 
---------------------------------------------------------------------------------------------  -----  ----- 
Minimum funding requirement obligation                                                          (37)   (50) 
---------------------------------------------------------------------------------------------  -----  ----- 
Provision for tax on that part of the economic surplus available as a refund on a winding-up 
 of the Scheme                                                                                 (157)  (200) 
---------------------------------------------------------------------------------------------  -----  ----- 
Net defined benefit asset                                                                        255    322 
---------------------------------------------------------------------------------------------  -----  ----- 
 
PGL Pension Scheme 
---------------------------------------------------------------------------------------------  -----  ----- 
Economic surplus (including GBP432 million (2017: GBP420 million) available as a refund on 
 a winding-up of the Scheme)                                                                     506    500 
---------------------------------------------------------------------------------------------  -----  ----- 
Adjustment for insurance policies eliminated on consolidation                                  (877)  (916) 
---------------------------------------------------------------------------------------------  -----  ----- 
Net economic deficit                                                                           (371)  (416) 
---------------------------------------------------------------------------------------------  -----  ----- 
Provision for tax on that part of the economic surplus available as a refund on a winding-up 
 of the Scheme                                                                                 (151)  (147) 
---------------------------------------------------------------------------------------------  -----  ----- 
Net defined benefit liability                                                                  (522)  (563) 
---------------------------------------------------------------------------------------------  -----  ----- 
 
Abbey Life Staff Pension Scheme 
---------------------------------------------------------------------------------------------  -----  ----- 
Net defined benefit liability                                                                   (74)   (70) 
---------------------------------------------------------------------------------------------  -----  -----

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 with a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.

Life expectancy - the majority of the schemes' obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. For the PGL scheme, this is partially offset by the buy in policies that move in line with the liabilities. These buy in policies are eliminated on consolidation (see section G6.2 for further details)

Information on each of these schemes is set out below.

Guaranteed Minimum Pension ('GMP') Equalisation

GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs need to be equalised. The Group has undertaken an initial assessment, and has included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities as at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. The cost of GMP equalisation across all schemes of GBP59 million (Pearl Scheme: GBP32 million; PGL Scheme: GBP23 million; and Abbey Scheme GBP4 million) has been recognised as a past service cost in the consolidated income statement. Any future changes to this estimate will be recognised in Other Comprehensive Income.

G6.1 Pearl Group Staff Pension Scheme

Scheme details

The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.

Defined benefit scheme

The Pearl Scheme is established under, and governed by, the trust deeds and rules and is funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited ('PGH2'), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate Trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The Trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company's articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.

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

The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2018, 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

A triennial funding valuation of the Pearl Scheme as at 30 June 2015 was completed in September 2016. This showed a deficit as at 30 June 2015 of GBP300 million, on the agreed technical provisions basis. The triennial funding valuation of the Scheme as at 30 June 2018 commenced during the year and is expected to be completed by September 2019. The cash flows utilised in the IFRS valuation as at 31 December 2018 have been updated to reflect the latest data available from the 30 June 2018 funding valuation and together with the impact of modelling enhancements implemented during the year, this has resulted in the recognition of an experience loss of GBP145 million in the year (2017: GBP15 million loss).

The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are gilt-based for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high-quality AA-rated corporate bonds. In addition, the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.

On 27 November 2012, the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the 'Pensions Agreement'), the principal terms of which were not altered following finalisation of the 30 June 2015 triennial valuation. The principal terms of the Pensions Agreement are:

-- annual cash payments into the Scheme of GBP70 million in 2013 and 2014 payable on 30 September, followed by payments of GBP40 million each year from 2015 to 2021. The timing of payment of contributions changed during 2017 so that the contributions are paid on a monthly basis following the last annual payment of GBP40 million completed in September 2016. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme;

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

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

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

-- the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, National Provident Life Limited, Pearl Group Services Limited and PGS2 Limited. The security claim granted under the share charges is capped at the lower of GBP600 million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter; and

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

It should be noted that the terms of the GBP900 million facility agreement (see note E5) restrict the Group's ability, with certain exceptions, to transfer assets into the secured companies over which the Trustee holds a charge over shares.

An additional liability of GBP37 million (2017: GBP50 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of GBP106 million (2017: GBP143 million) in accordance with the minimum funding requirement. A deferred tax asset of GBP18 million (2017: GBP24 million) has also been recognised to reflect tax relief at a rate of 17% (2017: 17%) that is expected to be available on the contributions, once paid into the Scheme.

Contributions totalling GBP40 million were paid into the Pearl Scheme in 2018 (2017: GBP50 million) reflecting the monthly instalments. The contributions paid into the Scheme for 2017 reflect GBP10 million in relation to the last quarter of 2016 and GBP40 million in relation to 2017 by monthly instalments. Contributions totalling GBP40 million are expected to be paid into the Scheme in 2019.

Liability management exercise

In June 2018, the Group commenced a pension increase exchange ('PlE') exercise in respect of the Pearl Scheme. Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all acceptances received in the period has been recognised in the consolidated financial statements as a reduction in scheme liabilities of GBP2 million shown as past service credit in the consolidated income statement.

Summary of amounts recognised in the consolidated financial statements

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

 
                                                                                    Provision for 
                                                                                       tax on the 
                                                                                         economic       Minimum 
                                                           Fair value      Defined        surplus       funding 
                                                            of scheme      benefit   available as   requirement 
                                                               assets   obligation       a refund    obligation  Total 
2018                                                             GBPm         GBPm           GBPm          GBPm   GBPm 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
At 1 January                                                    2,722      (2,150)          (200)          (50)    322 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Interest income/(expense)                                          67         (52)            (5)           (1)      9 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Past service cost                                                   -         (30)              -             -   (30) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Included in profit or loss                                         67         (82)            (5)           (1)   (21) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Remeasurements: 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Return on plan assets excluding amounts included in 
       interest income                                           (81)            -              -             -   (81) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Gain from changes in demographic assumptions                  -            8              -             -      8 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Gain from changes in financial assumptions                    -           70              -             -     70 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Experience loss                                               -        (145)              -             -  (145) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Change in provision for tax on economic surplus 
       available as a refund                                        -            -             48             -     48 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Change in minimum funding requirement obligation              -            -              -            14     14 
---------------------------------------------------------  ----------  -----------  -------------  ------------  -----

Included in other comprehensive income                           (81)         (67)             48            14   (86) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Employer's contributions                                           40            -              -             -     40 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Benefit payments                                                (117)          117              -             -      - 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
At 31 December                                                  2,631      (2,182)          (157)          (37)    255 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
 
                                                                                    Provision for 
                                                                                       tax on the 
                                                                                         economic       Minimum 
                                                           Fair value      Defined        surplus       funding 
                                                            of scheme      benefit   available as   requirement 
                                                               assets   obligation       a refund    obligation  Total 
2017                                                             GBPm         GBPm           GBPm          GBPm   GBPm 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
At 1 January                                                    2,685      (2,237)          (157)          (66)    225 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Interest income/(expense)                                          69         (56)            (4)           (2)      7 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Included in profit or loss                                         69         (56)            (4)           (2)      7 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Remeasurements: 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Return on plan assets excluding amounts included in 
       interest income                                             76            -              -             -     76 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Gain from changes in demographic assumptions                  -           51              -             -     51 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Loss from changes in financial assumptions                    -         (51)              -             -   (51) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Experience loss                                               -         (15)              -             -   (15) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Change in provision for tax on economic surplus 
       available as a refund                                        -            -           (39)             -   (39) 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
      Change in minimum funding requirement obligation              -            -              -            18     18 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Included in other comprehensive income                             76         (15)           (39)            18     40 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
Employer's contributions                                           50            -              -             -     50 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
Benefit payments                                                (158)          158              -             -      - 
---------------------------------------------------------  ----------  -----------  -------------  ------------  ----- 
 
At 31 December                                                  2,722      (2,150)          (200)          (50)    322 
---------------------------------------------------------  ----------  -----------  -------------  ------------  -----

Scheme assets

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

 
                                                                          2018                    2017 
---------------------------------------------------------------  -----------------------  --------------------- 
                                                                            Of which not           Of which not 
                                                                            quoted in an           quoted in an 
                                                                   Total   active market  Total   active market 
                                                                    GBPm            GBPm   GBPm            GBPm 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Hedging portfolio                                                  2,012             (4)  1,823            (35) 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Equities                                                               -               -    165               - 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Fixed interest gilts                                                  54               -     88               - 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Other debt securities                                              1,251               -  1,090               - 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Properties                                                           294             294    270             270 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Private equities                                                      28              28     35              35 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Hedge funds                                                           15              15     18              18 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Cash and other                                                        92               -    120               - 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
Obligations for repayment of stock lending collateral received   (1,115)               -  (887)               - 
---------------------------------------------------------------  -------  --------------  -----  -------------- 
                                                                   2,631             333  2,722             288 
---------------------------------------------------------------  -------  --------------  -----  --------------

1 The 2017 scheme asset analysis has been restated to provide a more relevant analysis consistent with the current year.

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

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

Defined benefit obligation

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

-- Deferred scheme members: 40% (2017: 37%); and

-- Pensioners: 60% (2017: 63%)

The weighted average duration of the defined benefit obligation at 31 December 2018 is 16 years (2017: 17 years).

Principal assumptions

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

 
                                                                          2018  2017 
                                                                             %     % 
------------------------------------------------------------------------  ----  ---- 
Rate of increase for pensions in payment (5% per annum or RPI if lower)   3.10  3.05 
------------------------------------------------------------------------  ----  ---- 
Rate of increase for deferred pensions ('CPI')                            2.40  2.20 
------------------------------------------------------------------------  ----  ---- 
Discount rate                                                             2.80  2.50 
------------------------------------------------------------------------  ----  ---- 
Inflation - RPI                                                           3.20  3.20 
------------------------------------------------------------------------  ----  ---- 
Inflation - CPI                                                           2.40  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 CMI 2017 Core Projections (2017: CMI 2016 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per annum at age 110 (unchanged from 2017). Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.9 years and 32.2 years for male and female members respectively (2017: 30.0 and 32.0 respectively).

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

 
2018 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Assumptions      Base         Discount rate                       RPI                     Life expectancy 
--------------  -----  ----------------------------  -----------------------------  ---------------------------- 
Sensitivity                    25bps          25bps          25bps                         1 year         1 year 
level                       increase       decrease       increase  25bps decrease       increase       decrease 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Impact on the 
 defined 
 benefit 
 obligation 
 (GBPm)         2,182           (82)             85             65            (76)             79           (79) 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
 
 
2017 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Assumptions     Base          Discount rate                       RPI                     Life expectancy 
--------------  -----  ----------------------------  -----------------------------  ---------------------------- 
Sensitivity                    25bps          25bps          25bps                         1 year         1 year 
level                       increase       decrease       increase  25bps decrease       increase       decrease 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Impact on the 
 defined 
 benefit 
 obligation 
 (GBPm)         2,150           (82)             88             57            (54)             85           (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 financial position.

G6.2 PGL Pension Scheme

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

Scheme details

Defined contribution scheme

Contributions in the year amounted to GBP7 million (2017: GBP6 million).

Defined benefit scheme

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

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

The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2018, undertaken by independent qualified actuaries.

Funding

A triennial funding valuation of the PGL Pension Scheme as at 30 June 2015 was completed in June 2016. This showed a surplus as at 30 June 2015 of GBP164 million. The triennial funding valuation of the Scheme as at 30 June 2018 commenced during the year and is expected to be completed by September 2019. The IFRS valuation cash flows have been updated to reflect the latest valuation data.

No contributions were paid in 2018 (2017: GBP10 million). Contributions amounting to GBP59 million in total were paid into the Scheme over the period from October 2013 to August 2017. There are no further committed contributions to pay in respect of the defined benefit section of the Scheme.

Insurance policies with Group entities

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

In December 2016, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL, which converted the longevity swap contract into a bulk annuity contract. The Scheme transferred certain additional risks in respect of the benefits payable to the deferred members covered by the longevity swap arrangement, including the investment risk associated with the assets covering those benefits. The Scheme transferred GBP1,164 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL, and was net of a GBP23 million prepayment by PLL to the Scheme in respect of benefits up to 31 May 2017. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position (see note E1). An adjustment of GBP6 million to the value of the premium was paid by PLL to the PGL Scheme in 2017. The economic effect of the 'buy-in' transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at 31 December 2018 was GBP856 million (2017: GBP895 million).

Included within insurance policies with Group entities of GBP877 million (2017: GBP916 million) is a further insurance policy reimbursement asset of GBP21 million (2017: GBP21 million) which was also eliminated on consolidation.

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

Summary of amounts recognised in the consolidated financial statements

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

 
                                                                                    Provision for 
                                                                                       tax on the 
                                                                                         economic       Minimum 
                                                                           Defined        surplus       funding 
                                                        Fair value of      benefit   available as   requirement 
                                                        scheme assets   obligation       a refund    obligation  Total 
2018                                                             GBPm         GBPm           GBPm          GBPm   GBPm 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
At 1 January                                                    1,206      (1,622)          (147)             -  (563) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
 
Interest income/(expense)                                          30         (40)            (3)             -   (13) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
Administrative expenses                                           (4)            -              -             -    (4) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
Past service cost                                                   -         (23)              -             -   (23) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
Included in profit or loss                                         26         (63)            (3)             -   (40) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
 
Remeasurements: 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
      Return on plan assets excluding amounts 
       included in interest income                               (41)            -              -             -   (41) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
      Experience gain                                               -           17              -             -     17 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
      Gain from changes in financial assumptions                    -           62              -             -     62 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
      Loss from changes in demographic assumptions                  -          (3)              -             -    (3) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
      Change in provision for tax on economic surplus 
       available as a refund                                        -            -            (1)             -    (1) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
Included in other comprehensive income                           (41)           76            (1)             -     34 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
 
Benefit payments                                                 (81)           81              -             -      - 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
Income received from insurance policies                            47            -              -             -     47 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
At 31 December                                                  1,157      (1,528)          (151)             -  (522) 
-----------------------------------------------------  --------------  -----------  -------------  ------------  ----- 
 
 
                                                                                    Provision for 
                                                                                       tax on the 
                                                                                         economic       Minimum 
                                                        Fair value of      Defined        surplus       funding 
                                                               scheme      benefit   available as   requirement 
                                                               assets   obligation       a refund    obligation  Total 
2017                                                             GBPm         GBPm           GBPm          GBPm   GBPm 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
At 1 January                                                    1,195      (1,649)          (135)           (4)  (593) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
 
Interest income/(expense)                                          31         (43)            (4)             -   (16) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
Administrative expenses                                           (2)            -              -             -    (2) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
Included in profit or loss                                         29         (43)            (4)             -   (18) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
 
Remeasurements: 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Return on plan assets excluding amounts included 
       in interest income                                          22            -              -             -     22 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Experience loss                                               -          (6)              -             -    (6) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Loss from changes in financial assumptions                    -         (38)              -             -   (38) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Gain from changes in demographic assumptions                  -           37              -             -     37 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Change in provision for tax on economic surplus 
       available as a refund                                        -            -            (8)             -    (8) 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
      Change in minimum funding requirement obligation              -            -              -             4      4 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
Included in other comprehensive income                             22          (7)            (8)             4     11 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
 
Employer's contributions                                           10            -              -             -     10 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
Benefit payments                                                 (77)           77              -             -      - 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
Income received from insurance policies                            27            -              -             -     27 
------------------------------------------------------  -------------  -----------  -------------  ------------  ----- 
At 31 December                                                  1,206      (1,622)          (147)             -  (563) 
------------------------------------------------------  -------------  -----------  -------------  ------------  -----

Scheme assets

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

 
                                                                         2018                   2017 
---------------------------------------------------------------  ---------------------  --------------------- 
                                                                          Of which not           Of which not 
                                                                          quoted in an           quoted in an 
                                                                 Total   active market  Total   active market 
                                                                  GBPm            GBPm   GBPm            GBPm 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Fixed interest gilts                                               291               -    357               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Index-linked bonds                                                 848               -    866               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Swaps                                                                5               5      7               7 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Properties                                                           -               -    111             111 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Hedge funds                                                          -               -     90              90 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Corporate Bonds                                                     16               -     17               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Cash and other                                                      12               -     12               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Obligations for repayment of stock lending collateral received    (24)               -  (254)               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
European Investment Bank Bonds                                       9               -      -               - 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Reported scheme assets                                           1,157               5  1,206             208 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Add back: 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
      Insurance policies eliminated on consolidation               877             877    916             916 
---------------------------------------------------------------  -----  --------------  -----  -------------- 
Economic value of assets                                         2,034             882  2,122           1,124 
---------------------------------------------------------------  -----  --------------  -----  --------------

The Group ensures that the investment positions are managed within an ALM framework that has been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework, an allocation of 85% of the scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment ('LDI') portfolio is passively managed against a liability benchmark in order to hedge the duration and inflation risks.

The PGL Pension Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising from the liabilities. Under the Scheme's stock lending programme, the Scheme lends a Government bond to an approved counterparty and receives a similar value of cash in return which it typically reinvested into other Government bonds. The PGL Pension Scheme retains economic exposure to the Government bonds, hence the value of the gilts continues to be recognised as a scheme asset 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: 36% (2017: 39%); and

-- Pensioners: 64% (2017: 61%)

The weighted average duration of the defined benefit obligation at 31 December 2018 is 16 years (2017: 18 years). The prior year value has been restated following refinements made to the modelling used in the calculation.

Principal assumptions

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

 
                                                                            2018  2017 
                                                                               %     % 
--------------------------------------------------------------------------  ----  ---- 
Rate of increase for pensions in payment (7.5% per annum or RPI if lower)   3.20  3.20 
--------------------------------------------------------------------------  ----  ---- 
Rate of increase for deferred pensions ('CPI')                              2.40  2.20 
--------------------------------------------------------------------------  ----  ---- 
Discount rate                                                               2.80  2.50 
--------------------------------------------------------------------------  ----  ---- 
Inflation - RPI                                                             3.20  3.20 
--------------------------------------------------------------------------  ----  ---- 
Inflation - CPI                                                             2.40  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 in line with CMI 2017 Core Projections (2017: CMI 2016 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% at age 110 (unchanged from 2017). Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.3 years (2017: 28.3 years) and 29.6 years (2017: 29.6 years) for male and female members respectively.

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

 
2018 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Assumptions      Base         Discount rate                       RPI                     Life expectancy 
--------------  -----  ----------------------------  -----------------------------  ---------------------------- 
Sensitivity                    25bps          25bps          25bps                         1 year         1 year 
level                       increase       decrease       increase  25bps decrease       increase       decrease 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Impact on the 
 defined 
 benefit 
 obligation 
 (GBPm)         1,528           (59)             60             48            (51)             57           (57) 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
 
 
2017 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Assumptions      Base         Discount rate                       RPI                     Life expectancy 
--------------  -----  ----------------------------  -----------------------------  ---------------------------- 
Sensitivity                    25bps          25bps          25bps                         1 year         1 year 
level                       increase       decrease       increase  25bps decrease       increase       decrease 
--------------  -----  -------------  -------------  -------------  --------------  -------------  ------------- 
Impact on the 
 defined 
 benefit 
 obligation 
 (GBPm)         1,622           (69)             74             47            (50)             61           (60) 
--------------  -----  -------------  -------------  -------------  --------------  -------------  -------------

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.

G6.3 Abbey Life Staff Pension Scheme

Scheme details

On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the 'Trustee'), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants. The last active member ceased employment with the Group during the year and consequently the Abbey Life Scheme no longer recognises a current service cost.

The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2018 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 GBP74 million.

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

-- a lump sum of GBP25 million into the Scheme settled on 31 July 2017;

-- fixed monthly contributions of GBP400,000 payable up to 30 June 2026 and monthly contributions of GBP83,552 in respect of administration expenses which are payable up to 30 June 2028 and will increase annually in line with the Retail Prices Index assumption; and

-- annual payments of GBP4 million into the 2016 Charged Account by 31 July each year, with the first payment being made on 31 July 2017, and the last payment due by 31 July 2025.

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

-- fixed monthly contributions of GBP400,000 payable up to 30 June 2026;

-- monthly contributions in respect of administration expenses of GBP85,640 payable up to 31 March 2019, then GBP100,000 payable up to 30 June 2028 increasing annually in line with the Retail Prices Index assumption; and

-- annual payments of GBP4 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:

 
                                                                            Fair value      Defined 
                                                                             of scheme      benefit 
                                                                                assets   obligation  Total 
2018                                                                              GBPm         GBPm   GBPm 
--------------------------------------------------------------------------  ----------  -----------  ----- 
At 1 January                                                                       251        (321)   (70) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Past service cost                                                                    -          (4)    (4) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Interest income/(expense)                                                            6          (8)    (2) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Administrative expenses                                                            (2)            -    (2) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Included in profit or loss                                                           4         (12)    (8) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Remeasurements: 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Return on plan assets excluding amounts included in interest income         (13)            -   (13) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Experience loss                                                                -          (5)    (5) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Gain from changes in financial assumptions                                     -           12     12 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Gain from changes in demographic assumptions                                   -            4      4 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Included in other comprehensive income                                            (13)           11    (2) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Employer's contributions                                                             6            -      6 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Benefit payments                                                                  (15)           15      - 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
At 31 December                                                                     233        (307)   (74) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
 
                                                                            Fair value      Defined 
                                                                             of scheme      benefit 
                                                                                assets   obligation  Total 
2017                                                                              GBPm         GBPm   GBPm 
--------------------------------------------------------------------------  ----------  -----------  ----- 
At 1 January                                                                       237        (324)   (87) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Current service cost                                                                 -          (1)    (1) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Interest income/(expense)                                                            6          (8)    (2) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Administrative expenses                                                            (2)            -    (2) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Included in profit or loss                                                           4          (9)    (5) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Remeasurements: 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Return on plan assets excluding amounts included in interest income            6            -      6 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Experience loss                                                                -          (1)    (1) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
      Loss from changes in financial assumptions                                     -         (12)   (12) 
--------------------------------------------------------------------------  ----------  -----------  -----

      Loss from changes in demographic assumptions                                   -          (1)    (1) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Included in other comprehensive income                                               6         (14)    (8) 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
Employer's contributions                                                            30            -     30 
--------------------------------------------------------------------------  ----------  -----------  ----- 
Benefit payments                                                                  (26)           26      - 
--------------------------------------------------------------------------  ----------  -----------  ----- 
 
At 31 December                                                                     251        (321)   (70) 
--------------------------------------------------------------------------  ----------  -----------  -----

Scheme assets

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

 
                                           Of which not 
                                           quoted in an 
                                  Total   active market 
2018                               GBPm            GBPm 
--------------------------------  -----  -------------- 
Equities - UK                        24               - 
--------------------------------  -----  -------------- 
Fixed interest government bonds      84               - 
--------------------------------  -----  -------------- 
Corporate bonds                     148               - 
--------------------------------  -----  -------------- 
Derivatives                        (40)            (40) 
--------------------------------  -----  -------------- 
Cash and cash equivalents            17               - 
--------------------------------  -----  -------------- 
Pension scheme assets               233            (40) 
--------------------------------  -----  -------------- 
 
 
                                           Of which not 
                                           quoted in an 
                                  Total   active market 
2017                               GBPm            GBPm 
--------------------------------  -----  -------------- 
Equities - UK                        28               - 
--------------------------------  -----  -------------- 
Fixed interest government bonds     105               - 
--------------------------------  -----  -------------- 
Corporate bonds                     149               - 
--------------------------------  -----  -------------- 
Derivatives                        (40)            (40) 
--------------------------------  -----  -------------- 
Cash and cash equivalents             9               - 
--------------------------------  -----  -------------- 
Pension scheme assets               251            (40) 
--------------------------------  -----  --------------

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

Defined benefit obligation

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

-- Active scheme members: nil% (2017: 5%)

-- Deferred scheme members: 49% (2017: 55%); and

-- Pensioners: 51% (2017: 40%)

The weighted average duration of the defined benefit obligation at 31 December 2018 is 17 years (2017: 18 years).

Principal assumptions

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

 
                                                                  2018   2017 
                                                                     %      % 
---------------------------------------------------------------  -----  ----- 
Rate of increase for pensions in payment                          3.10   3.05 
---------------------------------------------------------------  -----  ----- 
Rate of increase for deferred pensions ('CPI' subject to caps)    2.40   2.20 
---------------------------------------------------------------  -----  ----- 
Discount rate                                                     2.80   2.50 
---------------------------------------------------------------  -----  ----- 
Inflation - RPI                                                   3.20   3.20 
---------------------------------------------------------------  -----  ----- 
Inflation - CPI                                                   2.40   2.20 
---------------------------------------------------------------  -----  ----- 
Rate of salary increases                                           N/A   4.20 
---------------------------------------------------------------  -----  ----- 
Commutation of benefits to lump sums on retirement               20.00  15.00 
---------------------------------------------------------------  -----  -----

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

It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 'Light' tables for males and for females based on year of use. Future longevity improvements are based on CMI 2017 Core Projections (2017: CMI 2016 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per annum at age 110 (unchanged from 2017). Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.7 years and 27.2 years for male and female members respectively (2017: 25.8 years and 27.2 years respectively).

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

 
2018 
--------------  ----  -------------  -------------  --------------  --------------  -------------  ------------- 
Assumptions     Base         Discount rate                       RPI                      Life expectancy 
--------------  ----  ----------------------------  ------------------------------  ---------------------------- 
Sensitivity                   25bps          25bps                                         1 year         1 year 
level                      increase       decrease  25bps increase  25bps decrease       increase       decrease 
--------------  ----  -------------  -------------  --------------  --------------  -------------  ------------- 
Impact on the 
 defined 
 benefit 
 obligation 
 (GBPm)          307           (12)             13               9             (9)             12           (11) 
--------------  ----  -------------  -------------  --------------  --------------  -------------  ------------- 
 
 
2017 
------------------------------  ----  ---------  --------------  ---------  --------------  ---------  --------- 
Assumptions                     Base        Discount rate                   RPI               Life expectancy 
------------------------------  ----  -------------------------  -------------------------  -------------------- 
                                          25bps                      25bps                     1 year     1 year 
Sensitivity level                      increase  25bps decrease   increase  25bps decrease   increase   decrease 
------------------------------  ----  ---------  --------------  ---------  --------------  ---------  --------- 
Impact on the defined benefit 
 obligation (GBPm)               321       (15)              15         11            (11)         10        (9) 
------------------------------  ----  ---------  --------------  ---------  --------------  ---------  ---------

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 financial position.

G7. Intangible assets

 
Goodwill 
 Business combinations are accounted for by applying the acquisition method. Goodwill represents 
 the difference between the cost of the acquisition and the fair value of the net identifiable 
 assets acquired. 
 Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill 
 is stated at cost less any accumulated impairment losses. It is tested for impairment annually 
 or when there is evidence of possible impairment. Goodwill is not amortised. For impairment 
 testing, goodwill is allocated to relevant cash-generating units. Goodwill is impaired when 
 the recoverable amount is less than the carrying value. 
 In certain acquisitions, an excess of the acquirer's interest in the net fair value of the 
 acquiree's identifiable assets, liabilities, contingent liabilities and non-controlling interests 
 over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired

 over the fair value of the consideration is recognised in the consolidated income statement. 
 Acquired in-force business 
 Insurance and investment contracts with DPF acquired in business combinations and portfolio 
 transfers are measured at fair value at the time of acquisition. The difference between the 
 fair value of the contractual rights acquired and obligations assumed and the liability measured 
 in accordance with the Group's accounting policies for such contracts is recognised as acquired 
 in-force business. This acquired in-force business is amortised over the estimated life of 
 the contracts on a basis which recognises the emergence of the economic benefits. 
 The value of acquired in-force business related to investment contracts without DPF is recognised 
 at its fair value and is amortised on a diminishing balance basis. 
 An impairment review is performed whenever there is an indication of impairment. When the 
 recoverable amount is less than the carrying value, an impairment loss is recognised in the 
 consolidated income statement. Acquired in-force business is also considered in the liability 
 adequacy test for each reporting period. 
 The acquired in-force business is allocated to relevant cash-generating units for the purposes 
 of impairment testing. 
 Customer relationships 
 The customer relationship intangible asset includes vesting pension premiums and is measured 
 on initial recognition at cost. The cost of this intangible assets acquired in a business 
 combination is their 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. 
 Internally generated intangible assets are not capitalised and expenditure is reflected in 
 the consolidated income statement in the year in which the expenditure is incurred. 
 Present value of future profits on non-participating business in the with-profit fund 
 The present value of future profits is determined on a realistic basis. 
 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 
----------------  --------  --------------  -----------------------------------------------------------------  ------- 
                                  Acquired                    Present value 
                                 in--force         Customer       of future       Brands and 
                  Goodwill        business    relationships         profits            other      Total other    Total 
2018                  GBPm            GBPm             GBPm            GBPm             GBPm      intangibles     GBPm 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
Cost or 
valuation 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
At 1 January            57           2,266              297              11               20              328    2,651 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
On acquisition 
 of Standard 
 Life Assurance 
 businesses (see 
 note H2.1)              -           2,931                -               -               36               36    2,967 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
Revaluation              -               -                -               1                -                1        1 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
At 31 December          57           5,197              297              12               56              365    5,619 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
 
Amortisation and 
impairment 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
At 1 January             -           (968)            (124)               -              (2)            (126)  (1,094) 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
Amortisation 
 charge for the 
 year                    -           (196)             (15)               -              (3)             (18)    (214) 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
At 31 December           -         (1,164)            (139)               -              (5)            (144)  (1,308) 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
 
Carrying amount 
 at 31 December         57           4,033              158              12               51              221    4,311 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
 
Amount 
 recoverable 
 after 12 months        57           3,651              143              12               47              202    3,910 
----------------  --------  --------------  ---------------  --------------  ---------------  ---------------  ------- 
 
 
                                                                   Other intangibles 
---------------  --------  --------------  ------------------------------------------------------------------  ------- 
                                 Acquired                     Present value 
                                in--force         Customer        of future       Brands and 
                 Goodwill        business    relationships          profits            other      Total other    Total 
2017                 GBPm            GBPm             GBPm             GBPm             GBPm      intangibles     GBPm 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
Cost or 
valuation 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
At 1 January           57           2,266              297                6               20              323    2,646 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
Revaluation             -               -                -                5                -                5        5 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
At 31 December         57           2,266              297               11               20              328    2,651 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
 
Amortisation 
and impairment 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
At 1 January            -           (859)            (109)                -                -            (109)    (968) 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
Amortisation 
 charge for the 
 year                   -           (109)             (15)                -              (2)             (17)    (126) 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
At 31 December          -           (968)            (124)                -              (2)            (126)  (1,094) 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
 
Carrying amount 
 at 31 December        57           1,298              173               11               18              202    1,557 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  ------- 
 
Amount 
 recoverable 
 after 12 
 months                57           1,201              158               11               16              185    1,443 
---------------  --------  --------------  ---------------  ---------------  ---------------  ---------------  -------

G7.1 Goodwill

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

GBP47 million of goodwill is attributable to the Management Services segment including GBP8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk-adjusted discount rate of 8.9% (2017: 7.1%) and are consistent with those adopted by management in the Group's operating plan and, for the period 2023 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 GBP10 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 2023 and beyond, assume a zero growth rate. The underlying assumptions of these projections include market share, customer numbers, commission rates and expense inflation. The cashflows have been valued at a risk-adjusted discount rate of 11% that makes prudent allowance for the risk that future cash flows may differ from that assumed.

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

G7.2 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 GBP2,931 million was recognised during 2018 upon acquisition of the Standard Life Assurance businesses (see note H2).

G7.3 Customer relationships

The customer relationships intangible at 31 December 2018 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 GBP297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20-year period.

G7.4 Present value of future profits on non-participating business in the with-profit fund

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

G7.5 Other intangibles

Other intangibles include GBP20 million which was recognised at cost on acquisition of the AXA Wealth businesses and GBP36 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 G7.1). The value in use continues to exceed its carrying value.

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

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

This intangible was valued on a 'multi-period excess earnings' basis and is being amortised over a period of 15 years. Further details are set out in note H2.

G8. 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. 
 Equipment consists primarily of computer equipment and 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. 
------------------------------------------------------------------------------------------------- 
 
 
                             2018   2017 
                             GBPm   GBPm 
--------------------------  -----  ----- 
Equipment                      17      - 
--------------------------  -----  ----- 
Owner-occupied properties      31     26 
--------------------------  -----  ----- 
                               48     26 
--------------------------  -----  -----

Equipment includes GBP14 million which was recognised on acquisition of the Standard Life Assurance businesses. Additions in the year were GBP5 million and depreciation charged was GBP2 million.

Owner-occupied properties have been valued by accredited independent valuers at 31 December 2018 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 GBP31 million (2017: GBP26 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used.

The following table shows reconciliation from the opening to the closing fair value for the Level 3 owner-occupied properties at valuation:

 
                                                                        2018   2017 
                                                                        GBPm   GBPm 
---------------------------------------------------------------------  -----  ----- 
At 1 January                                                              26     25 
---------------------------------------------------------------------  -----  ----- 
On acquisition of Standard Life Assurance businesses (see note H2.1)       5      - 
---------------------------------------------------------------------  -----  ----- 
Remeasurement recognised in other comprehensive income                     -      1 
---------------------------------------------------------------------  -----  ----- 
At 31 December                                                            31     26 
---------------------------------------------------------------------  -----  ----- 
Unrealised gains for the year                                              -      1 
---------------------------------------------------------------------  -----  -----

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).

G9. Investment property

 
Investment property is stated at fair value. Fair value is the price that would be received 
 to sell a property in an orderly transaction between market participants at the measurement 
 date. Gains and losses arising from the change in fair value are recognised in the consolidated 
 income statement. 
 Leases, where a significant portion of the risks and rewards of ownership are retained by 
 the lessor, are classified as operating leases. Where investment property is leased out by 
 the Group, rental income from these operating leases is recognised as income in the consolidated 
 income statement on a straight-line basis over the period of the lease. 
------------------------------------------------------------------------------------------------- 
 
 
                                                                                             2018   2017 
                                                                                             GBPm   GBPm 
------------------------------------------------------------------------------------------  -----  ----- 
At 1 January                                                                                  612    646 
------------------------------------------------------------------------------------------  -----  ----- 
On acquisition of the Standard Life Assurance businesses (see note H2.1)                    5,878      - 
------------------------------------------------------------------------------------------  -----  ----- 
Additions                                                                                     119      -

------------------------------------------------------------------------------------------  -----  ----- 
Improvements                                                                                    3     10 
------------------------------------------------------------------------------------------  -----  ----- 
Disposals                                                                                    (74)   (53) 
------------------------------------------------------------------------------------------  -----  ----- 
(Losses)/gains on adjustments to fair value (recognised in consolidated income statement)    (18)      9 
------------------------------------------------------------------------------------------  -----  ----- 
At 31 December                                                                              6,520    612 
------------------------------------------------------------------------------------------  -----  ----- 
Unrealised (losses)/gains on properties held at end of period                                (28)      5 
------------------------------------------------------------------------------------------  -----  -----

As at 31 December 2018, a property portfolio of GBP6,401 million (2017: GBP474 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.

Investment properties also include GBP119 million (2017: GBP138 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).

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

The residential property reversions, an interest in customers' properties which the Group will realise upon their death, are valued using a DCF model based on the Group's proportion of the current open market value, and discounted for the expected lifetime of the policyholder derived from published mortality tables. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year end date.

The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.6%. Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.

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

 
                                               Significant             Range (weighted         Range (weighted 
Description              Valuation techniques  non-observable inputs   average) 2018           average) 2017 
-----------------------  --------------------  ----------------------  ----------------------  ----------------------- 
Commercial Investment    RICS valuation        Expected income per     GBP3.71 - GBP132.72     GBP5.39 - GBP100.40 
Property                                       sq. ft.                 (GBP36.66)              (GBP23.85) 
-----------------------  --------------------  ----------------------  ----------------------  ----------------------- 
                                               Estimated rental value  GBP4,789 - GBP13,800 
                                               per hotel room          (GBP8,948)              - 
-----------------------  --------------------  ----------------------  ----------------------  ----------------------- 
                                               Capitalisation rate     3.30% - 9.50% (5.10%)   4.72% - 10.48% (5.83%) 
-----------------------  --------------------  ----------------------  ----------------------  -----------------------

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 key valuation sensitivities in respect of the residential property reversions are noted below:

-- an increase of 1% in the deferred possession rate would decrease the market value by GBP5 million;

-- a decrease of 1% in the deferred possession rate would increase the market value by GBP5 million;

-- an increase of 10% in the mortality rate would increase the market value by GBP1 million; and

-- a decrease of 10% in the mortality rate would decrease the market value by GBP1 million.

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 GBP11 million (2017: GBP1 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to GBP2 million (2017: GBP4 million).

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

 
                                                2018   2017 
                                                GBPm   GBPm 
---------------------------------------------  -----  ----- 
Not later than 1 year                            262     22 
---------------------------------------------  -----  ----- 
Later than 1 year and not later than 5 years     884     61 
---------------------------------------------  -----  ----- 
Later than 5 years                             2,815     62 
---------------------------------------------  -----  -----

G10. 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. 
-------------------------------------------------------------------------------------------------- 
 
 
                                      2018   2017 
                                      GBPm   GBPm 
-----------------------------------  -----  ----- 
Investment broker balances             176     55 
-----------------------------------  -----  ----- 
Cash collateral pledged                339    338 
-----------------------------------  -----  ----- 
Reimbursement assets (note G1)          22     55 
-----------------------------------  -----  ----- 
Property related receivables           110      - 
-----------------------------------  -----  ----- 
Deferred acquisition costs              21      6 
-----------------------------------  -----  ----- 
Other debtors                          379    126 
-----------------------------------  -----  ----- 
                                     1,047    580 
-----------------------------------  -----  ----- 
 
Amount recoverable after 12 months       8     34 
-----------------------------------  -----  -----

G11. 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. 
--------------------------------------------------------------------------------------------------- 
 
 
                                                            2018   2017 
                                                            GBPm   GBPm 
---------------------------------------------------------  -----  ----- 
Bank and cash balances                                     2,124  1,181 
---------------------------------------------------------  -----  ----- 
Short-term deposits (including demand and time deposits)   2,802  1,064 
---------------------------------------------------------  -----  ----- 
                                                           4,926  2,245 
---------------------------------------------------------  -----  -----

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 GBP4,572 million (2017: GBP1,878 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.

H. Interests in subsidiaries and Associates

H1. Subsidiaries

Subsidiaries are consolidated from the date that effective control is obtained by the Group
(see basis of consolidation in note A1) and are excluded from consolidation from the date
they cease to be subsidiary undertakings. For subsidiaries disposed of during the year, any
difference between the net proceeds, plus the fair value of any retained interest, and the
carrying amount of the subsidiary including non-controlling interests, is recognised in the
consolidated income statement.
The Group uses the acquisition method to account for the acquisition of subsidiaries. The
cost of an acquisition is measured at the fair value of the consideration. Any excess of the
cost of acquisition over the fair value of the net assets acquired is recognised as goodwill.
In certain acquisitions an excess of the acquirer's interest in the net fair value of the
acquiree's identifiable assets, liabilities, contingent liabilities and non-controlling interests,
over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired
over the fair value of the consideration is recognised in the consolidated income statement.
Directly attributable acquisition costs are included within administrative expenses, except
for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition.
Costs directly related to the issuing of debt or equity securities are included within the
initial carrying amount of debt or equity securities where these are not carried at fair value.
Intra-group balances and income and expenses arising from intra-group transactions are eliminated
in preparing the consolidated financial statements.
The Group has invested in a number of collective investment schemes such as Open-ended Investments
Companies ('OEICs'), unit trusts, Société d'Investissement à Capital Variable
('SICAVs'), investment trusts and private equity funds. These invest mainly in equities, bonds,
property and cash and cash equivalents. The Group's percentage ownership in these collective
investment schemes can fluctuate according to the level of Group and third party participation
in 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.
Certain of the collective investment schemes have non-coterminous period ends and are consolidated
on the basis of additional financial statements prepared to the period end.
-----------------------------------------------------------------------------------------------------

H1.1 Significant restrictions

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

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

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

-- the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G6.

-- 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 2018, PeLHL held GBP46 million (2017: GBP40 million) within fixed and variable rate income securities and GBP1 million (2017: GBP5 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 G6.

H2. Acquisitions

H2.1 Acquisition of Standard Life Assurance businesses

On 31 August 2018, the Group acquired 100% of the issued share capital of Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as 'the Standard Life Assurance businesses') from SLA plc for total consideration of GBP2,994 million. The consideration consisted of GBP1,971 million of cash funded by a fully underwritten rights issue of GBP950 million, with the remaining balance of GBP1,021 million funded by a mix of new debt and Phoenix's own resources. In addition, SLA plc took a 19.99% equity stake in the Enlarged Group on completion valued at GBP1,023 million, based on the share price at 31 August 2018.

The table below summarises the fair value of identifiable assets acquired and liabilities assumed as at the date of acquisition.

 
                                                                                                    Fair value 
                                                                                             Notes        GBPm 
------------------------------------------------------------------------------------------  ------  ---------- 
Assets 
------------------------------------------------------------------------------------------  ------  ---------- 
Intangible assets: 
------------------------------------------------------------------------------------------  ------  ---------- 
      Acquired in-force business                                                                G7       2,931 
------------------------------------------------------------------------------------------  ------  ---------- 
      Other intangibles                                                                         G7          36 
------------------------------------------------------------------------------------------  ------  ---------- 
Property, plant and equipment                                                                   G8          19 
------------------------------------------------------------------------------------------  ------  ---------- 
Investment property                                                                             G9       5,878 
------------------------------------------------------------------------------------------  ------  ---------- 
Financial assets                                                                                       150,709 
--------------------------------------------------------------------------------------------------  ---------- 
Reinsurers' share of insurance contract liabilities                                             F1       4,264 
------------------------------------------------------------------------------------------  ------  ---------- 
Other insurance assets                                                                                      64 
--------------------------------------------------------------------------------------------------  ---------- 
Current tax                                                                                                195 
--------------------------------------------------------------------------------------------------  ---------- 
Prepayments and accrued income                                                                             353 
--------------------------------------------------------------------------------------------------  ---------- 
Other receivables                                                                                          613 
--------------------------------------------------------------------------------------------------  ---------- 
Cash and cash equivalents                                                                                3,643 
--------------------------------------------------------------------------------------------------  ---------- 
Total assets                                                                                           168,705 
--------------------------------------------------------------------------------------------------  ---------- 
 
Liabilities 
------------------------------------------------------------------------------------------  ------  ---------- 
Liabilities under insurance contracts                                                           F1      51,487 
------------------------------------------------------------------------------------------  ------  ----------

Investment contract liabilities                                                                        102,206 
--------------------------------------------------------------------------------------------------  ---------- 
Unallocated surplus                                                                             F2         525 
------------------------------------------------------------------------------------------  ------  ---------- 
Other financial liabilities                                                                              8,859 
--------------------------------------------------------------------------------------------------  ---------- 
Provisions                                                                                      G1         269 
------------------------------------------------------------------------------------------  ------  ---------- 
Deferred tax                                                                                    G2         667 
------------------------------------------------------------------------------------------  ------  ---------- 
Reinsurance payables                                                                                         6 
--------------------------------------------------------------------------------------------------  ---------- 
Payables related to direct insurance contracts                                                             342 
--------------------------------------------------------------------------------------------------  ---------- 
Current tax                                                                                                 66 
--------------------------------------------------------------------------------------------------  ---------- 
Accruals and deferred income                                                                                32 
--------------------------------------------------------------------------------------------------  ---------- 
Other payables                                                                                             820 
--------------------------------------------------------------------------------------------------  ---------- 
Bank overdraft                                                                                              26 
--------------------------------------------------------------------------------------------------  ---------- 
Total liabilities                                                                                      165,305 
--------------------------------------------------------------------------------------------------  ---------- 
 
Non-controlling interest                                                                        D4       (265) 
------------------------------------------------------------------------------------------  ------  ---------- 
Fair value of net assets acquired                                                                        3,135 
--------------------------------------------------------------------------------------------------  ---------- 
 
Gain arising on acquisition                                                                              (141) 
--------------------------------------------------------------------------------------------------  ---------- 
Purchase consideration transferred                                                                       2,994 
--------------------------------------------------------------------------------------------------  ---------- 
 
Analysis of cashflows on acquisition: 
------------------------------------------------------------------------------------------  ------  ---------- 
Net cash acquired with the subsidiaries (included in cash flow from investing activities)                3,617 
--------------------------------------------------------------------------------------------------  ---------- 
Cash paid including transaction costs                                                                  (2,010) 
--------------------------------------------------------------------------------------------------  ---------- 
Net cash flow on acquisition                                                                             1,607 
--------------------------------------------------------------------------------------------------  ----------

Acquired Value in-Force ('AVIF') and other intangibles

An asset of GBP2,931 million arises reflecting the present value of future profits associated with the acquired in-force business.

Under the Group's accounting policy (see note G7), AVIF arising on acquired insurance contracts and investment contracts with DPF is measured as the difference between the fair value of contractual 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 mortality rates, 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 view. The risk adjustment for the uncertainty in the cashflows has been determined using a cost of capital approach.

Deferred acquisition costs of GBP584 million and deferred front end fees of GBP(139) million, recognised by the Standard Life Assurance businesses have been derecognised on acquisition and replaced with the AVIF.

A separately identifiable intangible asset of GBP36 million relating to the Client Service and Proposition Agreement ('CSPA') entered into between Phoenix and SLA plc has been recognised in the acquisition balance sheet. This reflects the value associated with the receipt of marketing, distribution and customer relationship services from SLA plc at a nil or below market rate cost and the rights acquired for the usage of the Standard Life brand for the marketing of certain specified products. Further details are set out in note G7. The asset has been valued using a multi-period excess earnings method. The useful economic life of the intangible has been assessed as 15 years.

Other receivables

The financial assets acquired include other receivables with a fair value of GBP613 million. The gross amount due under the contracts is GBP613 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.

Goodwill

A gain on acquisition of GBP141 million has been recognised in the consolidated income statement for the year ended 31 December 2018, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses.

The cash consideration for the acquisition was fixed and determined using a 'locked box' pricing mechanism based on the position as at 31 December 2017, and recalibrated to reflect market conditions upon announcement of the transaction in February 2018. The net assets acquired were recognised in the consolidated financial statements at their fair values on 31 August 2018. Market movements and the impact of business written during 2018 increased the value of the in-force business as at the acquisition date compared to that assumed in the pricing basis, most notably equity market gains in the period from February to August 2018. Accordingly, a gain on acquisition has arisen on the transaction.

At the time of the announcement, the Group entered into arrangements to hedge the shareholder exposure to equity and currency risk in the Standard Life Assurance businesses in the period prior to completion of the transaction. Losses of GBP143 million were recognised on these hedges within net investment income during this period. These losses offset the gain arising on acquisition.

Transaction costs

Transaction costs of GBP43 million have been expensed and are included in administrative expenses in the consolidated income statement. GBP39 million of these costs were paid during the period.

Impact of the acquisition on results

From the date of acquisition, the Standard Life Assurance businesses contributed GBP775 million of total revenue, net of reinsurance payable, and GBP208 million of the profit after the tax attributable to owners of the parent. If the acquisition of the Standard Life Assurance businesses had taken place at the beginning of the year, total revenue net of reinsurance payable, would have been GBP4,186 million and the profit after the tax attributable to owners of the parent would have been GBP439 million.

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 2018, the Group held 44.7% (2017: 47.9%) of the issued share capital of UKCPT and the value of this investment, measured at fair value, was GBP496 million (2017: GBP550 million). Management has concluded that the Group did not control UKCPT in either the current or comparative periods. The Group does not hold a unilateral power of veto in general meetings and is restricted by the terms of an existing relationship agreement it has with UKCPT.

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

 
                                 2018   2017 
                                 GBPm   GBPm 
------------------------------  -----  ----- 
Non-current assets              1,431  1,336 
------------------------------  -----  ----- 
Current assets                     67    143 
------------------------------  -----  ----- 
Non-current liabilities         (249)  (250) 
------------------------------  -----  ----- 
Current liabilities              (36)   (24) 
------------------------------  -----  ----- 
                                1,213  1,205 
------------------------------  -----  ----- 
 
Revenue                            85    161 
------------------------------  -----  ----- 
Profit before tax                  59    135 
------------------------------  -----  ----- 
Taxation                          (6)    (4) 
------------------------------  -----  ----- 
Profit for the year after tax      53    131 
------------------------------  -----  -----

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 ('PEFs');

-- Asset backed securities;

-- Collateralised Debt Obligations ('CDOs');

-- Other debt structures; and

-- Phoenix Group EBT.

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

H4.1 Interests in consolidated structured entities

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

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

During the year, the Group granted further loans to the EBT of GBP8 million (2017: GBP4 million). Further loans are expected to be granted in 2019.

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

H4.2 Interests in unconsolidated structured entities

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

A summary of the Group's interest in unconsolidated structured entities is included below. These are shown according to the financial asset categorisation in the consolidated statement of financial position. Directly held collective investment schemes are further analysed by the predominant asset class in which the entity is invested.

 
                                                                                                   2017 
                                                                                         Carrying value 
                                                                                  2018     of financial 
                                                    Carrying value of financial assets           assets 
                                                                                  GBPm             GBPm 
-------------------------------------------------  -----------------------------------  --------------- 
Equities                                                                           463              344 
-------------------------------------------------  -----------------------------------  --------------- 
Collective investment schemes: 
-------------------------------------------------  -----------------------------------  --------------- 
Directly held collective investment schemes(1) : 
-------------------------------------------------  -----------------------------------  --------------- 
      Equities                                                                  17,693            4,166 
-------------------------------------------------  -----------------------------------  --------------- 
      Bonds                                                                      7,519            3,175 
-------------------------------------------------  -----------------------------------  --------------- 
      Property                                                                   1,963              472 
-------------------------------------------------  -----------------------------------  --------------- 
      Diversified                                                               19,185            1,359 
-------------------------------------------------  -----------------------------------  --------------- 
      Short-term liquidity                                                      12,464            8,465 
-------------------------------------------------  -----------------------------------  --------------- 
Indirectly held collective investment schemes(2)                                11,782            1,264 
-------------------------------------------------  -----------------------------------  --------------- 
Fixed and variable rate income securities: 
-------------------------------------------------  -----------------------------------  --------------- 
      Asset backed securities                                                    2,843              607 
-------------------------------------------------  -----------------------------------  --------------- 
                                                                                73,912           19,852 
-------------------------------------------------  -----------------------------------  ---------------

1 Directly held collective investment schemes refer to those structured entities directly invested in by Group companies. Such investments have been analysed by reference to the predominant asset class the structure is investing in.

2 Indirectly held collective investment schemes are those interests in structured entities that are held by collective investment schemes over which it has been assessed that the Group exercises overall control and have been consolidated into the financial statements.

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 I6.

H5. Group entities

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

 
                                                        If unincorporated, 
                                                      address of principal       Type of investment 
                             Registered address of                   place      (including class of  % of shares/units 
                             incorporated entities             of business             shares held)               held 
-------------------------  -----------------------  ----------------------  -----------------------  ----------------- 
Subsidiaries: 
-------------------------  -----------------------  ----------------------  -----------------------  ----------------- 
Phoenix Life Limited 
 (life assurance company)                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Life Assurance 
 Limited (life assurance 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Abbey Life Assurance 
 Company Limited (life 
 assurance company)                                             Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Assurance 
 Limited (life assurance 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life 
 International Designated 
 Activity Company (life 
 assurance company)                                              Dublin(5)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Pension 
 Funds Limited (life 
 assurance company)                                          Edinburgh(27)     Limited by Guarantee            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Britannic Finance Limited 
 (finance and insurance 
 services company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Customer Care 
 Limited (financial 
 services company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Group Holdings (No. 
 1) Limited (finance 
 company)                                                        London(2)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Group Management 
 Services Limited 
 (management services 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Customer Care 
 Limited 
 (financial services 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix ER1 Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Group Services 
 Limited (management 
 services company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (LC1) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (LC2) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (LCA) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (LCB) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (MC1) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (MC2) Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH Capital plc (finance 
 company)                                                        Dublin(7)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGMS (Ireland) Limited 
 (management services 
 company)                                                        Dublin(6)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix ER3 Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix ER4 Limited 
 (finance company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SL Direct Limited 
 (management services 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Unit Trust 
 Managers Limited (unit 
 trust manager)                                                 Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Wealth Services 
 Limited (management 
 services company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Wealth Trustee 
 Services Limited 
 (management services 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLACOM (No. 8) Limited 
 (loan provider company)                                     Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Assets and 
 Employee Services 
 Limited (service 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Lifetime 
 Mortgages Limited 
 (mortgage provider 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Standard Life 
 Assurance Company of 
 Europe B.V. (financial 
 holding company)                                             Amsterdam(9)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Vebnet Limited 
 (management service 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Mutual Securitisation plc 
 (finance company)                                              Dublin(28)                      N/A            100.00%

-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Britannic Money 
 Investment Services 
 Limited (investment 
 advice company)                                                Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Century Group Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Inesia SA (investment 
 company)                                                   Luxembourg(21)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Alcobendas Entrust 
 Limited (investment 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Axial Fundamental 
 Strategies (US 
 Investments) LLC                                           Wilmington(19)                      N/A            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
IH (Jersey) Limited 
 (investment company)                                           Jersey(16)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (WP) Investments                                                            Limited Liability 
 LLC (investment company)                                   Wilmington(19)                  Company            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Assurance Group 
 Holdings Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGMS (Glasgow) Limited 
 (investment company)                                        Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGS 2 Limited (investment 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SCP Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SPV1 Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SPV2 Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SPV3 Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SPV4 Limited 
 (investment company)                                           Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SPL (Holdings) Limited 
 (investment holding 
 company)                                                      Glasgow(12)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Private 
 Equity Trust plc 
 (investment company)                                        Edinburgh(26)          Ordinary Shares             55.20% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
CH Management Limited 
 (investment company)                                         Delaware(20)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
3 St Andrew Square 
 Apartments Limited 
 (property management 
 company)                                                    Edinburgh(26)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Abbey Life Trust 
 Securities Limited 
 (pension trustee 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
G Park Management Company 
 Limited (property 
 management company)                                            London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Hundred S.à r.l. 
 (property management 
 company)                                                   Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Lake Meadows Management 
 Company Limited 
 (property management 
 company)                                                       London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Life Services 
 Limited (property 
 management company)                                            Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SCP Pensions 
 Trustees Limited 
 (trustee company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix SCP Trustees 
 Limited (trustee 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Belgium No.1 SA                                                               Société 
 (property company)                                             Belgium(3)                  Anonyme            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
330 Avenida de Aragon SL 
 (property management 
 company)                                                       Madrid(40)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLIF Property Investment 
 GP Limited (General 
 Partner to SLIF Property 
 Investment)                                                 Edinburgh(26)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLIF Property Investment 
 LP Limited (General 
 Partner to SLIF Property 
 Investment)                                                 Edinburgh(26)      Limited partnership            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SPL (Holdings 1) Limited 
 (non-trading company)                                         Glasgow(12)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Impala Holdings Limited 
 (holding company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Group Holdings (No. 
 2) Limited (holding 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
NP Life Holdings Limited 
 (holding company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
London Life Limited 
 (non-trading company)                                          Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Alba Life Trustees 
 Limited (non-trading 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00%

-------------------------  -----------------------------------------------   ----------------------  ----------------- 
National Provident Life 
 Limited (non-trading 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix AW Limited 
 (non-trading company)                                          Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PA (GI) Limited 
 (non-trading company)                                          Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Group Holdings 
 (holding company - 
 directly owned by the 
 Company)                                                Cayman Islands(4)          Private Company            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Life Holdings 
 Limited (holding 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl RLH Limited 
 (investment holding 
 company)                                                      Glasgow(12)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGMS (Ireland) Holdings 
 Unlimited Company 
 (holding company)                                               Dublin(6)    Unlimited with Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Scottish Mutual Pension 
 Funds Investment Limited 
 (trustee company)                                           Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Netherlands No.1 B.V. 
 (financial holding 
 company)                                                     Amsterdam(9)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Trustee 
 Company Limited (trustee 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SunLife Limited 
 (financial services 
 distribution company)                                          Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Wealth Holdings 
 Limited (holding 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Life Holdings 
 Limited (holding 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (TC1) Limited 
 (holding company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PGH (TC2) Limited 
 (holding company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Vebnet (Holdings) Limited 
 (holding company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Abbey Life Trustee 
 Services Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Alba LAS Pensions 
 Management Limited 
 (dormant company)                                             Glasgow(10)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
BA (FURBS) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Britannic Group Services 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Century Trustee Services 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Cityfourinc (dormant 
 company)                                                       Wythall(1)    Unlimited with Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Clearfol Investment 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Corunna Limited (dormant 
 company)                                                      Glasgow(11)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Evergreen Trustee Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Gallions Reach Shopping 
 Park (Nominee) Limited 
 (dormant company)                                              London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Iceni Nominees (No. 2) 
 Limited (dormant 
 company)                                                       London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Impala Loan Company 1 
 Limited (dormant 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Inhoco 3107 Limited 
 (dormant company)                                              London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
London Life Trustees 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
National Provident 
 Institution (dormant                                                             Unlimited without 
 company)                                                       Wythall(1)                   Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
NPI (Printworks) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
NPI (Westgate) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
NPI Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Barwell 2) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Chiswick House) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Covent Garden) 
 Limited (dormant

 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Martineau Phase 1) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Martineau Phase 2) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Moor House 1) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Moor House 2) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Moor House) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Printworks) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl (Stockley Park) 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl AL Limited (dormant 
 company)                                                      Glasgow(10)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Group Secretariat 
 Services Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl MG Birmingham 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl MP Birmingham 
 Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl RLG Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Trustees Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl ULA Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PG Dormant (No 3) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PG Dormant (No 4) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PG Dormant (No 5) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PG Dormant (No 6) Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PG Dormant (No. 7) 
 Limited (dormant 
 company)                                                        London(2)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix & London 
 Assurance Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix ER2 Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix ER5 Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Life Insurance 
 Services Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Life Pension 
 Trust Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Pension Scheme 
 (Trustees) Limited                                             Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Pensions Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Pensions Trustee 
 Services Limited 
 (dormant company)                                              Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Scottish Mutual Assurance 
 Limited (dormant 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Scottish Mutual Customer 
 Care Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Scottish Mutual Nominees 
 Limited (dormant 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SL (NEWCO) Limited 
 (dormant company)                                           Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SL Liverpool plc (dormant 
 company)                                                       Wythall(1)   Public Limited Company            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLACOM (No. 10) Limited 
 (dormant company)                                           Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLACOM (No. 9) Limited 
 (dormant company)                                           Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Agency 
 Services Limited 
 (dormant)                                                   Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Investment 
 Funds Limited (dormant 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Master 
 Trust Co. Ltd (dormant

 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Property 
 Company Limited 
 (dormant)                                                   Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Heritable Securities 
 and Mortgage Investment 
 Association Ltd (dormant 
 company)                                                    Edinburgh(27)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The London Life 
 Association Limited 
 (dormant company)                                              Wythall(1)     Limited by Guarantee            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Pearl Martineau 
 Galleries Limited 
 Partnership (dormant 
 company)                                                       Wythall(1)      Limited Partnership            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Pearl Martineau 
 Limited Partnership 
 (dormant company)                                          Lynch Wood(22)      Limited Partnership            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Phoenix Life SCP 
 Institution (dormant 
 company)                                                    Edinburgh(27)     Limited by Guarantee            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
The Scottish Mutual 
 Assurance Society 
 (dormant company)                                             Glasgow(10)     Limited by Guarantee            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Welbrent Property 
 Investment Company 
 Limited (dormant 
 company)                                                       London(18)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Zilmer Limited (dormant 
 company)                                                       Wythall(1)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
28 Ribera del Loira SA 
 (dormant company)                                              Madrid(40)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Phoenix Group Employee 
 Benefit Trust                                                  Jersey(17)                    Trust            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Standard Life Assurance 
 (HWPF) Luxembourg SARL                                     Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Germany No.1 S.A.R.L                                    Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Germany No.2 S.A.R.L                                    Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Germany No.3 S.A.R.L                                    Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
SLA Ireland No.1 S.A.R.L                                    Luxembourg(25)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pilangen Logistik AB                                         Stockholm(23)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pilangen Logistik I AB                                       Stockholm(23)          Ordinary Shares            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Private Equity LP                                      Edinburgh(26)      Limited Partnership            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Pearl Strategic Credit LP                                    Edinburgh(26)      Limited Partnership            100.00% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
PUTM Bothwell Asia Pacific (Excluding Japan) Fund                Wythall(1)   Authorised Unit Trust             99.49% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Emerging Market Debt Unconstrained 
 Fund                                                            Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Emerging Markets Equity Fund                       Wythall(1)   Authorised Unit Trust             99.91% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Euro Sovereign Fund                                Wythall(1)   Authorised Unit Trust             87.78% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Europe Fund                                        Wythall(1)   Authorised Unit Trust             98.63% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell European Credit Fund                               Wythall(1)   Authorised Unit Trust             82.78% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Floating Rate ABS Fund                             Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Global Bond Fund                                   Wythall(1)   Authorised Unit Trust             99.90% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Global Credit Fund                                 Wythall(1)   Authorised Unit Trust             99.99% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Index-Linked Sterling Hedged Fund                  Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Japan Tracker Fund                                 Wythall(1)   Authorised Unit Trust             99.58% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Long Gilt Sterling Hedged Fund                     Wythall(1)   Authorised Unit Trust             99.91% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell North America Fund                                 Wythall(1)   Authorised Unit Trust             99.40% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Sterling Credit Fund                               Wythall(1)   Authorised Unit Trust             99.82% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Sterling Government Bond Fund                      Wythall(1)   Authorised Unit Trust             99.02% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Tactical Asset Allocation Fund                     Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Cautious Unit Trust                                         Wythall(1)   Authorised Unit Trust             99.33% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM European Unit Trust                                         Wythall(1)   Authorised Unit Trust             99.42% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Far Eastern Unit Trust                                      Wythall(1)   Authorised Unit Trust             99.69% 
--------------------------------------------------   ----------------------  ----------------------  -----------------

PUTM Growth Unit Trust                                           Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM International Growth Unit Trust                             Wythall(1)   Authorised Unit Trust             99.62% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Opportunity Unit Trust                                      Wythall(1)   Authorised Unit Trust             99.99% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM UK All-Share Index Unit Trust                               Wythall(1)   Authorised Unit Trust             99.96% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM UK Equity Unit Trust                                        Wythall(1)   Authorised Unit Trust             99.84% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM UK Stock Market Fund                                        Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM UK Stock Market Fund (Series 3)                             Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Seabury Assets Fund - Standard Life Investments 
 The Euro VNAV Liquidity Fund                                    Dublin(29)         UCITS, sub fund            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Seabury Assets Fund - Standard Life Investments 
 The Sterling VNAV Liquidity Fund                                Dublin(29)         UCITS, sub fund             99.57% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Diversified Growth Fund                          London(30)          OEIC, sub fund             83.18% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional Mainstream UK Equity 
 Trust                                                           London(30)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional UK Gilt Fund                       London(30)          OEIC, sub fund             75.29% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional Short Duration Bond 
 Fund                                                            London(30)   Authorised unit trust             99.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell UK All Share Listed Equity Fund                    Wythall(1)   Authorised Unit Trust             99.43% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell UK Equity Income Fund                              Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Sub-Sovereign Bond Fund                            Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
PUTM Bothwell Institutional Credit Fund                          Wythall(1)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional UK Equity Tracker 
 Trust                                                           London(30)   Authorised Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Global Funds - Janus Henderson 
 Institutional Overseas Bond Fund                                London(30)          OEIC, sub fund             99.07% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional UK Index 
 Opportunities Fund                                              London(30)          OEIC, sub fund             75.53% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Strategic Investment Funds - Janus 
 Henderson Institutional North American 
 Index Opportunities Fund                                        London(30)          OEIC, sub fund             87.82% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Strategic Investment Funds - Janus 
 Henderson Institutional European Index 
 Opportunities Fund                                              London(30)          OEIC, sub fund             80.03% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Strategic Investment Funds - Janus 
 Henderson Institutional Asia Pacific ex 
 Japan Index Opportunities Fund                                  London(30)          OEIC, sub fund             76.25% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Strategic Investment Funds - Janus 
 Henderson Institutional Japan Index Opportunities 
 Fund                                                            London(30)          OEIC, sub fund             69.32% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Japanese Equity 
 Growth Trust                                                 Edinburgh(26)          OEIC, sub fund             73.02% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company II - Euro Ethical 
 Equity Fund                                                  Edinburgh(26)          OEIC, sub fund             87.01% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company II - Corporate 
 Debt Fund                                                    Edinburgh(26)          OEIC, sub fund            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - European Trust               Edinburgh(26)              Unit Trust             92.69% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Japanese Trust               Edinburgh(26)              Unit Trust             81.74% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - North American 
 Trust                                                        Edinburgh(26)              Unit Trust             81.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Pacific Trust                Edinburgh(26)              Unit Trust             92.68% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Standard Life 
 Global Equity Trust II                                       Edinburgh(26)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - UK Corporate Bond 
 trust                                                        Edinburgh(26)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Standard Life 
 Active Plus Bond Trust                                       Edinburgh(26)              Unit Trust             99.99% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Standard Life 
 International Trust                                          Edinburgh(26)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Pan European 
 Trust                                                        Edinburgh(26)              Unit Trust             99.97% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - UK Equity General 
 Trust                                                        Edinburgh(26)              Unit Trust             99.76% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio

 Managed III Fund                                             Edinburgh(26)          OEIC, sub fund             74.20% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - 
 Enhanced-Diversification Growth Fund                         Edinburgh(26)          OEIC, sub fund             98.04% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Multi Asset Trust                               Edinburgh(26)              Unit Trust             99.99% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life European Trust II                               Edinburgh(26)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Global Emerging 
 Markets Equity                                               Edinburgh(26)          OEIC, sub fund             77.82% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Emerging Market 
 Debt Fund                                                    Edinburgh(26)          OEIC, sub fund             89.09% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - Standard Life 
 Short Dated UK Government Bond Trust                         Edinburgh(26)              Unit Trust             99.96% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Trust Management - UK Government 
 Bond Trust                                                   Edinburgh(26)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV II - Global 
 Short Duration Corporate Bond Fund                          Luxembourg(31)         SICAV, sub fund             76.05% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Equities                                                    Luxembourg(31)         SICAV, sub fund             88.84% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - European 
 Government All Stocks                                       Luxembourg(31)         SICAV, sub fund            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Japanese 
 Equities                                                    Luxembourg(31)         SICAV, sub fund             75.74% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Bond                                                        Luxembourg(31)         SICAV, sub fund             76.59% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 High Yield Bond                                             Luxembourg(31)         SICAV, sub fund             68.18% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 REIT Focus                                                  Luxembourg(31)         SICAV, sub fund             91.43% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - China 
 Equities                                                    Luxembourg(31)         SICAV, sub fund             75.33% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Emerging Markets Unconstrained                              Luxembourg(31)         SICAV, sub fund             86.83% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Emerging Markets Local CCY Debt                             Luxembourg(31)         SICAV, sub fund             71.98% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Emerging 
 Market Debt Unconstrained                                   Luxembourg(31)         SICAV, sub fund             84.25% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Aberdeen Capital Trust Inc                                       London(18)   Authorised Unit Trust             99.26% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
                                                                                    Special Limited 
ASI Phoenix Fund Financing SCSp (PLFF)                       Luxembourg(36)             Partnership            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AB SICAV I - Global Factor Portfolio                         Luxembourg(31)         SICAV, sub fund             53.14% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Ignis Private Equity Fund LP                              Cayman Islands(4)     Limited Partnership            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Ignis Strategic Credit Fund LP                            Cayman Islands(4)     Limited Partnership            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Crawley Unit Trust                                               Jersey(13)              Unit Trust            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
North American Strategic Partners 2008 L.P.                  Wilmington(19)     Limited Partnership             80.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
North American Strategic Partners (Feeder) 2008 
 L.P.                                                        Wilmington(19)     Limited Partnership            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Ignis Strategic Solutions Funds plc - Systematic 
 Strategies Fund                                                  Dublin(8)          OEIC, sub fund            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Ignis Strategic Solutions Funds plc - Fundamental 
 Strategies Fund                                                  Dublin(8)          OEIC, sub fund            100.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Associates: 
-------------------------  -----------------------  ----------------------  -----------------------  ----------------- 
The Moor House Limited 
 Partnership                                                    London(15)      Limited Partnership             33.27% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Moor House General 
 Partner Limited                                                London(15)      Limited Partnership             33.30% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Estates Limited 
 (property investment 
 company)                                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property GP 
 Limited                                                      Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Holdings Limited 
 (property investment 
 company)                                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Nominee Limited 
 (property investment 
 company)                                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 REIT Limited                                                 Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Estates Holdings Limited 
 (property investment

 company)                                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UKCPT Limited Partnership                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Finance Holdings Limited                                     Guernsey(14)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
UK Commercial Property 
 Estates (Reading) 
 Limited                                                        London(18)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Brixton Radlett Property 
 Limited                                                        London(18)          Ordinary Shares             44.73% 
-------------------------  -----------------------------------------------   ----------------------  ----------------- 
Significant holdings: 
-------------------------  -----------------------  ----------------------  -----------------------  ----------------- 
Brent Cross Partnership                                          London(15)     Limited Partnership             24.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Castlepoint LP                                               Birmingham(42)         Ordinary Shares             35.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Gallions Reach Shopping Park Unit Trust                          Jersey(13)              Unit Trust             50.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Janus Henderson Institutional Global Responsible 
 Managed Fund                                                    London(30)          OEIC, sub fund             57.49% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Capital Infrastructure I L.P.                   Edinburgh(26)     Limited Partnership             26.30% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global Absolute Return 
 Strategies Retail Acc                                        Edinburgh(26)              Unit Trust             75.52% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments UK Retail Park Trust                   Jersey(41)              Unit Trust             56.60% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments UK Shopping Centre Trust               Jersey(41)              Unit Trust             40.66% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - UK Equity 
 Recovery Fund                                                Edinburgh(26)          OEIC, sub fund             34.46% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - UK Equity 
 Growth Fund                                                  Edinburgh(26)          OEIC, sub fund             24.29% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - UK Equity High 
 Income Fund                                                  Edinburgh(26)          OEIC, sub fund             29.90% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - American Equity 
 Unconstrained Fund                                           Edinburgh(26)          OEIC, sub fund             21.93% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - UK Equity High 
 Alpha Fund                                                   Edinburgh(26)          OEIC, sub fund             22.09% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Global Equity 
 Unconstrained                                                Edinburgh(26)          OEIC, sub fund             46.26% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - UK 
 Opportunities Fund                                           Edinburgh(26)          OEIC, sub fund             63.93% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Short Duration 
 Credit Fund                                                  Edinburgh(26)          OEIC, sub fund             20.70% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Smaller 
 Companies Fund                                               Edinburgh(26)          OEIC, sub fund             28.63% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - European Equity 
 Growth Fund                                                  Edinburgh(26)          OEIC, sub fund             24.11% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company II - UK Equity 
 Unconstrained Fund                                           Edinburgh(26)          OEIC, sub fund             36.62% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company II - Ethical 
 Corporate Bond Fund                                          Edinburgh(26)          OEIC, sub fund             37.13% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Market I Fund                                                Edinburgh(26)          OEIC, sub fund             46.84% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Market II Fund                                               Edinburgh(26)          OEIC, sub fund             41.52% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Market III Fund                                              Edinburgh(26)          OEIC, sub fund             59.21% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Market IV Fund                                               Edinburgh(26)          OEIC, sub fund             57.92% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Market V Fund                                                Edinburgh(26)         OEIC , sub fund             65.25% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Multi-Manager I Fund                                         Edinburgh(26)          OEIC, sub fund             56.21% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Multi-Manager II Fund                                        Edinburgh(26)          OEIC, sub fund             54.62% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Multi-Manager III Fund                                       Edinburgh(26)          OEIC, sub fund             60.23% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Multi-Manager IV Fund                                        Edinburgh(26)          OEIC, sub fund             53.24% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Multi-Manager V Fund                                         Edinburgh(26)          OEIC, sub fund             52.18% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Managed I Fund                                               Edinburgh(26)          OEIC, sub fund             65.10% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio

 Managed II Fund                                              Edinburgh(26)          OEIC, sub fund             65.48% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Managed IV Fund                                              Edinburgh(26)          OEIC, sub fund             61.11% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Managed V Fund                                               Edinburgh(26)          OEIC, sub fund             66.78% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Managed Income II Fund                                       Edinburgh(26)          OEIC, sub fund             43.84% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company III - MyFolio 
 Managed Income III Fund                                      Edinburgh(26)          OEIC, sub fund             50.75% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Strategic Bond Fund                 Edinburgh(26)              Unit Trust             53.29% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Dynamic Distribution 
 Fund                                                         Edinburgh(26)              Unit Trust             49.15% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments UK Real Estate 
 Accumulation Feeder Fund                                     Edinburgh(26)              Unit Trust             46.09% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investment Company - Global Emerging 
 Market Equity Income Fund                                    Edinburgh(26)          OEIC, sub fund             69.75% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Managed Trust - American Equity 
 Unconstrained                                                Edinburgh(26)              Unit Trust             48.27% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Managed Trust - Standard Life Japan 
 Fund                                                         Edinburgh(26)              Unit Trust             45.28% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global Real Estate Fund             Edinburgh(26)              Unit Trust             51.85% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Euro 
 Smaller Companies                                           Luxembourg(31)         SICAV, sub fund             33.00% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - European 
 Corporate Bond                                              Luxembourg(31)         SICAV, sub fund             31.95% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Absolute Return Strategies                                  Luxembourg(31)         SICAV, sub fund             37.43% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Absolute 
 Return Global Bond Strategies                               Luxembourg(31)         SICAV, sub fund             45.99% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Corporate Bond                                              Luxembourg(31)         SICAV, sub fund             56.47% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Global SICAV - Global 
 Focused Strategies                                          Luxembourg(31)         SICAV, sub fund             46.02% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Standard Life Investments Real Estate Income 
 Feeder Fund                                                     London(18)              Unit Trust             30.19% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Scottish Widows Tracker and Specialist Investment 
 Funds - International Bond Fund                              Edinburgh(32)          OEIC, sub fund             60.73% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AXA Fixed Interest Investment ICVC - Sterling 
 Strategic Bond Fund                                             London(33)         UCITS, sub fund             61.92% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AB SICAV I - Diversified Yield Plus Portfolio                Luxembourg(31)         SICAV, sub fund             42.34% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
MI Somerset Global Emerging Markets                               Essex(34)          OEIC, sub fund             34.49% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Aberdeen Liquidity Fund (Lux) - Euro Fund                    Luxembourg(39)         SICAV, sub fund             36.62% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Aberdeen Liquidity Fund (Lux) - Sterling Fund                Luxembourg(39)         SICAV, sub fund             22.21% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Aberdeen Liquid (Lux) Ultra Short Duration 
 Sterling Fund                                               Luxembourg(39)         SICAV, sub fund             34.60% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AXA Sterling Index Linked Bond Fund                              London(33)          OEIC, sub fund             22.71% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
BMO Barclays 1-3 Year Global Corporate Bond (GBP 
 Hedged) UCITS ETF                                               London(37)         UCITS, sub fund             49.17% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
iShares MSCI Taiwan UCITS ETF                                    Dublin(38)         UCITS, sub fund             24.46% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Scottish Widow UK and Income - Scottish Widows 
 Ethical Fund                                                 Edinburgh(35)          OEIC, sub fund             20.39% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AXA Global High Income Fund                                      London(33)          OEIC, sub fund             25.68% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
AQR UCITS Funds - AQR Global Risk Parity C4 UCITS 
 Fund                                                               USA(24)         UCITS, sub fund             48.37% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
Aberdeen Global Emerging Markets Quantitative 
 Equity Fund                                                     London(18)          OEIC, sub fund             27.08% 
--------------------------------------------------   ----------------------  ----------------------  ----------------- 
 
   1   1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG, United Kingdom 
   2   Juxon House, 100 St. Paul's Churchyard, London, EC4M 8BU, United Kingdom 
   3   Avenue Louise 326, bte 33 1050 Brussels, Belgium 
   4   Ugland House, Grand Cayman, KY1-1104, Cayman Islands 
   5   90 St. Stephen's Green, Dublin, D2, Ireland

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

   7   Arthur Cox Building, 10 Earlsfort Terrace, Dublin 2, Dublin, Ireland 
   8   25/28 North Wall Quay, Dublin 1, Dublin, Ireland 
   9   Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands

10 301 St Vincent Street, Glasgow, G2 5HN, United Kingdom

11 50 Bothwell Street, Glasgow, G2 6HR, United Kingdom

12 110 Queen Street, Glasgow, G1 3BX, United Kingdom

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

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

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

16 22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey

17 32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey

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

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

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

21 8 Boulevard Royal, L-2449, Luxembourg, Luxembourg

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

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

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

25 6B, rue Gabriel Lippmann, Parc d'Activité Syrdall 2, L-5365 Münsbach, Luxembourg

26 1 George Street, Edinburgh, EH2 2LL, United Kingdom

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

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

29 70 Sir Rogerson's Quay, Dublin 2, Republic of Ireland

30 201 Bishopsgate, London, EC2M 3AE, United Kingdom

31 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg

32 15 Dalkeith Road, Edinburgh, EH16 5BU, United Kingdom

33 7 Newgate Street, London EC1A 7NX, United Kingdom

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

35 PO Box 28015, Edinburgh, EH16 5WL, United Kingdom

36 49, Avenue J.F. Kennedy, L-1855 Luxembourg,

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

38 J.P. Morgan House, International Financial Services Centre, Dublin 1, Ireland

39 35a Avenue J.F. Kennedy, L-1855, Luxembourg

40 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 - Madrid, Spain

41 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey

42 2 Snowhill, Birmingham, B4 6WR, United Kingdom

The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution:

-- SMA (Jersey) Limited;

-- ILC1 (Jersey) Limited;

-- PGH1 (Jersey) Limited; and

-- PG Dormant No 2 Holdings.

The following subsidiaries were fully disposed of during the period. The subsidiaries were deconsolidated from the date of disposal:

-- PUTM Bothwell Fixed ABS Sterling Hedged Fund;

-- PUTM Bothwell Credit Financial Sterling Hedged Fund;

-- PUTM Bothwell Global Equity Fund;

-- PUTM Bothwell Credit Non Financial Sterling Hedged Fund;

-- PUTM Bothwell UK Equity Smaller Companies Fund;

-- BlackRock LBG DC 'A' Fund; and

-- AB SICAV I - ESG Responsible Global Factor Portfolio AB

The Group no longer has significant holdings in the following undertakings:

-- BlackRock Market Advantage X GBP Acc;

-- Aberdeen UK Smaller Companies Equity Fund;

-- Architas MA Active Dynamic Fund Class R Net Accumulation.

-- American Century SICAV - Concentrated Global Growth Equity;

-- Standard Life Investments - Sterling Liquidity Fund; and

-- Achitas Diversified Real Assets 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:

 
                                                                        2018   2017 
                                                                        GBPm   GBPm 
---------------------------------------------------------------------  -----  ----- 
Expense arising from equity-settled share-based payment transactions       9      8 
---------------------------------------------------------------------  -----  -----

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. Following the scheme of arrangement on 12 December 2018 (see note A1), participants in the Old PGH LTIP plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares.

Assuming no good leavers or other events which would trigger early vesting rights, the 2016 and 2017 LTIP awards are subject to performance conditions tied to the Company's performance in respect of cumulative cash generation and Total Shareholder Return ('TSR'). The 2018 LTIP award is subject to performance conditions tied to the Company's performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and TSR.

For all LTIP awards, a holding period applies so that any LTIP awards to Executive Committee members for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.

2018 LTIP awards were granted on 21 March 2018. The number of shares for all outstanding LTIP awards as at 10 July 2018 were increased to take into account the impact of the Group's rights issue (see note D1). This adjustment was based on the Theoretical Ex-Rights Price. The 2015 LTIP awards vested during the year. The 2016 awards will vest on 30 March 2019 and 2 June 2019, the 2017 awards will vest on 24 March 2020 and the 2018 awards will vest on 21 March 2021.

The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted. The fair value of the 2016, 2017 and 2018 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a 'market condition'. The fair value of the 2016, 2017 and 2018 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below:

 
                                                                          2016 TSR performance                2016 TSR 
                                       2018 TSR                2017 TSR      condition - March   performance condition 
                          performance condition   performance condition                  grant            - June grant 
-----------------------  ----------------------  ----------------------  ---------------------  ---------------------- 
Share price (p)                           709.5                   787.5                  943.5                   871.0 
-----------------------  ----------------------  ----------------------  ---------------------  ---------------------- 
Expected term (years)                       3.0                     2.8                    3.0                     3.0 
-----------------------  ----------------------  ----------------------  ---------------------  ---------------------- 
Expected volatility (%)                      20                      24                     26                      26 
-----------------------  ----------------------  ----------------------  ---------------------  ---------------------- 
Risk-free interest rate 
 (%)                                       0.96                     0.2                    0.4                     0.4 
-----------------------  ----------------------  ----------------------  ---------------------  ---------------------- 
Expected dividend yield                                                                      Dividends are received by 
 (%)                                                                                holders of the awards therefore no 
                                                                                  adjustment to fair value is required 
-----------------------  ---------------------------------------------------------------------------------------------

On 21 December 2018, LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. There are three discreet vesting periods for these awards ending on 24 March 2019, 27 March 2020 and 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.

Each year, the Group issues a Chairman's share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 21 March 2018, awards were granted and are expected to vest on 21 March 2021. The 2017 awards are expected to vest on 24 March 2020. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving a 'CC' performance grading or above.

Deferred Bonus Share Scheme ('DBSS')

Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. As noted for the LTIP, following the Scheme of Arrangement, participants in the Old PGH DBSS plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares. The grant of these shares is conditional on the employee remaining in employment with the Group for a period of three years with the three-year deferral period running to the dealing day following the third anniversary of the announcement of the annual results. Dividends will accrue for DBSS awards over the three-year deferral period.

The 2018 DBSS was granted on 21 March 2018 and is expected to vest on 15 March 2021. The number of shares for all outstanding DBSS awards as at 10 July 2018 were increased to take into account the impact of the Group's rights issue (see note D1). This adjustment has been based on the Theoretical Ex-Rights Price. The 2015 DBSS awards vested during the year. The 2016 awards are expected to vest on 24 March 2019 and the 2017 awards are expected to vest on 20 March 2020.

The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the options were granted.

Sharesave scheme

The sharesave scheme allows participating employees to save up to GBP500 each month over a period of either three or five years.

Under the sharesave arrangement, participants remaining in the Group's employment at the end of the three or five year saving period are entitled to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for certain reasons are able to use their savings to purchase shares if they leave less than six months before the end of their three or five year periods.

Following the scheme of arrangement, participants in the Old PGH sharesave plan exchanged their options over Old PGH shares for equivalent options over PGH plc ordinary shares. All sharesave options were increased in November 2016 and again in July 2018 following the Group's rights issues (see note D1) and the exercise price of these awards was also amended as a result of these issues. The 2018 sharesave options were granted on 10 April 2018.

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 2014 to 2018 sharesave options:

 
                                  2018                2017                2016                2015                2014 
                             sharesave           sharesave           sharesave           sharesave           sharesave 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------ 
Share price (p)                  768.5               747.0               889.0               843.0               674.0 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------ 
Exercise price 
 (GBP) (Revised)                 5.629               5.674               5.746               5.654               4.618 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------ 
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   1.0 (for 3.25 year  0.2 (for 3.25 year  0.6 (for 3.25 year  0.8 (for 3.25 year  1.3 (for 3.25 year 
the expected term      scheme) and 1.1     scheme) and 0.4     scheme) and 1.0     scheme) and 1.2     scheme) and 1.9 
of the                  (for 5.25 year      (for 5.25 year      (for 5.25 year      (for 5.25 year      (for 5.25 year 
award                          scheme)             scheme)             scheme)             scheme)             scheme) 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------ 
Expected 
 volatility (%) 
 based on the 
 Company's share 
 price volatility 
 to date                          30.0                30.0                30.0                30.0                30.0 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------ 
Dividend yield (%)                 6.5                 6.3                 6.0                 6.3                 7.9 
------------------  ------------------  ------------------  ------------------  ------------------  ------------------

Share Incentive Plan

The Group operates a Share Incentive Plan ('SIP') which allows participating employees to purchase 'Partnership shares' in the Company through monthly contributions which are limited to the lower of GBP150 per month and 10% of gross monthly salary. For every three Partnership shares purchased, the Company gives the employee one 'Matching share'. Matching shares are required to be held for three years.

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 2018, 49,854 matching shares were conditionally awarded to employees (2017: 33,705).

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 2018 
-----------------------------------------  -------------------------------- 
                                                 LTIP  Sharesave       DBSS 
-----------------------------------------  ----------  ---------  --------- 
Outstanding at the beginning of the year    2,992,327  1,264,992    630,489 
-----------------------------------------  ----------  ---------  --------- 
Granted during the year                     1,215,824    453,167    289,625 
-----------------------------------------  ----------  ---------  --------- 
Corporate action                              416,937    164,896     77,642 
-----------------------------------------  ----------  ---------  --------- 
Forfeited during the year                   (576,218)  (237,293)   (26,141) 
-----------------------------------------  ----------  ---------  --------- 
Exercised during the year                   (254,809)  (270,142)  (200,575) 
-----------------------------------------  ----------  ---------  --------- 
Outstanding at the end of the year          3,794,061  1,375,620    771,040 
-----------------------------------------  ----------  ---------  --------- 
 
 
                                             Number of share options 2017 
-----------------------------------------  -------------------------------- 
                                              LTIP(1)  Sharesave       DBSS 
-----------------------------------------  ----------  ---------  --------- 
Outstanding at the beginning of the year    3,469,421  1,037,156    633,118 
-----------------------------------------  ----------  ---------  --------- 
Granted during the year                     1,056,987    675,549    229,465 
-----------------------------------------  ----------  ---------  --------- 
Forfeited during the year                   (754,443)   (64,886)    (4,409) 
-----------------------------------------  ----------  ---------  --------- 
Exercised during the year                   (779,638)  (382,827)  (227,685) 
-----------------------------------------  ----------  ---------  --------- 
Outstanding at the end of the year          2,992,327  1,264,992    630,489 
-----------------------------------------  ----------  ---------  ---------

1 Updated to incorporate number of Chairman's awards within the table

The weighted average fair value of options granted during the year was GBP5.75 (2017: GBP4.75).

The weighted average share price at the date of exercise for the rewards exercised is GBP6.82 (2017: GBP7.72).

The weighted average remaining contractual life for the rewards outstanding as at 31 December 2018 is six years (2017: six years).

I2. Cash flows from operating activities

 
The following analysis gives further detail behind the 'cash utilised by operations' figure 
 in the statement of consolidated cash flows. 
------------------------------------------------------------------------------------------- 
 
 
                                                                                                    2018     2017 
                                                                                                    GBPm     GBPm 
----------------------------------------------------------------------------------------------  --------  ------- 
Profit/(loss) for the period before tax                                                              260      (7) 
----------------------------------------------------------------------------------------------  --------  ------- 
Non-cash movements in profit for the year before tax: 
----------------------------------------------------------------------------------------------  --------  ------- 
      Gain on acquisition                                                                          (141)        - 
----------------------------------------------------------------------------------------------  --------  ------- 
      Fair value losses/(gains) on: 
----------------------------------------------------------------------------------------------  --------  ------- 
       Investment property                                                                            18      (9)

----------------------------------------------------------------------------------------------  --------  ------- 
       Financial assets and derivative liabilities                                                12,861  (2,896) 
----------------------------------------------------------------------------------------------  --------  ------- 
       Borrowings                                                                                     29     (23) 
----------------------------------------------------------------------------------------------  --------  ------- 
      Amortisation of intangible assets                                                              214      126 
----------------------------------------------------------------------------------------------  --------  ------- 
      Change in present value of future profits                                                      (1)      (5) 
----------------------------------------------------------------------------------------------  --------  ------- 
      Change in unallocated surplus                                                                 (88)       46 
----------------------------------------------------------------------------------------------  --------  ------- 
      Share-based payment charge                                                                       9        8 
----------------------------------------------------------------------------------------------  --------  ------- 
      Interest expense on borrowings                                                                 142      132 
----------------------------------------------------------------------------------------------  --------  ------- 
      Premium paid on partial redemption of GBP300 million unsecured bond                              -       25 
----------------------------------------------------------------------------------------------  --------  ------- 
      Net interest expense on Group defined benefit pension scheme asset/liability                     6       11 
----------------------------------------------------------------------------------------------  --------  ------- 
      Pension past service costs                                                                      57        - 
----------------------------------------------------------------------------------------------  --------  ------- 
      Other costs of pension schemes                                                                   6        5 
----------------------------------------------------------------------------------------------  --------  ------- 
Decrease in investment assets                                                                      5,230    4,411 
----------------------------------------------------------------------------------------------  --------  ------- 
Decrease in reinsurance assets                                                                       681    1,154 
----------------------------------------------------------------------------------------------  --------  ------- 
Decrease in insurance contract and investment contract liabilities                              (19,186)  (1,933) 
----------------------------------------------------------------------------------------------  --------  ------- 
Decrease in deposits received from reinsurers                                                      (178)     (24) 
----------------------------------------------------------------------------------------------  --------  ------- 
(Decrease)/increase in obligation for repayment of collateral received                             (568)      338 
----------------------------------------------------------------------------------------------  --------  ------- 
Net decrease/(increase) in working capital                                                           328    (113) 
----------------------------------------------------------------------------------------------  --------  ------- 
Other Items 
----------------------------------------------------------------------------------------------  --------  ------- 
      Contributions to defined benefit pension schemes                                              (46)     (90) 
----------------------------------------------------------------------------------------------  --------  ------- 
      Acquisition related expenses to be included within cash flows from investing activities         43        - 
----------------------------------------------------------------------------------------------  --------  ------- 
Cash (utilised)/generated by operations                                                            (324)    1,156 
----------------------------------------------------------------------------------------------  --------  -------

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, fixed and variable rate income securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities principally comprise investment contracts, borrowings for financing purposes, derivative liabilities and net asset value attributable to unit holders.

The risk management disclosures in the consolidated financial statements set out the major risks that the Group businesses are exposed to and describe the Group's approach to managing these. The section on financial risk is included in note E6, the section on insurance risk is included in note F4 and the sections on risk and capital management objectives and other risks are included below. The Group's risk management framework is described in the risk management commentary on pages 39 to 46 of the Annual Report and Accounts.

Other risks

Customer risk

Customer risk is the risk of reductions in earnings and/or value, through inappropriate or poor customer treatment (including poor advice).

Operational risk

Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events.

Capital Management Framework

The Group's Capital Management Framework is designed to achieve the following objectives:

-- to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital;

-- to ensure sufficient liquidity to meet obligations to policyholders and other creditors;

-- to optimise the Fitch Ratings financial leverage to maintain an investment grade credit rating; and

-- to maintain a stable and sustainable dividend policy.

The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.

Group capital

Group capital is managed on a Solvency II basis. Under the Solvency II framework, the primary sources of capital managed by the Group 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 transferability restrictions to the Basic Own Funds.

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

In December 2015, the Group was granted the PRA's approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA's approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group's Internal Model in March 2017 and March 2018 respectively. The capital assessment of the Abbey Life business remained on a Standard Formula basis as at 31 December 2017. Therefore, the Solvency II position of the Group at that date was based partially on the Group's Internal Model and partially on Standard Formula.

The acquired Standard Life Assurance businesses also determine their capital requirements in accordance with an approved partial Internal Model. In accordance with the approvals received from the PRA, the Enlarged Group operates a partial Internal Model to calculate Group SCR, aggregating outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two. A harmonisation programme to combine the two models into a single Internal Model has commenced. The Irish life entity, Standard Life International Designated Activity Company, determines its capital requirements in accordance with the Standard Formula.

Group capital resources - unaudited

The Group capital resources are based on the Group's Eligible Own Funds adjusted to remove amounts pertaining to unsupported with-profit funds and Group pension schemes:

 
                                                                                            2018    2017 
Unaudited                                                                                  GBPbn   GBPbn 
----------------------------------------------------------------------------------------  ------  ------ 
PGH plc Eligible Own Funds                                                                  10.3     6.6 
----------------------------------------------------------------------------------------  ------  ------ 
Remove Own Funds pertaining to unsupported with-profit funds and the PGL pension scheme    (2.3)   (2.0) 
----------------------------------------------------------------------------------------  ------  ------ 
Group capital resources                                                                      8.0     4.6 
----------------------------------------------------------------------------------------  ------  ------

Solvency II surplus

Until 1 July 2017, the Group's Solvency II assessment and Group supervision was performed at the PLHL level as this was the highest EEA insurance holding company. A waiver which permitted Group supervision to take place at the level of the ultimate parent, Old PGH, via other methods as opposed to full Group supervision expired on 30 June 2017. The Group's capital position is now being managed at the PGH plc level only.

An analysis of the PGH plc Solvency II surplus as at 31 December 2018 is provided in the business review section on page 28. 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 228 to 229.

14. Related party transactions

 
In the ordinary course of business, the Group and its subsidiaries carry out transactions 
 with related parties as defined by IAS 24 Related party disclosures. 
-----------------------------------------------------------------------------------------

I4.1 Related party transactions

During the year, the Group entered into the following transactions with related parties. As set out in note H2, SLA plc took a 19.99% equity stake in the Enlarged Group, and as a result became a related party of the Group. SLA plc is considered to have a significant influence over the Group due to their equity stake and representation on the Board of Directors.

 
                                                                        Balances 
                                                      Transactions   outstanding  Transactions           Balances 
                                                              2018          2018          2017   outstanding 2017 
                                                              GBPm          GBPm          GBPm               GBPm 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Pearl Group Staff Pension Scheme 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Payment of administrative expenses                             (3)             -           (3)                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
UK Commercial Property Trust Limited 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Dividend income                                                 22             -            23                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Reduction in investment                                       (35)             -             -                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
SLA plc 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Investment management fees                                    (87)          (55)             -                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Fees under Transitional Services Arrangement                   (2)           (2)             -                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Receipts under Transitional Services Arrangement                26            15             -                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Receipts under Client Service Proposition Agreement              5             2             -                  - 
----------------------------------------------------  ------------  ------------  ------------  ----------------- 
Dividend paid                                                 (33)             -             -                  - 
----------------------------------------------------  ------------  ------------  ------------  -----------------

I4.2 Transactions with key management personnel

The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows:

 
                                        2018   2017 
                                        GBPm   GBPm 
-------------------------------------  -----  ----- 
Salary and other short-term benefits       5      4 
-------------------------------------  -----  ----- 
Equity compensation plans                  2      2 
-------------------------------------  -----  -----

Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 76 to 105.

During the year to 31 December 2018 key management personnel and their close family members contributed GBP28k (2017: nil) to Pensions and Savings products sold by the Group. At 31 December 2018, the total value of key management personnel's investments in Group Pensions and Savings products was GBP1,639k (2017: nil).

I5. Operating leases

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

Operating lease rentals charged within administrative expenses amounted to GBP10 million (2017: GBP6 million).

The Group has commitments under non-cancellable operating leases as set out below:

 
                                                2018   2017 
                                                GBPm   GBPm 
---------------------------------------------  -----  ----- 
Not later than 1 year                             17      5 
---------------------------------------------  -----  ----- 
Later than 1 year and not later than 5 years      35     11 
---------------------------------------------  -----  ----- 
Later than five years                             39      - 
---------------------------------------------  -----  -----

The principal operating lease commitments for 2018 concern office space located at St Vincent Street, Glasgow, Juxon House, London, Redcliff Street, Bristol, Lyoner Straße, Frankfurt, and Arche Noah, Graz (2017: St Vincent Street, Glasgow and Juxon House, London and Redcliff Street, Bristol).

Disclosures of future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties are included in note G9.

I6. Commitments

 
This note analyses the Group's other commitments. 
------------------------------------------------- 
 
 
                                                                           2018   2017 
                                                                           GBPm   GBPm 
------------------------------------------------------------------------  -----  ----- 
To subscribe to private equity funds and other unlisted assets              655    543 
------------------------------------------------------------------------  -----  ----- 
To purchase, construct or develop investment property and income strips     125      - 
------------------------------------------------------------------------  -----  ----- 
For repairs, maintenance or enhancements of investment property              15      1 
------------------------------------------------------------------------  -----  -----

I7. 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. 
---------------------------------------------------------------------------------------------------

I7.1 Annuity sales

As set out in note G1, at the request of the Financial Conduct Authority ('FCA'), SLAL are conducting a past business review of non-advised annuity sales. The purpose of the review is to identify whether relevant customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and where appropriate provide redress to customers who have suffered loss as a result of not having received sufficient information. The Group has recognised provisions with regard to its obligations identified as a result of this activity to date. In relation to this review, the FCA is carrying out an investigation and it is possible that the FCA may impose a financial penalty on the Group. At this stage it is not possible to determine a reliable estimate of the financial impact of this contingent liability and the determination of any liability arising remains dependent on the occurrence of uncertain future events, including finalisation of the FCA's review. Any financial impact on the Group would be expected to be mitigated by the indemnity agreement that exists with SLA plc, subject to the liability caps that exist within the agreement. Further details are provided in note G1.

I7.2 Legal proceedings

In the normal course of business the Group is exposed to certain legal issues, which 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.

I8. 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 4 March 2019, the Board recommended a final dividend of 23.4p per share (2017: 25.1p per share) for the year ended 31 December 2018. 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 2018 and will be charged to the statement of changes in equity in 2019.

N Lyons

C Bannister

J McConville

A Barbour

C Fleming

K Green

W Mayall

B O'Dwyer

J Pollock

B Richards

N Shott

K Sorenson

4 March 2019

PARENT COMPANY ACCOUNTS

Statement of Financial Position

As at 31 December 2018

 
                                                             2018 
                                                     Notes   GBPm 
---------------------------------------------------  -----  ----- 
EQUITY AND LIABILITIES 
---------------------------------------------------  -----  ----- 
Equity attributable to ordinary shareholders 
---------------------------------------------------  -----  ----- 
Share capital                                            3     72 
---------------------------------------------------  -----  ----- 
Share premium                                            3      - 
---------------------------------------------------  -----  ----- 
Other reserve                                                 (4) 
---------------------------------------------------  -----  ----- 
Retained earnings                                           4,075 
---------------------------------------------------  -----  ----- 
Total equity attributable to ordinary shareholders          4,143 
---------------------------------------------------  -----  ----- 
 
Tier 1 Notes                                             4    411 
---------------------------------------------------  -----  ----- 
 
Total equity                                                4,554 
---------------------------------------------------  -----  ----- 
 
Liabilities 
---------------------------------------------------  -----  ----- 
Financial liabilities 
---------------------------------------------------  -----  ----- 
  Borrowings                                             5  1,634 
---------------------------------------------------  -----  ----- 
  Derivatives                                            6      1 
---------------------------------------------------  -----  ----- 
Other amounts due to Group entities                     15      1 
---------------------------------------------------  -----  ----- 
Accruals and deferred income                             7     33 
---------------------------------------------------  -----  ----- 
Total liabilities                                           1,669 
---------------------------------------------------  -----  ----- 
 
Total equity and liabilities                                6,223 
---------------------------------------------------  -----  ----- 
 
 
                                                2018 
                                        Notes   GBPm 
--------------------------------------  -----  ----- 
ASSETS 
--------------------------------------  -----  ----- 
Investments in Group entities               8  4,146 
--------------------------------------  -----  ----- 
Financial assets 
--------------------------------------  -----  ----- 
   Loans and receivables                    9  2,056 
--------------------------------------  -----  ----- 
Other amounts due from Group entities      15     20 
--------------------------------------  -----  ----- 
Cash and cash equivalents                  10      1 
--------------------------------------  -----  ----- 
Total assets                                   6,223 
--------------------------------------  -----  -----

The notes identified numerically on pages 216 to 221 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 128 to 213.

Statement of Cash Flows

For the period from 5 October 2018 to 31 December 2018

 
                                                                   2018 
                                                           Notes   GBPm 
---------------------------------------------------------  -----  ----- 
Cash flows from operating activities 
---------------------------------------------------------  -----  ----- 
Cash generated by operations                                  11      - 
---------------------------------------------------------  -----  ----- 
Net cash flows from operating activities                              - 
---------------------------------------------------------  -----  ----- 
 
Cash flows from investing activities 
---------------------------------------------------------  -----  ----- 
Interest received from Group entities                                29 
---------------------------------------------------------  -----  ----- 
Net cash flows from investing activities                             29 
---------------------------------------------------------  -----  ----- 
 
Cash flows from financing activities 
---------------------------------------------------------  -----  ----- 
Interest paid                                                      (28) 
---------------------------------------------------------  -----  ----- 
Net cash flows from financing activities                           (28) 
---------------------------------------------------------  -----  ----- 
 
Net increase in cash and cash equivalents                             1 
---------------------------------------------------------  -----  ----- 
Cash and cash equivalents at the beginning of the period              - 
---------------------------------------------------------  -----  ----- 
Cash and cash equivalents at the end of the period                    1 
---------------------------------------------------------  -----  -----

Statement of Changes in Equity

For the period from 5 October 2018 to 31 December 2018

 
                                                                                      Total equity 
                                     Share      Share      Other                      attributable     Tier 1 
                                   capital    Premium    Reserve                       to ordinary      Notes    Total 
                                  (note 3)   (note 3)   (note 8)  Retained earnings   shareholders   (note 4)   equity 
                                      GBPm       GBPm       GBPm               GBPm           GBPm       GBPm     GBPm 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
On incorporation at 5 October 
2018                                     -          -          -                  -              -          -        - 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
 
Total comprehensive expense for 
 the period attributable to 
 owners                                  -          -          -                (3)            (3)          -      (3) 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
Issue of shares under scheme of 
 arrangement                            72      4,078        (4)                  -          4,146          -    4,146 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
Capital reduction                        -    (4,078)          -              4,078              -          -        - 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
Issue of Tier 1 Notes via 
 substitution                            -          -          -                  -              -        411      411 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  ------- 
At 31 December 2018                     72          -        (4)              4,075          4,143        411    4,554 
-------------------------------  ---------  ---------  ---------  -----------------  -------------  ---------  -------

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

(a) Basis of preparation

Phoenix Group Holdings plc (the 'Company') was incorporated on 5 October 2018 under the UK Companies Act 2006 and is domiciled in England and Wales. The financial statements for the period ended 31 December 2018 are the first set of financial statements prepared by the Company. Accordingly, there is no comparative information to disclose in the individual financial statements.

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.

Statement of Compliance

The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU') and in accordance with the provisions of the UK Companies Act 2006.

The financial statements are presented in sterling (GBP) 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 121 to 213, 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. The Company first assesses whether objective evidence of impairment exists. Evidence of impairment needs to be significant or prolonged to determine that objective evidence of impairment exists. 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 financials asset are carried at amortised cost, using the effective interest method.

Financial assets measured at amortised cost are included in note 9.

Impairment of financial assets

The Company assesses the expected credit losses associated with its loans and receivables, 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 12 for detail of how the Company assesses whether the credit risk of a financial asset has increased since initial recognition and the approach to estimating ECLs.

The loss allowance reduces the carrying value of the financial asset and is reassessed at each reporting date. ECLs and subsequent remeasurements of the ECL, are recognised in the income statement. For other receivables, the ECL rate is recalculated each reporting period with reference to the counterparties of each balance.

2. FINANCIAL INFORMATION

New accounting pronouncements not yet effective

Details of the standards, interpretations and amendments to be adopted in future periods are detailed in note A5 to the consolidated financial statements, none of which are expected to have a significant impact on the Company's financial statements.

Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 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 AND SHARE PREMIUM

The Company was incorporated on 5 October 2018 with an issued share capital comprising 2 ordinary shares of GBP0.10 each and 50,000 redeemable preference shares of GBP1.00 each.

On 31 October 2018, all issued redeemable preference shares were cancelled.

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

The shares of the Company are listed on the London Stock Exchange and trading in these shares commenced on 13 December 2018.

Following court approval on 18 December 2018, the entire issued share premium of the Company as at 18 December 2018 was cancelled. The sum of GBP4,078 million arising on the share premium cancellation has been credited to the Company's retained earnings.

 
                                                    2018 
                                                    GBPm 
--------------------------------------------  ---------- 
Issued and fully paid: 
--------------------------------------------  ---------- 
721 million ordinary shares of GBP0.10 each   72,119,921 
--------------------------------------------  ---------- 
 
 
                                                   Number         GBP 
--------------------------------------------  -----------  ---------- 
At incorporation on 5 October 2018                      2           - 
--------------------------------------------  -----------  ---------- 
Issue of shares under scheme of arrangement   721,199,212  72,119,921 
--------------------------------------------  -----------  ---------- 
Ordinary shares in issue at 31 December       721,199,214  72,119,921 
--------------------------------------------  -----------  ----------

4. TIER 1 NOTES

The accounting policy for the Tier 1 Notes is included in note D3 to the consolidated financial statements.

 
                          Tier 1 
                           Notes 
                            GBPm 
------------------------  ------ 
At 5 October 2018              - 
------------------------  ------ 
Issued via substitution      411 
------------------------  ------ 
At 31 December 2018          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 GBP411 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 D3 to the consolidated financial statements.

5. BORROWINGS

The accounting policy for borrowings is included in note E5 to the consolidated financial statements.

 
                                                    Carrying value  Fair value 
--------------------------------------------------  --------------  ---------- 
                                                              2018        2018 
                                                              GBPm        GBPm 
--------------------------------------------------  --------------  ---------- 
GBP428 million subordinated loans (note a)                     439         441 
--------------------------------------------------  --------------  ---------- 
GBP450 million Tier 3 subordinated notes (note b)              447         447 
--------------------------------------------------  --------------  ---------- 
US $500 million Tier 2 bonds (note c)                          343         342 
--------------------------------------------------  --------------  ---------- 
EUR500 million Tier 2 notes (note d)                           405         390 
--------------------------------------------------  --------------  ---------- 
Total borrowings                                             1,634       1,620 
--------------------------------------------------  --------------  ---------- 
 
Amount due for settlement after 12 months                    1,634 
--------------------------------------------------  --------------  ----------

a. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the GBP428 million subordinated notes due 2025 at a coupon of 6.625%, which were initially recognised at fair value of GBP439 million.

b. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the GBP450 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%, which were initially recognised at fair value of GBP447 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 GBP349 million.

d. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the EUR500 million Tier 2 notes due 2029 with a coupon of 4.375%, which were initially recognised at fair value of GBP407 million.

e. On 12 December 2018, the Company became an additional borrower on an unsecured revolving credit facility, maturing in June 2022. The facility is undrawn as at 31 December 2018 and accrues interest at LIBOR plus 1.1%. A utilisation fee of between 0.1% and 0.4% is applicable dependent on the amount drawn.

f. On 12 December 2018, the Company became an additional borrower and guarantor to an acquisition facility with an aggregate principal amount of GBP600 million. The acquisition facility is undrawn as at 31 December 2018 and has a final maturity date of 31 August 2019. The Group is entitled to request two six-month extensions to the term of the facility (which would together extend the maturity date to 31 August 2020). The interest period may be selected by the Group and the interest rate for the initial six-month period is LIBOR plus a margin of 0.5%.

Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings. As part of the substitutions, accrued interest was also transferred to the Company and was settled prior to 31 December 2018.

For the purposes of the additional fair value disclosure 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.

 
                                                            Non-cash flow 
-----------------------------------------  --------  ----------------------------  --------- 
                                                               Loans     Movement 
                                           At 5 Oct       issued via   in foreign  At 31 Dec 
                                               2018   subsitution(1)     exchange       2018 
                                               GBPm             GBPm         GBPm       GBPm 
-----------------------------------------  --------  ---------------  -----------  --------- 
GBP428 million subordinated notes                 -              439            -        439 
-----------------------------------------  --------  ---------------  -----------  --------- 
GBP450 million Tier 3 subordinated notes          -              447            -        447 
-----------------------------------------  --------  ---------------  -----------  --------- 
US $500 million Tier 2 bonds                      -              349          (6)        343 
-----------------------------------------  --------  ---------------  -----------  --------- 
EUR500 million Tier 2 notes                       -              407          (2)        405 
-----------------------------------------  --------  ---------------  -----------  --------- 
                                                  -            1,642          (8)      1,634 
-----------------------------------------  --------  ---------------  -----------  ---------

1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and receivables (refer to note 9).

6. DERIVATIVES

The accounting policy for derivatives is included in note E3 to the consolidated financial statements.

The Company has entered into a cross currency swap to hedge against adverse currency movements in respect of the EUR500 million Tier 2 notes.

The fair value of the derivative liability is as follows:

 
                                     2018 
                                     GBPm 
----------------------------------  ----- 
Cross currency interest rate swap       1 
----------------------------------  -----

7. ACCRUALS AND DEFERRED INCOME

The accounting policy for accruals and deferred income is included in note G4 to the consolidated financial statements.

 
                                             2018 
                                             GBPm 
------------------------------------------  ----- 
Accruals and deferred income                   33 
------------------------------------------  ----- 
Amount due for settlement after 12 months       - 
------------------------------------------  -----

8. INVESTMENTS IN GROUP ENTITIES

 
                  2018 
                  GBPm 
---------------  ----- 
Cost 
---------------  ----- 
At 5 October         - 
---------------  ----- 
Additions        4,146 
---------------  ----- 
At 31 December   4,146 
---------------  -----

On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in old PGH, reflected in the table above, was determined as the carrying amount of the Company's share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of GBP4 million has been recognised as an Other reserve, and is shown as a separate component of equity.

For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entity directly held by the Company is separately identified.

9. LOANS AND RECEIVABLES

 
                                  Carrying value  Fair value 
--------------------------------  --------------  ---------- 
                                            2018        2018 
                                            GBPm        GBPm 
--------------------------------  --------------  ---------- 
Loans due from PLHL (note a)               1,231       1,231 
--------------------------------  --------------  ---------- 
Loans due from Old PGH (note b)              825         808 
--------------------------------  --------------  ---------- 
Total loans and receivables                2,056       2,039 
--------------------------------  --------------  ---------- 
 
Amounts due after 12 months                2,056 
--------------------------------  --------------  ----------

All loans and receivables balances are due from Group entities and are measured at amortised cost using the effective interest method. The fair value of these loans and receivables are also disclosed.

a. On 12 December 2018, the Company was assigned a GBP428 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 GBP440 million and is accreted to par over the period to 2025. At 31 December 2018, the carrying value of the loan was GBP440 million.

On 12 December 2018, the Company was assigned a GBP450 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 GBP448 million and is accreted to par over the period to 2022. At 31 December 2018, the carrying value of the loan was GBP448 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 GBP349 million and is accreted to par over the period to 2027. Movement in foreign exchange during the period reduced the carrying value by GBP6 million. At 31 December 2018, the carrying value of the loan was GBP343 million.

b. On 12 December 2018, the Company entered into a new GBP825 million loan agreement with Old PGH as consideration for the substitution of the Company as issuer of the Tier 1 Notes and EUR500 million Tier 2 notes. The loan accrues interest at a rate of 6 month LIBOR plus 1.22% and matures on 31 December 2023.

None of the loans are considered to be past due or impaired.

For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and receivables are categorised as Level 3 financial instruments. The fair value of loans and receivables 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.

10. CASH AND CASH EQUIVALENTS

The accounting policy for cash and cash equivalents is included in note G11 to the consolidated financial statements.

 
                          2018 
                          GBPm 
-----------------------  ----- 
Bank and cash balances       1 
-----------------------  -----

11. CASH FLOWS FROM OPERATING ACTIVITIES

 
                                                                                         2018 
                                                                                         GBPm 
--------------------------------------------------------------------------------------  ----- 
Loss for the year before tax                                                              (2) 
--------------------------------------------------------------------------------------  ----- 
Adjustments to reconcile profit for the year to cash flows from operating activities: 
--------------------------------------------------------------------------------------  ----- 
   Investment income from other Group entities                                            (5) 
--------------------------------------------------------------------------------------  ----- 
   Finance costs                                                                            5 
--------------------------------------------------------------------------------------  ----- 
   Fair value losses                                                                      (2) 
--------------------------------------------------------------------------------------  ----- 
   Foreign exchange movement on borrowings at amortised cost                              (2) 
--------------------------------------------------------------------------------------  ----- 
Net decrease in working capital                                                             6 
--------------------------------------------------------------------------------------  ----- 
Cash generated by operations                                                                - 
--------------------------------------------------------------------------------------  -----

12. 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 2018, total capital was GBP4,554 million. The movement in capital in the period comprises the total comprehensive expense for the period attributable to owners of GBP3 million, proceeds from the issue of shares under the scheme of arrangement of GBP4,146 million and the substituted Tier 1 Notes of GBP411 million.

In addition, the Group also manages its capital on a regulatory basis as described in note I3 to the consolidated financial statements.

The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company has hedged the currency risk on its foreign currency hybrid debt (US $500 million and EUR500 million) through a US $500 million internal loan and a EUR500 million internal cross currency interest rate swap.

Details of the Group's financial risk management policies are outlined in note E6 to the consolidated financial statements.

Credit risk management practices

The Company's current credit risk grading framework comprises the following categories:

 
Category    Description                                                             Basis for recognising ECL 
----------  ----------------------------------------------------------------------  ---------------------------------- 
Performing  The counterparty has a low risk of default and does not have any        12 month ECL 
            past-due amounts 
----------  ----------------------------------------------------------------------  ---------------------------------- 
Doubtful    There has been a significant increase in credit risk since initial      Lifetime ECL - not credit impaired 
            recognition 
----------  ----------------------------------------------------------------------  ---------------------------------- 
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         Amount is written off 
            financial difficulty and the 
            Group has no realistic prospect of recovery 
----------  ----------------------------------------------------------------------  ----------------------------------

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:

 
                                  External     Internal       12 month             Gross        Loss               Net 
                                    Credit       Credit    or lifetime   carrying amount   Allowance   carrying amount 
                                    rating       rating            ECL              GBPm        GBPm              GBPm 
-------------------------------  ---------  -----------  -------------  ----------------  ----------  ---------------- 
Loans and receivables (note 9)         N/A   Performing   12 month ECL             2,056           -             2,056 
-------------------------------  ---------  -----------  -------------  ----------------  ----------  ---------------- 
Other amounts due from Group 
 entities (note 15)                    N/A   Performing   12 month ECL                20           -                20 
-------------------------------  ---------  -----------  -------------  ----------------  ----------  ---------------- 
Cash and cash equivalents (note 
 10)                                   AAA          N/A   12 month ECL                 1           -                 1 
-------------------------------  ---------  -----------  -------------  ----------------  ----------  ----------------

The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also, forward-looking analysis.

Loans and receivables - The Company is exposed to credit risk relating to loans and receivables from other Group Companies, which are considered low risk. Given their low risk and the short time period since inception of the loan, the loss allowance has been set at less than GBP1 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.

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 and the short time period since inception of the loan, the loss allowance has been set at less than GBP1 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 AAA investment grade 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.

13. SHARE-BASED PAYMENTS

Following the scheme of arrangement on 12 December 2018 (see note 3), participants in the Old PGH share plans had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares. On 21 December 2018, LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. As the new grant of LTIP awards and replacement of all existing awards occurred near the end of the reporting period, no share-based payment entries have been recognised in the Company accounts.

Further detailed information on the Group's share-based plans is included in note I1 in the consolidated financial statements.

14. 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 76 to 105 of the Annual Report and Accounts.

15. 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.

During the period ended 31 December 2018, the Company entered into the following transactions with Group entities:

 
                                             2018 
                                             GBPm 
------------------------------------------  ----- 
Interest income from other Group entities       5 
------------------------------------------  -----

Amounts due from related parties at the end of the year:

 
                                             2018 
                                             GBPm 
------------------------------------------  ----- 
Loans due from Group entities               2,056 
------------------------------------------  ----- 
Other amounts due from Group entities          20 
------------------------------------------  ----- 
                                            2,076 
------------------------------------------  ----- 
Amount due for settlement after 12 months   2,056 
------------------------------------------  -----

Amounts due to related parties at the end of the year:

 
                                             2018 
                                             GBPm 
------------------------------------------  ----- 
Other amounts due to Group entities             1 
------------------------------------------  ----- 
Cross currency interest rate swap               1 
------------------------------------------  ----- 
Amount due for settlement after 12 months       - 
------------------------------------------  -----

16. 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.

17. EVENTS AFTER THE REPORTING PERIOD

Details of events after the reporting date are included in note I8 to the consolidated financial statements.

On 22 February 2019, the Company acquired Standard Life International Designated Activity Company from another Group entity. The consideration was GBP162 million and this was in the form of an intra-group loan liability assumed.

N Lyons

C Bannister

J McConville

A Barbour

C Fleming

K Green

W Mayall

B O'Dwyer

J Pollock

B Richards

N Shott

K Sorenson

4 March 2019

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:

 
                                   Shareholder 
                                and non-profit  Participating                 Participating 
31 December 2018                      funds(1)   supported(1)             non-supported(2)   Unit-linked(2)   Total(3) 
 Carrying value                           GBPm           GBPm                          GBPm            GBPm       GBPm 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Cash and cash equivalents                2,522          2,304                         5,046           7,026     16,898 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Debt securities - gilts                  3,046            375                        15,813           5,887     25,121 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Debt securities - bonds                 12,801          1,632                        22,384          30,410     67,227 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Equity securities                          129             45                        13,910          67,154     81,238 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Property investments                       101             44                         2,046           6,074      8,265 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Other investments(4)                     2,948            192                         2,844           6,279     12,263 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
At 31 December 2018                     21,547          4,592                        62,043         122,830    211,012 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Cash and cash equivalents in 
 Group holding companies                                                                                           346 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Cash and financial assets in 
 other Group companies                                                                                             582 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Financial assets held by the 
 non-controlling interest in 
 consolidated collective 
 investment 
 schemes                                                                                                         2,990 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Total Group consolidated 
 assets                                                                                                        214,930 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
Comprised of: 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
      Investment property                                                                                        6,520 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
      Financial assets                                                                                         204,577 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
      Cash and cash

       equivalents                                                                                               4,926 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
      Derivative liabilities                                                                                   (1,093) 
-----------------------------  ---------------  -------------  ----------------------------  --------------  --------- 
                                                                                                               214,930 
-----------------------------  ---------------  -------------  ----------------------------  --------------  ---------

1 Includes assets where shareholders of the life companies bear the investment risk.

2 Includes assets where policyholders bear most of the investment risk.

3 This information is presented on a look through basis to underlying funds where available.

4 Includes equity release mortgages of GBP2,020 million, commercial real estate loans of GBP449 million, income strips of GBP654 million, policy loans of GBP9 million, other loans of GBP170 million, net derivative assets of GBP2,832 million, reinsurers' share of investment contracts of GBP5,417 million and other investments of GBP712 million.

The following table provides a reconciliation of the total life company assets to the Assets under Administration ('AUA') as at 31 December 2018 detailed in the Business Review on page 31:

 
                                                         GBPbn 
------------------------------------------------------  ------ 
Total Life Company assets                                211.0 
------------------------------------------------------  ------ 
Off-balance sheet AUA(1)                                  31.1 
------------------------------------------------------  ------ 
Less: Standard Life Trustee Investment Plan assets(2)   (15.8) 
------------------------------------------------------  ------ 
Assets under Administration                              226.3 
------------------------------------------------------  ------

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 consolidated statement of financial position) but on which the Group earns fee revenue.

2 Assets held within the Standard Life Trustee Investment Plan product are excluded from AUA as materially all profits accrue to third party investment managers.

 
                                                      Shareholder 
                                                   and non-profit  Participating   Participating 
31 December 2017                                            funds      Supported   non-supported  Unit-linked    Total 
 Carrying value                                              GBPm           GBPm            GBPm         GBPm     GBPm 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Cash and cash equivalents                                   1,906          2,554           4,312        2,355   11,127 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Debt securities - gilts                                     3,059            470           6,461          963   10,953 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Debt securities - bonds                                     7,362          1,627           6,166        3,049   18,204 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Equity securities                                             158             52           5,350       16,845   22,405 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Property investments                                          112             52             847          651    1,662 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Other investments(1)                                        1,745            206           1,547        6,103    9,601 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
At 31 December 2017                                        14,342          4,961          24,683       29,966   73,952 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Cash and cash equivalents in Group holding 
 companies                                                                                                         535 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Cash and financial assets in other Group 
 companies                                                                                                         456 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Financial assets held by the non-controlling 
 interest in consolidated collective investment 
 schemes                                                                                                         1,012 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Total Group consolidated assets                                                                                 75,955 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Comprised of: 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Investment property                                                                                                612 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Financial assets                                                                                                74,340 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Cash and cash equivalents                                                                                        2,245 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
Derivative liabilities                                                                                         (1,242) 
------------------------------------------------  ---------------  -------------  --------------  -----------  ------- 
                                                                                                                75,955 
------------------------------------------------  ---------------  -------------  --------------  -----------  -------

1 Includes equity release mortgages of GBP1,255 million, policy loans of GBP12 million, other loans of GBP199 million, net derivative assets of GBP1,563 million, reinsurers' share of investment contracts of GBP6,085 million, and other investments of GBP487 million.

The following table analyses by type the debt securities of the life companies:

 
                                 Shareholder 
31 December 2018              and non-profit                                        Participating 
Analysis by type of debt               funds  Participating supported              non--supported  Unit-linked   Total 
securities                              GBPm                     GBPm                        GBPm         GBPm    GBPm 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Gilts                                  3,046                      375                      15,813        5,887  25,121 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Other government and 
 supranational(2)                      1,460                      309                       9,334       10,005  21,108 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Corporate - financial 
 institutions                          5,151                      649                       7,631       10,806  24,237 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Corporate - other                      5,625                      168                       4,838        9,435  20,066 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Asset backed securities 
 ('ABS')                                 565                      506                         581          164   1,816 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
At 31 December 2018                   15,847                    2,007                      38,197       36,297  92,348 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------

2 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.

 
                                 Shareholder 
31 December 2017              and non-profit                                        Participating 
Analysis by type of debt               funds  Participating supported              non--supported  Unit-linked   Total 
securities                              GBPm                     GBPm                        GBPm         GBPm    GBPm 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Gilts                                  3,059                      470                       6,461          963  10,953 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Other government and 
 supranational                         1,163                      333                       2,109          871   4,476 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Corporate - financial 
 institutions                          2,812                      443                       1,902          187   5,344 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Corporate - other                      2,810                      161                       1,550        1,962   6,483 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Asset backed securities 
 ('ABS')                                 577                      690                         605           29   1,901 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
At 31 December 2017                   10,421                    2,097                      12,627        4,012  29,157 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------

The life companies' debt portfolio was GBP92.3 billion at 31 December 2018. Shareholders had direct exposure to GBP17.9 billion of these assets (including supported participating funds), of which 99% of rated securities were investment grade. The shareholders' credit risk exposure to the non-supported participating funds is primarily limited to the shareholders' share of future bonuses. Shareholders' credit risk exposure to the unit-linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.

Sovereign and supranational debt represented 29% of the debt portfolio in respect of shareholder exposure, or GBP5.2 billion, at 31 December 2018. The vast majority of the life companies' exposure to sovereign and supranational debt holdings is to UK gilts.

The following table sets out a breakdown of the life companies' sovereign and supranational debt security holdings by country:

 
31 December 2018                 Shareholder 
Analysis of sovereign and     and non-profit                                        Participating 
supranational debt security            Funds  Participating supported              non--supported  Unit-linked   Total 
holdings by country                     GBPm                     GBPm                        GBPm         GBPm    GBPm 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
UK                                     3,428                      415                      16,023        5,925  25,791 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Supranationals                           573                       84                         335           52   1,044 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
USA                                        6                        3                         125        3,551   3,685 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Germany                                   69                       62                       3,437          388   3,956 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
France                                    71                       39                       2,455          343   2,908 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Netherlands                               28                       19                         345          106     498 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Italy                                     45                        -                           -          342     387 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Greece                                     -                        -                          12           49      61 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Spain                                      -                        -                           -          145     145 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Belgium                                    5                        1                         710           36     752 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Other - non-Eurozone                     245                       51                       1,045        4,769   6,110 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Other - Eurozone                          36                       10                         659           79     784 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
Indirectly held debt 
 securities                                -                        -                           1          107     108 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
At 31 December 2018                    4,506                      684                      25,147       15,892  46,229 
---------------------------  ---------------  -----------------------  --------------------------  -----------  ------ 
 
 
31 December 2017 
Analysis of sovereign 
and supranational debt              Shareholder                                     Participating 
security holdings by       and non-profit funds  Participating supported           non--supported  Unit-linked   Total 
country                                    GBPm                     GBPm                     GBPm         GBPm    GBPm 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
UK                                        3,413                      519                    6,722          971  11,625 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Supranationals                              606                       89                      359           25   1,079 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
USA                                           -                        3                      122          346     471 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Germany                                      78                       72                      507           74     731 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
France                                       26                       25                      113           62     226 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Netherlands                                  29                       20                      117           11     177 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Italy                                        55                        -                        -           34      89 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Spain                                         -                        -                        -           37      37 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Other - non-Eurozone                          7                       66                      592          258     923 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
Other - Eurozone                              8                        9                       38           16      71 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------ 
At 31 December 2017                       4,222                      803                    8,570        1,834  15,429 
------------------------  ---------------------  -----------------------  -----------------------  -----------  ------

All of the life companies' debt securities are held at fair value through profit or loss under IAS 39, and therefore already reflect any reduction in value between the date of purchase and the reporting date.

The life companies have in place a comprehensive database that consolidates credit exposures across counterparties, geographies and business lines. This database is used for credit monitoring, stress testing and scenario planning. The life companies continue to manage their balance sheets prudently and have taken extra measures to ensure their market exposures remain within risk appetite.

The following table sets out a breakdown of the life companies' financial institution corporate debt security holdings by country:

 
31 December 2018 
Analysis of financial 
institution corporate           Shareholder and                                     Participating 
debt security holdings         non-profit funds  Participating supported           non--supported  Unit-linked   Total 
by country                                 GBPm                     GBPm                     GBPm         GBPm    GBPm 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
UK                                        2,670                      162                    3,017        1,964   7,813 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
USA                                         750                       46                      934        1,188   2,918 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Germany                                     125                       13                      410          591   1,139 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
France                                      172                       52                      734        1,468   2,426 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Netherlands                                 409                       42                      377          780   1,608 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Italy                                        29                        -                       44           45     118 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Ireland                                       -                        -                       31           43      74 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Spain                                        58                        -                       91          218     367 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Luxembourg                                    1                        -                       18           12      31 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Belgium                                       6                       20                       84           85     195 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Other - non-Eurozone                        878                      299                    1,723        4,287   7,187 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Other - Eurozone                             53                       15                      168          125     361 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
At 31 December 2018                       5,151                      649                    7,631       10,806  24,237 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
 
 
31 December 2017 
Analysis of financial 
institution corporate               Shareholder                                      Participating 
debt security holdings     and non-profit funds  Participating supported            non--supported  Unit-linked  Total 
by country                                 GBPm                     GBPm                      GBPm         GBPm   GBPm 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
UK                                        1,428                       83                       827          106  2,444 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
USA                                         598                       47                       425           25  1,095 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Germany                                      72                        9                        47            3    131 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
France                                      100                       34                        80            4    218 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Netherlands                                 190                       66                       186           28    470 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Italy                                         7                        -                         7            -     14 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Spain                                         3                        -                        16            -     19 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Other - non-Eurozone                        389                      182                       283           14    868 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
Other - Eurozone                             25                       22                        31            7     85 
------------------------  ---------------------  -----------------------  ------------------------  -----------  ----- 
At 31 December 2017                       2,812                      443                     1,902          187  5,344 
------------------------  ---------------------  -----------------------  ------------------------  -----------  -----

The life companies had GBP87 million (2017: GBP10 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece, and Spain, at 31 December 2018. The GBP5,800 million (2017: GBP3,255 million) total shareholder exposure to financial institution corporate debt comprised GBP3,080 million (2017: GBP2,648 million) senior debt, GBP2,230 million (2017: GBP2 million) Tier 1 debt and GBP490 million (2017: GBP605 million) Tier 2 debt.

The GBP5,800 million shareholder exposure to financial institution corporate debt comprised GBP3,505 million (2017: GBP2,037 million) bank debt and GBP2,295 million (2017: GBP1,218 million) non-bank debt.

For each of the life companies' significant financial institution counterparties, industry and other data has been used to assess the exposure of the individual counterparties. As part of the Group's risk appetite framework and analysis of shareholder exposure to a potential worsening of the economic situation, this assessment has been used to identify counterparties considered to be most at risk from defaults. The financial impact on these counterparties, and the contagion impact on the rest of the shareholder portfolio, is assessed under various scenarios and assumptions. This analysis is regularly reviewed to reflect the latest economic outlook, economic data and changes to asset portfolios. The results are used to inform the Group's views on whether any management actions are required.

The following table sets out a breakdown of the life companies' corporate - other debt security holdings by country:

 
31 December 2018 
Analysis of corporate -         Shareholder and                                     Participating 
other debt security            non-profit funds  Participating supported           non--supported  Unit-linked   Total 
holdings by country                        GBPm                     GBPm                     GBPm         GBPm    GBPm 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
UK                                        2,484                       55                    2,200        2,559   7,298 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
USA                                         872                       32                      681        2,170   3,755 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Germany                                     506                       64                      437          729   1,736 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------

France                                      544                        5                      472          490   1,511 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Netherlands                                 112                        -                       79          129     320 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Italy                                       119                        1                       73          114     307 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Ireland                                      11                        -                       23           47      81 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Spain                                        94                        1                       62           98     255 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Luxembourg                                    -                        -                        4           53      57 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Belgium                                     122                        1                       97          120     340 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Other - non-Eurozone                        751                        9                      626        1,296   2,682 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Other - Eurozone                             10                        -                        2           68      80 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Indirectly held debt 
 securities                                   -                        -                       82        1,562   1,644 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
At 31 December 2018                       5,625                      168                    4,838        9,435  20,066 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
 
 
31 December 2017 
Analysis of corporate -          Shareholder and                                     Participating 
other debt security             non-profit funds  Participating supported           non--supported  Unit-linked  Total 
holdings by country                         GBPm                     GBPm                     GBPm         GBPm   GBPm 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
UK                                         1,248                       66                      783          747  2,844 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
USA                                          561                       31                      200           72    864 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Germany                                      241                       43                      142           25    451 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
France                                       219                       16                      139           19    393 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Netherlands                                    5                        -                       15            3     23 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Italy                                         47                        1                       32            5     85 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Ireland                                        5                        -                        -            8     13 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Spain                                         46                        1                       20            2     69 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Belgium                                       82                        -                       32            2    116 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Other - non-Eurozone                         345                        3                      185        1,041  1,574 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Other - Eurozone                              11                        -                        2           38     51 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
At 31 December 2017                        2,810                      161                    1,550        1,962  6,483 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  -----

The following table sets out a breakdown of the life companies' ABS holdings by country:

 
31 December 2018                 Shareholder and                                     Participating 
Analysis of ABS                 non-profit funds  Participating supported           non--supported  Unit-linked  Total 
holdings by country                         GBPm                     GBPm                     GBPm         GBPm   GBPm 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
UK                                           507                      317                      433          115  1,372 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
USA                                            -                        -                        2            1      3 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Germany                                        -                       29                        -            -     29 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
France                                         -                       33                        8            1     42 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Netherlands                                    8                       64                       35           12    119 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Italy                                          -                        -                        5            -      5 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Ireland                                       27                        1                       32            2     62 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Spain                                          -                       17                        -            -     17 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Luxembourg                                     -                       34                       17            5     56 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Other - non-Eurozone                          23                       11                       49           22    105 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Indirectly held debt 
 securities                                    -                        -                        -            6      6 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
At 31 December 2018                          565                      506                      581          164  1,816 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
 
 
31 December 2017                 Shareholder and                                     Participating 
Analysis of ABS                 non-profit funds  Participating supported           non--supported  Unit-linked  Total 
holdings by country                         GBPm                     GBPm                     GBPm         GBPm   GBPm 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
UK                                           507                      523                      527           28  1,585 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  -----

USA                                            -                        -                        2            -      2 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Germany                                        -                        9                        4            -     13 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
France                                        15                       45                        -            -     60 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Netherlands                                    9                       76                       23            1    109 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Ireland                                       36                        -                       26            -     62 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Luxembourg                                     -                       32                       18            -     50 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Other - non-Eurozone                          10                        5                        5            -     20 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
Other - Eurozone                               -                        -                        -            -      - 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  ----- 
At 31 December 2017                          577                      690                      605           29  1,901 
-----------------------  -----------------------  -----------------------  -----------------------  -----------  -----

The following table sets out the credit rating analysis of the debt portfolio:

 
31 December 2018                Shareholder and                                     Participating 
Credit rating analysis         non-profit funds  Participating supported           non--supported  Unit-linked   Total 
of debt portfolio                          GBPm                     GBPm                     GBPm         GBPm    GBPm 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
AAA                                       1,485                      775                    5,576        4,855  12,691 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
AA                                        5,246                      775                   21,929        8,611  36,561 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
A                                         5,866                      363                    5,446        7,347  19,022 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
BBB                                       2,868                       38                    3,998        4,932  11,836 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
BB                                           10                        3                      180           58     251 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
B and below                                  71                        -                      387        3,959   4,417 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Non-rated                                   301                       53                      597        1,410   2,361 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Indirectly held debt 
 securities                                   -                        -                       84        5,125   5,209 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
At 31 December 2018                      15,847                    2,007                   38,197       36,297  92,348 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------

94% of rated securities were investment grade at 31 December 2018 (2017: 99%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders' funds were 99% and 93% respectively (2017: 99% and 98% respectively).

 
31 December 2017                Shareholder and                                     Participating 
Credit rating analysis         non-profit funds  Participating supported           non--supported  Unit-linked   Total 
of debt portfolio                          GBPm                     GBPm                     GBPm         GBPm    GBPm 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
AAA                                       1,162                      867                    1,568          549   4,146 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
AA                                        4,169                      747                    7,055          995  12,966 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
A                                         3,154                      325                    1,264          280   5,023 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
BBB                                       1,652                       33                    1,716          282   3,683 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
BB                                           49                        2                      187           23     261 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
B and below                                   -                        1                      101            1     103 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
Non-rated                                   235                      122                      736        1,882   2,975 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------ 
At 31 December 2017                      10,421                    2,097                   12,627        4,012  29,157 
-----------------------  ----------------------  -----------------------  -----------------------  -----------  ------

Additional Capital Disclosures

PGH PLC SOLVENCY II SURPLUS

The PGH plc surplus at 31 December 2018 is GBP3.2 billion (2017: GBP1.8 billion).

 
            31 December 2018 
                   Estimated  31 December 2017 
                       GBPbn             GBPbn 
----------  ----------------  ---------------- 
Own Funds               10.3               6.6 
----------  ----------------  ---------------- 
SCR                    (7.1)             (4.8) 
----------  ----------------  ---------------- 
Surplus                  3.2               1.8 
----------  ----------------  ----------------

The surplus has increased during the period largely due to the acquisition of the Standard Life Assurance businesses financed through an equity raise and the issuance of capital qualifying debt, capital synergies achieved associated with the acquisition and the delivery of management actions partly offset by the impact of dividends paid (including accrual for the 2018 final dividend), financing costs and net adverse economic and other variances.

calculation of group solvency

The Solvency II regulations set out two methods for calculating Group solvency, 'Method 1' (being the default accounting based consolidation method) and 'Method 2' (the deduction and aggregation method). Under Method 2, the solo Own Funds are aggregated rather than consolidated on a line by line basis. The SCR is also aggregated, with no allowance for diversification. Method 2 is used for all entities within the Standard Life Assurance businesses acquired and Method 1 is used for all other entities of the Group. The Group has approval to use a combination of Methods 1 and 2 for consolidating its Group solvency results.

COMPOSITION OF OWN FUNDS

Own Funds items are classified into different Tiers based on the features of the specific items and the extent to which they possess the following characteristics, with Tier 1 being the highest quality.

-- availability to be called up on demand to fully absorb losses on a going-concern basis, as well as in the case of winding-up ('permanent availability'); and

-- in the case of winding-up, the total amount that is available to absorb losses before repayment to the holder until all obligations to policyholders and other beneficiaries have been met ('subordination').

PGH plc's total Own Funds are analysed by Tier as follows:

 
                        31 December 2018 
                               Estimated  31 December 2017 
                                   GBPbn             GBPbn 
----------------------  ----------------  ---------------- 
Tier 1 - Unrestricted                7.8               5.0 
----------------------  ----------------  ---------------- 
Tier 1 - Restricted                  0.5                 - 
----------------------  ----------------  ---------------- 
Tier 2                               1.5               1.0 
----------------------  ----------------  ---------------- 
Tier 3                               0.5               0.6 
----------------------  ----------------  ---------------- 
Total Own Funds                     10.3               6.6 
----------------------  ----------------  ----------------

PGH plc's unrestricted Tier 1 capital accounts for 76% (2017: 76%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.

Restricted Tier 1 capital comprises the Tier 1 Notes issued in April 2018, the terms of which enable it to qualify as restricted Tier 1 capital for regulatory reporting purposes.

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 GBP0.4 billion (31 December 2017: GBP0.5 billion) and the deferred tax asset of GBP0.1 billion (2017: GBP0.1 billion).

BREAKDOWN OF SCR

Following the acquisition, the Group now 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. Standard Life International Designated Activity Company calculates its capital requirements in accordance with Standard Formula. An analysis of the undiversified SCR of PGH plc is presented below:

 
                                     31 December 2018 
--------------------------  ----------------------------------  ----------- 
                                     Phoenix     Standard Life  31 December 
                              Internal Model    Internal Model         2017 
                                           %                 %            % 
--------------------------  ----------------  ----------------  ----------- 
Longevity                                 26                15           30 
--------------------------  ----------------  ----------------  ----------- 
Credit                                    18                13           15 
--------------------------  ----------------  ----------------  ----------- 
Persistency                               10                26           14 
--------------------------  ----------------  ----------------  ----------- 
Interest rates                            11                10            7 
--------------------------  ----------------  ----------------  ----------- 
Operational                                7                 8            9 
--------------------------  ----------------  ----------------  ----------- 
Swap spreads                               2                 1            3 
--------------------------  ----------------  ----------------  ----------- 
Other market risks                        16                16           15 
--------------------------  ----------------  ----------------  ----------- 
Other non-market risks                    10                11            7 
--------------------------  ----------------  ----------------  ----------- 
Total pre-diversified SCR                100               100          100 
--------------------------  ----------------  ----------------  -----------

The principal risks of the Group are described in detail in note E6 and F4 in the IFRS consolidated financial statements.

BREAKDOWN OF SHAREHOLDER CAPITAL POSITION

The shareholder capital position is an adjusted PGH plc position which excludes Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme of GBP2.3 billion as at 31 December 2018 (2017: GBP2.0 billion).

The shareholder capital position is further analysed between the contributions of the life companies and holding companies as follows:

 
                  31 December 2018 
                         Estimated  31 December 2017 
                             GBPbn             GBPbn 
----------------  ----------------  ---------------- 
Own Funds                      8.0               4.6 
----------------  ----------------  ---------------- 
Life Companies                 7.5               4.0 
----------------  ----------------  ---------------- 
Holding Company                0.5               0.6 
----------------  ----------------  ---------------- 
SCR                          (4.8)             (2.8) 
----------------  ----------------  ---------------- 
Life Companies               (4.4)             (2.4) 
----------------  ----------------  ---------------- 
Holding Company              (0.4)             (0.4) 
----------------  ----------------  ---------------- 
Surplus                        3.2               1.8 
----------------  ----------------  ---------------- 
Life Companies                 3.1               1.6 
----------------  ----------------  ---------------- 
Holding Company                0.1               0.2 
----------------  ----------------  ----------------

Own Funds within the Life Companies of GBP7.5 billion (2017: GBP4.0 billion) comprise GBP4.5 billion (2017: GBP0.8 billion) in the shareholders' funds, GBP2.0 billion (2017: GBP2.1 billion) in the non-profit funds, GBP0.5 billion (2017: GBP0.5 billion) in the supported with-profit funds and future shareholder transfers of GBP0.5 billion (2017: GBP0.6 billion).

Own Funds within the holding companies of GBP0.5 billion (2017: GBP0.6 billion) principally comprises cash and other financial assets held in the holding companies, net of shareholder borrowings which do not qualify as capital under the Solvency II regulations.

MINIMUM CAPITAL REQUIREMENTS

Minimum Capital Requirement ('MCR') is the minimum amount of capital an insurer is required to hold below which policyholders and beneficiaries would become exposed to an unacceptable level of risk if an insurer was allowed to continue its operations. For Groups this is referred to as the Minimum Consolidated Group SCR ('MGSCR')

The MCR is calculated according to a formula prescribed by the Solvency II regulations and is subject to a floor of 25% of the SCR or EUR3.7 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 2018 is GBP1.0 billion (2017: GBP1.2 billion).

PGH plc's Method 1 Eligible Own Funds to cover MGSCR is GBP4.2 billion (2017: GBP5.3 billion) leaving an excess of Eligible Own Funds over MGSCR of GBP3.2 billion (2017: GBP4.1 billion), which translates to an MGSCR coverage ratio of 408% (2017: 448%).

The MCR for the Method 2 part of the Group is GBP1.1 billion, with Eligible Own Funds of GBP4.2 billion, leaving an excess of Eligible Own Funds over MCR of GBP3.1 billion, which translates to an MCR coverage ratio of 377%.

Alternative Performance Measures

The Group assesses its financial performance based on a number of measures. Some measures are management derived measures of historic or future financial performance, position or cash flows of the Group; which are not defined or specified in accordance with relevant financial reporting frameworks such as International Financial Reporting Standards ('IFRS') or Solvency II. These measures are known as Alternative Performance Measures ('APMs').

APMs are disclosed to provide stakeholders with further helpful information on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the measures determined according to IFRS and Solvency II requirements. Accordingly, these APMs may not be comparable with similarly titled measures and disclosures by other companies.

A list of the APMs used in our results as well as their definitions, why they are used and, if applicable, how they can be reconciled to the nearest equivalent GAAP measure is provided below. Further discussion of these measures can be found in the business review on page 28 and the definitions of all APMs are included in the glossary on page 234.

 
                                                                                         Reconciliation to financial 
APM                          Definition                    Why is this measure used      statements 
---------------------------  ----------------------------  ----------------------------  ----------------------------- 
Assets under Administration  The Group's Assets under      AUA indicates the potential   A reconciliation from the 
                             Administration ('AUA')        earnings capability of the    Group's IFRS consolidated 
                             represents assets             Group arising from its        statement of financial 
                             administered by or on behalf  insurance and                 position to the 
                             of the Group, covering both   investment business. AUA      Group's AUA is provided on

                             policyholder fund and         flows provide a measure of    page 222. 
                             shareholder assets. It        the Group's ability to 
                             includes assets recognised    deliver new business 
                             in the Group's IFRS           growth. 
                             consolidated statement of 
                             financial position together 
                             with certain assets 
                             administered by the Group 
                             for which beneficial 
                             ownership resides with 
                             customers. 
---------------------------  ----------------------------  ----------------------------  ----------------------------- 
Financial                    Financial leverage is         The Group seeks to manage     The debt and equity figures 
 leverage ratio              calculated by Phoenix (using  the level of debt on its      are directly sourced from the 
                             Fitch Ratings' stated         balance sheet by monitoring   Group's IFRS consolidated 
                             methodology) as debt          its financial                 statement 
                             as a percentage               leverage ratio. This is to    of financial position on 
                             of the sum of debt and        ensure the Group maintains    pages 123 
                             equity. Debt is defined as    its investment grade credit   and 124 and the analysis of 
                             the IFRS carrying value of    rating as                     borrowings note on page 155. 
                             shareholder borrowings.       issued by Fitch Ratings and 
                             Equity                        optimises its funding costs 
                             is defined as the sum of      and financial flexibility 
                             equity attributable to the    for future 
                             owners of the parent          acquisitions. 
                             (excluding goodwill), 
                             the unallocated surplus and 
                             the Tier 1 Notes. 
---------------------------  ----------------------------  ----------------------------  ----------------------------- 
New business contribution    Represents the increase in    This measure is considered a  New business contribution is 
                             Solvency II shareholder Own   prudent proxy for the future  not directly reconcilable to 
                             funds arising from new        cash generation that is       the Group's Solvency II 
                             business written              expected                      metrics 
                             in the year, adjusted to      to emerge over the life of    as it represents an in-year 
                             exclude the associated risk   contracts written in the      movement. Further analysis is 
                             margin and any restrictions   period.                       provided on page 31. 
                             in respect 
                             of contract boundaries and 
                             stated on a net of tax 
                             basis. 
---------------------------  ----------------------------  ----------------------------  ----------------------------- 
Operating companies'         Cash remitted by the Group's  The statement of              Operating companies' cash 
 cash                        operating companies to the    consolidated cash flows       generation is not directly 
 generation                  Group's holding companies.    prepared in accordance with   reconcilable to an equivalent 
                                                           IFRS combines cash flows      GAAP measure 
                                                           relating to shareholders      (IFRS statement of 
                                                           with cash flows relating to   consolidated cash flows) as 
                                                           policyholders, but the        it includes amounts that 
                                                           practical management          eliminate on consolidation. 
                                                           of cash within the Group      Further details of holding 
                                                           maintains a distinction       companies' cash flows are 
                                                           between the two. The Group    included within the business 
                                                           therefore focuses             review on 
                                                           on the cash flows of the      page 28 and a breakdown of 
                                                           holding companies which       the Group's cash position by 
                                                           relate only to shareholders.  type of entity is provided in 
                                                           Such cash flows               the 
                                                           are considered more           additional life company asset 
                                                           representative of the cash    disclosures section on page 
                                                           generation that could         222. 
                                                           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                    Operating profit is a         This measure provides a more  A reconciliation of operating 
 profit                      financial performance         representative view of the    profit to the IFRS result 
                             measure based on expected     Group's performance than the  before tax attributable to 
                             long-term investment          IFRS                          owners 
                             returns. It is stated before  result after tax as it        is included in the business 
                             tax and non-operating items   provides long-term            review on page 28 and in the 
                             including amortisation and    performance information       primary financial statements 
                             impairments                   unaffected by short--term     on page 
                             of intangibles, finance       economic volatility and       121. 
                             costs attributable to owners  one-off items, and is stated 
                             and other non-operating       net of policyholder finance 
                             items which in                charges and 
                             the Director's view should    tax. 
                             be excluded by their nature   It helps give stakeholders a 
                             or incidence to enable a      better understanding of the 
                             full understanding            underlying performance of 
                             of financial performance.     the Group 
                             Further details of the        by identifying and analysing 
                             components of this measure    non--operating items. 
                             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. 
---------------------------  ----------------------------  ----------------------------  ----------------------------- 
Phoenix Life Free Surplus    The Solvency II surplus of    This figure provides a view   Please see business review 
                             the life companies that is    of the level of surplus       section page 28 for further 
                             in excess of their Board      capital in the Life           analysis of the solvency 
                             approved capital              companies that is             positions 
                             management policies.          available for distribution    of the life companies. 
                                                           to the holding companies, 
                                                           and the generation of Free 
                                                           Surplus underpins 
                                                           future operating cash 
                                                           generation. 
---------------------------  ----------------------------  ----------------------------  -----------------------------

Shareholder                  Represents total Eligible     The unsupported with-profit   Further details of the 
 Capital                     Own Funds divided by the      funds and Group pension       Shareholder Capital Coverage 
 Coverage                    Solvency Capital              funds do not contribute to    Ratio and its calculation are 
 Ratio                       Requirements ('SCR'),         the Group Solvency            included 
                             adjusted to a shareholder     II surplus. However, the      in the business review on 
                             view through the exclusion    inclusion of related Own      page 28 and the additional 
                             of amounts relating to those  Funds and SCR amounts         capital disclosures section 
                             ring-fenced                   dampens the implied           on page 228. 
                             with-profit funds and Group   Solvency II capital ratio. 
                             pension schemes whose Own     The Group therefore focuses 
                             Funds exceed their SCR.       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. 
---------------------------  ----------------------------  ----------------------------  -----------------------------

ADDITIONAL INFORMATION

 
IN THIS SECTION 
Shareholder Information      232 
Forward-looking Statements   233 
Glossary                     234

Shareholder Information

ANNUAL GENERAL MEETING

Our Annual General Meeting ('AGM') will be held on 2 May 2019 at 9:00am.

The voting results for our 2019 AGM, including proxy votes and votes withheld, will be available on the Group's website shortly after the meeting.

SHARE PRICE PERFORMANCE

Phoenix Group Holdings plc share price performance

Price pence per share (rebased to Phoenix)

SHAREHOLDER PROFILE AS AT 31 DECEMBER 2018

 
Range of shareholdings  No. of shareholders      %  No. of shares      % 
----------------------  -------------------  -----  -------------  ----- 
1-1,000                                 507  25.95        245,988   0.03 
----------------------  -------------------  -----  -------------  ----- 
1,001-5,000                             686  35.11      1,657,308   0.23 
----------------------  -------------------  -----  -------------  ----- 
5,001-10,000                            152   7.78      1,049,923   0.14 
----------------------  -------------------  -----  -------------  ----- 
10,001-250,000                          382  19.55     26,959,020   3.74 
----------------------  -------------------  -----  -------------  ----- 
250,001-500,000                          80   4.09     29,115,610   4.04 
----------------------  -------------------  -----  -------------  ----- 
500,001 and above                       147   7.52    662,171,365  91.82 
----------------------  -------------------  -----  -------------  ----- 
Total                                 1,954           721,199,214 
----------------------  -------------------  -----  -------------  -----

SHAREHOLDER SERVICES

Managing your shareholding

Our registrar, Computershare, maintains the Company's register of members. Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding, please contact directly using the contact details set out below.

Registrar details

Computershare Investor Services PLC

The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ

Shareholder helpline number +44 (0) 370 707 0181

Fax number +44 (0) 370 703 6116

www.investorcentre.co.uk/contactus

Dividend mandates

Shareholders may find it convenient to have their dividends paid directly to their bank or building society account.

Access Computershare's web-based enquiry service www.investorcentre.co.uk to download forms such as a dividend mandate form or submit dividend mandate details online; view details of your Phoenix Group shareholding and recent dividend payments; update your address details and register for shareholder electronic communications to receive notification Phoenix Group shareholder mailings by email.

Alternatively, contact Computershare using the details above.

Scrip dividend alternative

The Company does not currently offer a scrip dividend alternative.

Warning to shareholders

Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas-based 'brokers' who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as 'boiler rooms'.

Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports about the Company.

If you receive any unsolicited investment advice:

-- make sure you get the correct name of the person and organisation;

-- check that they are properly authorised by the Financial Conduct Authority ('FCA') before getting involved by visiting www.fca.org.uk/firms/systems-reporting/register;

-- report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and

-- if the calls persist, hang up.

If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme ('FSCS'). The FCA can also be contacted by completing an online form available at www.fca.org.uk/consumers/report-scam-unauthorised-firm.Details of any share dealing facilities that the Company endorses will be included in Company mailings.

More detailed information on this or similar activity can be found on the FCA website available at www.fca.org.uk/consumers.

SHARE PRICE

You can access the current share price of Phoenix Group Holdings plc on the Group's website together with electronic copies of the Group's financial reports and presentations at www.thephoenixgroup.com/investor-relations.aspx.

ORDINARY SHARES - 2018 FINAL DIVID

 
Ex-dividend date                                 21 March 2019 
-----------------------------------------------  ------------- 
Record date                                      22 March 2019 
-----------------------------------------------  ------------- 
Payment date for the recommended final dividend     7 May 2019 
-----------------------------------------------  -------------

GROUP FINANCIAL CALAR FOR 2019

 
Annual General Meeting                                    2 May 2019 
-----------------------------------------------------  ------------- 
Announcement of unaudited six months' Interim Results  7 August 2019 
-----------------------------------------------------  -------------

FORWARD-LOOKING STATEMENTS

The 2018 Annual Report and Accounts contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's current plans, goals 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 we have 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, new government initiatives related to the financial crisis and the effect of the European Union's 'Solvency II' requirements on the Group's capital maintenance requirements;

-- the political, legal and economic effects of the UK's vote to leave the European Union;

-- the impact of inflation and deflation;

-- 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; and

-- 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 the 2018 Annual Report and Accounts.

The Group undertakes no obligation to update any of the forward-looking statements contained within the 2018 Annual Report and Accounts or any other forward-looking statements it may make or publish.

The 2018 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed.

Nothing in the 2018 Annual Report and Accounts is or should be construed as a profit forecast or estimate.

Glossary

 
ABBEY LIFE                                     The companies comprising of Abbey Life Assurance Company Limited, Abbey 
                                               Life Trustee Services 
                                               Limited and Abbey Life Trust Securities Limited 
---------------------------------------------  ----------------------------------------------------------------------- 
ABS                                            Asset Backed Securities - A collateralised security whose value and 
                                               income payments are derived 
                                               from a specified pool of underlying assets 
---------------------------------------------  ----------------------------------------------------------------------- 
ACQUIRED VALUE IN FORCE ('AVIF')               The present value of future profits on a portfolio of long-term 
                                               insurance and investment contracts, 
                                               acquired either directly or through the purchase of, or investment in, 
                                               a business 
---------------------------------------------  ----------------------------------------------------------------------- 
ALM                                            Asset Liability Management - Management of mismatches between assets 
                                               and liabilities within 
                                               risk appetite 
---------------------------------------------  ----------------------------------------------------------------------- 
ALTERNATIVE PERFORMANCE MEASURE                An Alternative Performance Measure ('APM') is a financial measure of 
                                               historic or future financial 
                                               performance, financial position or cash flows, other than a financial 
                                               measure defined under 
                                               IFRS or under Solvency II regulations. The Group uses a range of these 
                                               metrics to provide 
                                               a better understanding of the underlying performance of the Group. All 
                                               APMs are defined within 
                                               this glossary and the APM section on page 230 
---------------------------------------------  ----------------------------------------------------------------------- 
ANNUITY POLICY                                 A policy that pays out regular benefit amounts, either immediately and 
                                               for the remainder of 
                                               a policyholder's lifetime (immediate annuity), or deferred to commence 
                                               at some future date 
                                               (deferred annuity) 
---------------------------------------------  ----------------------------------------------------------------------- 
ACQUISITION                                    The acquisition by Phoenix of the Standard Life Assurance businesses 
                                               from Standard Life Aberdeen, 
                                               which completed on 31 August 2018 
---------------------------------------------  ----------------------------------------------------------------------- 
ASSET MANAGEMENT                               The management of assets using a structured approach to guide the act 
                                               of acquiring and disposing 
                                               of assets, with the objective of meeting defined investment goals and 
                                               maximising value for 
                                               investors, including policyholders 
---------------------------------------------  ----------------------------------------------------------------------- 
ASSETS UNDER ADMINISTRATION                    Assets administered by or on behalf of the Group, covering both 
                                               policyholder funds and shareholder 
                                               assets. This includes assets recognised in the Group's IFRS 
                                               consolidated statement of financial 
                                               position together with certain assets administered by the Group but for 
                                               which beneficial ownership 
                                               resides with customers. 
---------------------------------------------  ----------------------------------------------------------------------- 
BREXIT                                         The vote by the people of the United Kingdom to leave the EU in the 
                                               referendum held on 23 
                                               June 2016 
---------------------------------------------  ----------------------------------------------------------------------- 
CLOSED LIFE FUND                               A fund that no longer accepts new business. The fund continues to be 
                                               managed for the existing 
                                               policyholders 
---------------------------------------------  ----------------------------------------------------------------------- 
EBT                                            Employee Benefit Trust - A trust set up to enable its Trustee to 
                                               purchase and hold shares 
                                               to satisfy employee share-based incentive plan awards. The Company's 
                                               EBT is the Phoenix Group 
                                               Holdings plc Employee Benefit Trust 
---------------------------------------------  ----------------------------------------------------------------------- 
ECONOMIC ASSUMPTIONS                           Assumptions related to future interest rates, inflation, market value 
                                               movements and tax 
---------------------------------------------  ----------------------------------------------------------------------- 
EEA                                            European Economic Area - Established on 1 January 1994 and is an 
                                               agreement between Norway, 
                                               Iceland, Liechtenstein and the European Union. It allows these 
                                               countries to participate in 
                                               the EU's single market without joining the EU 
---------------------------------------------  ----------------------------------------------------------------------- 
ENLARGED                                       The Phoenix Group including the acquired Standard Life Assurance 
 GROUP                                         businesses. 
---------------------------------------------  ----------------------------------------------------------------------- 
EXPERIENCE VARIANCES                           Current period differences between the actual experience incurred and 
                                               the assumptions used 
                                               in the calculation of IFRS insurance liabilities 
---------------------------------------------  ----------------------------------------------------------------------- 
FINANCIAL LEVERAGE                             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 adjusted to 
                                               exclude goodwill, the unallocated surplus and the Tier 1 Notes 
---------------------------------------------  ----------------------------------------------------------------------- 
FINANCIAL REPORTING COUNCIL                    The UK's independent regulator responsible for promoting high-quality 
                                               corporate governance 
                                               and reporting to foster investment 
---------------------------------------------  ----------------------------------------------------------------------- 
FREE SURPLUS                                   The amount of capital held in life companies in excess of that needed 
                                               to support their regulatory 
                                               Solvency Capital Requirement, plus the capital required under the Board 
                                               approved capital management 
                                               policy

---------------------------------------------  ----------------------------------------------------------------------- 
FCA                                            Financial Conduct Authority - The body responsible for supervising the 
                                               conduct of all financial 
                                               services firms and for the prudential regulation of those financial 
                                               services firms not supervised 
                                               by the Prudential Regulation Authority ('PRA'), such as asset managers 
                                               and independent financial 
                                               advisers 
---------------------------------------------  ----------------------------------------------------------------------- 
FOS                                            Financial Ombudsman Service - An ombudsman established in 2000, and 
                                               given statutory powers 
                                               in 2001 by the Financial Services and Markets Act 2000, to help settle 
                                               disputes between consumers 
                                               and UK-based businesses providing financial services 
---------------------------------------------  ----------------------------------------------------------------------- 
GAR                                            Guaranteed Annuity Rate - A rate available to certain pension 
                                               policyholders to acquire an 
                                               annuity at a contractually guaranteed conversion rate 
---------------------------------------------  ----------------------------------------------------------------------- 
HMRC                                           HM Revenue and Customs 
---------------------------------------------  ----------------------------------------------------------------------- 
HOLDING COMPANIES                              Refers to Phoenix Group Holdings plc, Phoenix Group Holdings, PGH 
                                               Capital plc, Phoenix Life 
                                               Holdings Limited, Pearl Group Holdings (No. 2) Limited, Impala Holdings 
                                               Limited, Pearl Group 
                                               Holdings (No. 1) Limited, PGH (LCA) Limited, PGH (LCB) Limited and 
                                               Pearl Life Holdings Limited 
---------------------------------------------  ----------------------------------------------------------------------- 
IASB                                           International Accounting Standards Board 
---------------------------------------------  ----------------------------------------------------------------------- 
IFRS                                           International Financial Reporting Standards - Accounting standards, 
                                               interpretations and the 
                                               framework adopted by the International Accounting Standards Board 
---------------------------------------------  ----------------------------------------------------------------------- 
IN-FORCE                                       Long-term business written before the period end and which has not 
                                               terminated before the period 
                                               end 
---------------------------------------------  ----------------------------------------------------------------------- 
INHERITED ESTATE                               The assets of the long-term with-profit funds less the realistic 
                                               reserves for non-profit policies 
                                               written into the non--profit fund, less asset shares aggregated across 
                                               the with-profit policies 
                                               and any additional amounts expected at the valuation date to be paid to 
                                               in-force policyholders 
                                               in the future in respect of smoothing costs and guarantees 
---------------------------------------------  ----------------------------------------------------------------------- 
LIBOR                                          London Interbank Offer Rate - The average interbank interest rate at 
                                               which a selection of 
                                               banks on the London money market are prepared to lend to one another 
---------------------------------------------  ----------------------------------------------------------------------- 
LTIP                                           Long-Term Incentive Plan - The part of an executive's remuneration 
                                               designed to incentivise 
                                               long-term value for shareholders through an award of shares with 
                                               vesting contingent on employment 
                                               and the satisfaction of stretching performance conditions linked to 
                                               Group strategy 
---------------------------------------------  ----------------------------------------------------------------------- 
MINIMUM CAPITAL REQUIREMENTS ('MCR')           MCR is the minimum amount of capital that the Group needs to hold to 
                                               cover its risks under 
                                               the Solvency II regulatory framework 
---------------------------------------------  ----------------------------------------------------------------------- 
MSA                                            Management Services Agreement - Contracts that exist between Phoenix 
                                               Life and management services 
                                               companies or between management services companies and their outsource 
                                               partners 
---------------------------------------------  ----------------------------------------------------------------------- 
NEW BUSINESS CONTRIBUTION                      Represents the increase in Solvency II shareholder Own Funds arising 
                                               from new business written 
                                               in the year (net of associated tax), 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 
---------------------------------------------  ----------------------------------------------------------------------- 
NON-ECONOMIC ASSUMPTIONS                       Assumptions related to future levels of mortality, morbidity, 
                                               persistency and expenses 
---------------------------------------------  ----------------------------------------------------------------------- 
NON-PROFIT FUND                                A fund which is not a with-profit fund, where risks and rewards of the 
                                               fund fall wholly to 
                                               shareholders 
---------------------------------------------  ----------------------------------------------------------------------- 
OPERATING COMPANIES                            Refers to the trading companies within Phoenix Life 
---------------------------------------------  ----------------------------------------------------------------------- 
OPERATING COMPANIES' CASH GENERATION           Operating companies' cash generation represents cash remitted by the 
                                               Group's operating companies 
                                               to the holding companies 
---------------------------------------------  ----------------------------------------------------------------------- 
OPERATING PROFIT                               Operating profit is a non-GAAP measure that is considered a more 
                                               representative measure of 
                                               performance than IFRS profit or loss after tax as it is based on 
                                               expected long-term investment 
                                               returns 
---------------------------------------------  ----------------------------------------------------------------------- 
ORIGO                                          An electronic pensions transfer system 
---------------------------------------------  ----------------------------------------------------------------------- 
OWN FUNDS                                      Basic Own Funds comprise the excess of assets over liabilities valued 
                                               in accordance with the 
                                               Solvency II principles and subordinated liabilities which qualify to be 
                                               included in Own Funds 
                                               under the Solvency II rules. 
                                               Eligible Own Funds are the amount of Own Funds that are available to 
                                               cover the Solvency Capital

                                               Requirements after applying prescribed tiering limits and 
                                               transferability restrictions to 
                                               Basic Own Funds 
---------------------------------------------  ----------------------------------------------------------------------- 
PARTIAL INTERNAL MODEL                         The model used to calculate the Group Solvency Capital Requirement 
                                               pursuant to Solvency II. 
                                               It aggregates outputs from both the existing Phoenix Internal Model and 
                                               the Standard Life 
                                               Internal Model with no diversification between the two 
---------------------------------------------  ----------------------------------------------------------------------- 
PART VII TRANSFER                              The transfer of insurance policies under Part VII of Financial Services 
                                               and Markets Act 2000. 
                                               The insurers involved can be in the same corporate group or in 
                                               different groups. Transfers 
                                               require the consent of the High Court, which will consider the views of 
                                               the PRA and FCA and 
                                               of an Independent Expert 
---------------------------------------------  ----------------------------------------------------------------------- 
PARTICIPATING BUSINESS                         See with-profit fund 
---------------------------------------------  ----------------------------------------------------------------------- 
PERIPHERAL EUROZONE                            Refers to Portugal, Ireland, Italy, Greece and Spain 
---------------------------------------------  ----------------------------------------------------------------------- 
PRA                                            Prudential Regulation Authority - The body responsible for the 
                                               prudential regulation and supervision 
                                               of banks, building societies, credit unions, insurers and major 
                                               investment firms. The PRA 
                                               and FCA use a Memorandum of Understanding to co-ordinate and carry out 
                                               their respective responsibilities 
---------------------------------------------  ----------------------------------------------------------------------- 
PROTECTION POLICY                              A policy which provides benefits payable on certain events. The 
                                               benefits may be a single lump 
                                               sum or a series of payments and may be payable on death, serious 
                                               illness or sickness 
---------------------------------------------  ----------------------------------------------------------------------- 
RIGHTS ISSUE                                   The rights issue announced by Phoenix on 30 May 2018 and completed on 
                                               10 July 2018 in connection 
                                               with the part financing of the acquisition of the Standard Life 
                                               Assurance businesses 
---------------------------------------------  ----------------------------------------------------------------------- 
SHAREHOLDER CAPITAL COVERAGE RATIO             Represents total Eligible Own Funds divided by the Solvency Capital 
                                               Requirements ('SCR'), 
                                               adjusted to a shareholder view through the exclusion of amounts 
                                               relating to those ring-fenced 
                                               with-profit funds and Group pension schemes whose Own Funds exceed 
                                               their SCR 
---------------------------------------------  ----------------------------------------------------------------------- 
SOLVENCY II                                    A new regime for the prudential regulation of European insurance 
                                               companies that came into 
                                               force on 1 January 2016 
---------------------------------------------  ----------------------------------------------------------------------- 
SOLVENCY II SURPLUS                            The excess of Eligible Own Funds over the Solvency Capital Requirement 
---------------------------------------------  ----------------------------------------------------------------------- 
SOLVENCY CAPITAL REQUIREMENTS ('SCR')          SCR relates to the risks and obligations to which the Group is exposed, 
                                               and 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' 
---------------------------------------------  ----------------------------------------------------------------------- 
STANDARD FORMULA                               A set of calculations prescribed by the Solvency II regulations for 
                                               generating the SCR 
---------------------------------------------  ----------------------------------------------------------------------- 
STANDARD LIFE ASSURANCE BUSINESSES             Standard Life Assurance Limited, Standard Life Pensions Fund Limited, 
                                               Standard Life International 
                                               Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, 
                                               Standard Life Lifetime 
                                               Mortgages Limited, Standard Life Assets and Employee Services Limited 
                                               and Standard Life Investment 
                                               Funds Limited (together known as the Standard Life Assurance 
                                               businesses) acquired by the Group 
                                               on 31 August 2018. 
---------------------------------------------  ----------------------------------------------------------------------- 
SUNLIFE                                        SunLife Limited. The Company which distributes SunLife branded products 
                                               on behalf of its immediate 
                                               parent company, Phoenix Life Limited and certain third parties 
---------------------------------------------  ----------------------------------------------------------------------- 
TIER 1 NOTES                                   The GBP500 million fixed rate reset perpetual restricted Tier 1 write 
                                               down Notes issued by 
                                               Phoenix 
---------------------------------------------  ----------------------------------------------------------------------- 
TRANSITIONAL MEASURES ON TECHNICAL PROVISIONS  Transitional Measures on Technical Provisions ('TMTP') is an allowance, 
                                               subject to the PRA's 
                                               approval, to apply a transitional deduction to technical provisions. 
                                               The transitional deduction 
                                               corresponds to the difference between net technical provisions 
                                               calculated in accordance with 
                                               Solvency II principals and net technical provisions calculated in 
                                               accordance with the previous 
                                               regime and is expected to decrease linearly over a period of 16 years 
                                               starting from 1 January 
                                               2016 to 1 January 2032. TMTP is subject to a mandatory recalculation 
                                               every two years or on 
                                               the occurrence of certain defined events 
---------------------------------------------  ----------------------------------------------------------------------- 
TSR                                            Total Shareholder Return - The total return, over a fixed period, to an 
                                               investor in terms 
                                               of share price growth and dividends (assuming that dividends paid are 
                                               re-invested, on the 
                                               ex--dividend date, in acquiring further shares) 
---------------------------------------------  ----------------------------------------------------------------------- 
UK CORPORATE GOVERNANCE CODE                   Standards of good corporate governance practice in the UK relating to 
                                               issues such as board 
                                               composition and development, remuneration, accountability, audit and 
                                               relations with shareholders

---------------------------------------------  ----------------------------------------------------------------------- 
UKCPT                                          A property investment company which is domiciled in Guernsey and listed 
                                               on the London Stock 
                                               Exchange 
---------------------------------------------  ----------------------------------------------------------------------- 
UK HERITAGE                                    The Group's business segment where products are no longer marketed to 
                                               customers, for example 
                                               with-profits, annuities and many legacy unit linked life and pension 
                                               products 
---------------------------------------------  ----------------------------------------------------------------------- 
UK OPEN                                        The Group's business segment where products are actively marketed to 
                                               new and existing customers. 
---------------------------------------------  ----------------------------------------------------------------------- 
UNIT-LINKED POLICY                             A policy where the benefits are determined by the investment 
                                               performance of the underlying 
                                               assets in the unit--linked fund 
---------------------------------------------  ----------------------------------------------------------------------- 
WITH-PROFIT FUND                               A fund where policyholders are entitled to a share of the profits of 
                                               the fund. Normally, policyholders 
                                               receive their share of the profits through bonuses. Also known as a 
                                               participating fund as 
                                               policyholders have a participating interest in the with-profit funds 
                                               and any declared bonuses. 
                                               Generally, policyholder and shareholder participation in the 
                                               with-profit funds in the UK is 
                                               split 90:10 
---------------------------------------------  -----------------------------------------------------------------------

Online Resources

Reducing our environmental impact

In line with our Corporate Responsibility programme, and as part of our desire to reduce our environmental impact, you can view key information on our website.

Go online

www.thephoenixgroup.com

Investor relations

Our Investor Relations section includes information such as our most recent news and announcements, results presentations, annual and interim reports, share-price performance, AGM and EGM information, UK Regulatory Returns and contact information.

Go online

www.thephoenixgroup.com/investor-relations

News and updates

To stay up-to-date with Phoenix Group news and other changes to our site's content, you can sign up for e-mail alerts, which will notify you when content is added.

Go online

www.thephoenixgroup.com/site-services/e-mail-alerts.aspx

Paper information

Printed by Park Communications on FSC(R) certified paper. Park is an EMAS certified company and its Environmental Management System is certified to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on Galerie Silk, a paper containing 100% Environmental Chlorine Free (ECF) virgin fibre sourced from well managed, responsible, FSC(R) certified forests.

Design and production Radley Yeldar

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR CKPDKABKKDNK

(END) Dow Jones Newswires

March 05, 2019 02:02 ET (07:02 GMT)

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