I: Other notes

I1: Acquisition of subsidiaries

a Acquisition of Reassure America Life Insurance Company (REALIC)

On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson National Life Insurance Company (JNLI) completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC). The purchase consideration which remains subject to final agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). The acquisition increases the scale of the Group’s life business in the US, helping Jackson to diversify earnings by increasing the amount of income from underwriting activities thereby enhancing the quality of earnings in a capital efficient manner. Immediately prior to the acquisition, SRLC entered into a reinsurance arrangement with Swiss Re, the former ultimate parent company facilitating Swiss Re to retain a portion of the REALIC business. As collateral for this reinsurance arrangement, REALIC holds £2.1 billion of policy loans, bonds and short-term investments, which are offset by a funds withheld liability.

REALIC was a US-based insurance company whose business model was to acquire, through purchase or reinsurance, closed blocks of insurance business, primarily life assurance risks. REALIC did not write new business.

The purchase consideration paid is equivalent to the fair value of the identifiable acquired assets and liabilities assumed and accordingly no goodwill is recognised under IFRS on the date of completion of the acquisition.

In addition to the purchase consideration, the Group incurred £9 million of acquisition related costs that have been recognised as an expense during the year, in the consolidated income statement.

The provisional fair value of the acquired assets and liabilities are shown in the table below.

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  Fair value
recognised at
acquisition
date
£m
Identifiable assets  
Intangible assets attributable to shareholders:  
Acquired value of in-force business 5
Other non-investment and non-cash assets:  
Reinsurers' share of insurance contract liabilities 5,444
Deferred tax 390
Current tax recoverable 44
Accrued investment income 58
Other debtors 38
Investments of long-term business and other operations:  
Loans 2,204
Equity securities and portfolio holdings in unit trusts 69
Debt securities 7,177
Cash and cash equivalents 147
Total identifiable assets 15,576
Identifiable liabilities  
Policyholder liabilities:  
Insurance contract liabilities 12,912
Other non-insurance liabilities 2,294
Total identifiable liabilities 15,206
Net identifiable assets acquired and liabilities assumed 370
Purchase consideration 370

At the date the financial statements were approved, the fair value of the identifiable acquired assets and liabilities and the consideration were subject to finalisation. In accordance with accounting guidance for business combinations, the Company will continue to review the balance sheet and record required adjustments, for up to a 12 month period following the acquisition close date, in order to reflect updated information on certain accruals, related expenses, or other potential valuation adjustments, if further information becomes available about facts and circumstances that existed as of the acquisition date. Any measurement period adjustments determined to be material will be applied retrospectively to the acquisition date in the Company’s consolidated financial statements and depending on the nature of the adjustment, the Company’s results subsequent to the acquisition period could be affected.

Reserves were initially valued consistent with existing IFRS guidance. Accordingly, as for the Group’s measurement of Jackson’s insurance assets and liabilities, under IFRS 4, a ‘grandfathered’ US GAAP basis has been applied. For instance the traditional products were valued using standard modeling techniques with assumptions updated to match current interest rate environment or be consistent with Jackson’s assumptions where appropriate. Base reserves on interest sensitive products were set equal to the account value and the reserves accounted for under FASB ASC Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) were adjusted to reflect Jackson’s assumptions where appropriate. In addition, provision has been made for the effects of fair valuing the acquired policyholder liabilities and value of in force business in accordance with IFRS 3.

Included within the identifiable assets as shown above are loans and other debtors acquired with fair values of £2,204 million and £38 million, respectively. These values represent the gross contractual amounts all of which are expected to be collected. The majority of the loans of £2,204 million were held to back liabilities for funds withheld under reinsurance arrangements as described above.

The consolidated statement of cash flows contains a £224 million net cash outflow in respect of this acquisition representing cash consideration of £371 million (based on the preliminary purchase price of £417 million with a deferred consideration of £46 million) less cash and cash equivalents acquired of £147 million.

Impact of acquisition on the results of the Group

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  Actual £m Estimated £m
  Post
acquisition
period from
4 Sept to
31 Dec 2012

Full Year
2012
note (i)

Notes

  1. Estimation of the REALIC business’ contribution to the Group’s consolidated revenue and profit before tax for the year if the acquisition had occurred on 1 January 2012. In determining these amounts, it has been assumed that the fair value adjustments which arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2012.
  2. The profit of £61 million for the period has been determined after a charge of £(19) million for amortisation of acquisition accounting adjustments. This charge reflects the net effect of:
    1. The difference between the yield on the acquired debt securities (excluding those held to back funds withheld for reinsurance contracts) determined by reference to their market value at acquisition as required by the IFRS 3 purchase GAAP purposes and the book yield on a historic GAAP basis;
    2. Amortisation of the fair value adjustments on policyholder liabilities; and
    3. Amortisation of the acquired value of in-force business.

    This charge has been shown separately within Group’s supplementary analysis of profit, as explained in note B1.
Revenue 184 695
     
Operating profit based on longer-term investment returns 67  
Short-term fluctuations in investment returns 13  
Amortisation of acquisition accounting on the purchase of REALICnote (ii) (19)
 
Profit before tax 61 123

b Acquisition of Thanachart Life Assurance Company Limited

On 5 November 2012, Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited (Prudential Thailand) entered into an agreement to acquire 100 per cent of Thanachart Life Assurance Company Limited (Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank Public Company limited (Thanachart Bank). The consideration for Thanachart Life is THB 17.5 billion (£352 million at the year end exchange rate) settled in cash on completion, with a further payment of THB 0.5 billion (£10 million) payable 12 months after completion, subject to a post-completion adjustment to reflect the net asset value as at the completion date. The transaction is subject to regulatory approval and is expected to close in the first half of 2013. Upon completion of the transaction, Thanachart Life will become a wholly-owned subsidiary of Prudential Thailand.

As part of the deal, Prudential Thailand and Thanachart Bank have entered into an agreement to establish an exclusive 15-year partnership to develop jointly their bancassurance business in Thailand. This transaction builds on Prudential’s strategy of focusing on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.

c PAC with-profits funds acquisitions

2012:

The PAC with-profits fund, via its venture fund holdings and as part of its investment portfolio, has made an acquisition of a joint venture, see note H8. There were no acquisitions of subsidiaries made during the year.

2011:

The PAC with-profits fund, via its venture fund holdings and as part of its investment portfolio, made acquisitions during the period. These were acquisitions for a 100 per cent interest of Earth & Wind Energias Renovables SL, a company which invests in solar panel parks, in March 2011 and a 100 per cent interest of Alticom Holdings BV, a company investing in telecommunication towers, in June 2011. The Earth & Wind portfolio of solar panel parks was further expanded with the acquisition of a 100 per cent interest in Promociones Fotovoltaicas Betula SL, Promociones Fotovoltaicas Castanea SL, Promociones Fotovoltaicas Corylus SL and Promociones Fotovoltaicas Fagus SL in July 2011 and a 50 per cent controlling interest in Sarinena Solar SL in October 2011.

As these transactions are within the with-profits fund, they have no impact on shareholders’ profit or equity for the year ended 31 December 2011. The impact on the Group’s consolidated revenue, including investment returns, is not material. Had the acquisitions been effected at 1 January 2011, the revenue and profit of the Group for the year ended 31 December 2011 would not have been materially different.

A summary of the consideration, goodwill and net assets acquired relating to these four acquisitions is provided in the table below:

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  2011
Total
£m
Cash consideration paid 67
Net assets acquired:  
Property, plant and equipment 190
Other non-investment and non-cash assets 16
Cash and cash equivalents 14
Borrowings attributable to with-profits funds (114)
Derivative liabilities (2)
Other non-insurance liabilities (49)
Fair value of net assets acquired 55
Total goodwill arising on acquisition attributable to the with-profits fund 12

I2: Changes to Group's holdings

PPM South Africa

On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 49.99 per cent. Under IFRS requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 49.99 per cent holding at fair value resulting in a reclassification of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS application, the transactions gave rise to a gain on dilution of £42 million. This amount is shown separately and in the Group’s 2012 supplementary analysis of profit excluded from the Group’s IFRS operating profit based on longer-term investment returns. The net cash outflow arising from this change to the Group’s holdings, as shown in the consolidated statement of cash flows, of £23 million, comprised the net effect of cash and cash equivalents no longer consolidated and the cash proceeds received.

I3: Staff and pension plans

a Staff and employment costs

The average number of staff employed by the Group during the year was:

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  2012 2011
Business operations:    
Asia operations 18,584 17,001
US operations 4,000 3,785
UK operations 5,035 4,628
Total 27,619 25,414

The costs of employment were:

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  2012 £m 2011 £m 2010 £m
  • * The derivation of these amounts is shown in note (b)(i)4(i).
  • Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of Prudential Staff Pension Scheme (PSPS) as described in note (b)(i)1 below, the other pension costs for PSPS represents the cash cost of contributions for ongoing service of active members and the unwind of discount on the opening provision for deficit funding for PSPS.
Business operations:      
Wages and salaries 1,204 1,101 1,052
Social security costs 85 75 69
Other pension costs:      
Defined benefit schemes*:      
Defined benefit schemes – PSPS 17 22 27
Defined benefit schemes – Other schemes* 21 (34) 31
Defined contribution schemes:      
Defined contribution schemes – Domestic 12 12 11
Defined contribution schemes – Overseas 35 29 26
Pension actuarial and other (gains) losses charged to income statement* (145) (37) 26
  (60) (8) 121
Total 1,229 1,168 1,242

b Pension plans

i Defined benefit plans

1 Summary

The Group asset (liability) in respect of defined benefit pension schemes is as follows:

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  2012 £m 2011 £m
  PSPS Other
schemes
Total Total

* At 31 December 2012, the PSPS pension asset of £164 million and the other schemes’ pension liabilities of £205 million were included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of financial position. The comparative liabilities of £229 million as at 31 December 2011 were included within ‘Provisions’.

Underlying economic surplusnote4(i) 1,174 (36) 1,138 1,543
Less: unrecognised surplus and adjustment for obligation under IFRIC 14 for deficit funding (2011 only)note 4(i) (1,010) (1,010) (1,607)
Economic surplus (deficit) (including investment in Prudential insurance policies)note 4(i) 164 (36) 128 (64)
Attributable to:        
PAC with-profits fund 115 (37) 78 (41)
Shareholder-backed operations 49 1 50 (23)
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies (169) (169) (165)
IAS 19 pension asset (liability) on the Group statement of financial position* 164 (205) (41) (229)

The Group’s businesses operate a number of pension schemes. The specific features of these plans vary in accordance with the regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS), which PSPS accounts for 86 per cent (2011: 86 per cent) of the underlying scheme liabilities of the Group defined benefit schemes.

The Group also operates two smaller defined benefit schemes for UK employees in respect of Scottish Amicable and M&G. For all three schemes, the projected unit method was used for the most recent full actuarial valuations. There is also a small defined benefit scheme in Taiwan with a negligible deficit.

Triennial actuarial valuations

Defined benefit schemes in the UK are generally required to be subject to full actuarial valuation every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds.

The last completed actuarial valuation of PSPS was as at 5 April 2011 by CG Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. This valuation was finalised in the first half of 2012 and demonstrated the scheme to be 111 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. As a result of this valuation, future contributions into the scheme have been reduced to the minimum level of contributions required under the scheme rules effective from July 2012.

Excluding expenses, the contributions fell to approximately £6 million per annum from the £50 million per annum paid previously. The new contributions are only for ongoing service of current employees that are active members of the scheme. No deficit type funding is required. Deficit funding for PSPS, where applicable, as applied in 2011, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed consideration in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity. In 2012, total contributions paid in the year including expenses were £36 million (2011: £54 million).

The market value of PSPS scheme assets as at the 5 April 2011 valuation was £5,255 million. The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the purposes of the 2011 valuation were as follows:

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Rate of increase in salaries Nil
Rate of inflation:  
Retail Prices Index (RPI) 3.7
Consumer Prices Index (CPI) 3.0
Rate of increase of pensions in payment for inflation:  
Guaranteed (maximum 5%) 3.0
Guaranteed (maximum 2.5%) 2.5
Discretionary Nil
Expected returns on plan assets 4.2
Mortality assumptions:

The tables used for PSPS pensions in payment at 5 April 2011 were:

Base post retirement mortality

For current male (female) pensioners 113% (108%) of the mortality rates of the 2000 series mortality tables (PNMA00/PNFA00), published by the Continuous Mortality Investigation Bureau (CMI).

For male (female) non-pensioners 107% (92%) of the 2000 series rates (PNMA00/PNFA00).

Allowance for future improvements to post retirement mortality

For males (females) 100% (75%) of Medium Cohort subject to a minimum rate of improvement of 2.00% (1.25%) up to the age of 90, decreasing linearly to zero by age of 120 with a long-term rate of 1.75% pa (1.5% pa) but adjusted as follows:

  • period improvements are blended between ages 60 to 80 to the long-term improvement rate over a 15 year period (compared with a 20 year period in the core CMI model) and;
  • cohort improvements are assumed to dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model).

The last completed actuarial valuation of the Scottish Amicable Pension Scheme (SAPS) was as at 31 March 2011 by Jonathan Seed, Fellow of the Institute and Faculty of Actuaries, of Xafinity Consulting. This valuation was finalised in the second half of 2012 and demonstrated the scheme to be 85 per cent funded. Based on this valuation, it was agreed with the Trustees that the existing level of deficit funding of £13.1 million per annum continues to be paid into the scheme over the next six years, to eliminate the actuarial deficit.

The last completed actuarial valuation of the M&G pension scheme was as at 31 December 2011 by Paul Belok, Fellow of the Institute and Faculty of Actuaries, of AON Hewitt Limited. This valuation was finalised in the second half of 2012 and demonstrated the scheme to be 83 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a three year period are being made from January 2013 of £18.6 million per annum for the first two years and £9.3 million in the third year. This compares to the £10.5 million of deficit funding paid by the Group in 2012.

Summary economic and IAS 19 financial positions

Under the IAS 19 ‘Employee Benefits’ valuation basis, the Group applies IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. Under IFRIC 14, a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable.

For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. Accordingly, prior to the finalisation of the 5 April 2011 triennial valuation, the Group had not recognised the underlying surplus of PSPS (31 December 2011: £1,588 million gross of deferred tax) and had recognised an economic liability for deficit funding (31 December 2011: £19 million gross of deferred tax).

The underlying IAS 19 surplus for PSPS at 31 December 2012 was £1,174 million. The finalisation of the 5 April 2011 triennial valuation was accompanied by an agreement with the Trustees that additional deficit type funding would no longer be necessary and furthermore, the level of contributions for ongoing service of current employees was reduced to the minimum level required by the scheme rules. As a consequence, a portion of the surplus, being £164 million, is now recognised as recoverable. The £164 million represents the present value of the economic benefits available from the reductions to future ongoing contributions to the scheme. Accordingly, a net surplus of £164 million gross of deferred tax was recognised at 31 December 2012. Of this amount, £115 million was allocated to the PAC with-profits fund and £49 million was allocated to the shareholders’ fund.

The IAS 19 deficit of the Scottish Amicable Pension Scheme at 31 December 2012 was £74 million (31 December 2011: deficit of £55 million) and has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders’ fund.

The IAS 19 surplus of the M&G pension scheme on an economic basis at 31 December 2012 was £38 million (31 December 2011: surplus of £10 million) and is wholly attributable to shareholders. The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. As at 31 December 2012, the M&G pension scheme has invested £169 million in Prudential insurance policies (31 December 2011: £165 million). After excluding these investments that are offset against liabilities to policyholders, the IAS 19 basis position of the M&G pension scheme is a deficit of £131 million (31 December 2011: deficit of £155 million).

2 Corporate governance

The rules of the Group’s largest pension arrangement, the defined benefit section of PSPS, a final salary scheme, specify that, in exercising its investment powers, the Trustee’s objective is to achieve the best overall investment return consistent with the security of the assets of the scheme. In doing this, consideration is given to the nature and duration of the scheme’s liabilities. The Trustee sets the benchmark for the asset mix, following analysis of the liabilities by the Scheme’s Actuary and, having taken advice from the Investment Managers, then selects benchmark indices for each asset type in order to measure investment performance against a benchmark return.

The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectives every three years, to coincide with the Actuarial Valuation, or earlier if the Scheme Actuary recommends. Interim reviews are conducted annually based on changing economic circumstances and financial market levels.

The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment Managers. In carrying out this responsibility, the Investment Managers are required by the Pensions Act 1995 to have regard to the need for diversification and suitability of investments. Subject to a number of restrictions contained within the relevant asset management agreements, the Investment Managers are authorised to invest in any class of investment asset. However, the Investment Managers will not invest in any new class of investment asset without prior consultation with the Trustee.

The Trustee consults the Principal Employer, the Prudential Assurance Company, on these investment principles, but the ultimate responsibility for the investment of the assets of the scheme lies with the Trustee.

The investment policies and strategies for the other two UK defined benefit schemes, the M&G Group Pension Scheme and the Scottish Amicable Staff Pension Scheme, which are both final salary schemes, follow similar principles, but have different target allocations reflecting the particular requirements of the schemes.

3 Assumptions

The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December were as follows:

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  2012 % 2011 %
  • * The discount rate has been determined by reference to an ‘AA’ corporate bond index, adjusted where applicable, to allow for the difference in duration between the index and the pension liabilities.
  • The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
  • The rates of 2.5 per cent are those for PSPS. Assumed rates of increase of pensions in payments for inflation for all other schemes are 2.7 per cent in 2012 (2011: 2.9 per cent).
Discount rate* 4.4 4.7
Rate of increase in salaries 2.7 2.9
Rate of inflation    
Retail prices index (RPI) 2.7 2.9
Consumer prices index (CPI) 2.0 1.9
Rate of increase of pensions in payment for inflation:    
Guaranteed (maximum 5%) 2.5 2.5
Guaranteed (maximum 2.5%) 2.5 2.5
Discretionary 2.5 2.5
Expected returns on plan assets 3.1 5.1

The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements in mortality. The specific allowance for 2012 and 2011 is in line with a custom calibration of the 2009 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). The tables used for PSPS immediate annuities in payment at 31 December 2012 and 2011 were:

Male: 108.6 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and

Female: 103.4 per cent PNFA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term mortality improvement rate of 1.00 per cent per annum.

The assumed life expectancies on retirement at age 60, based on the mortality table used was:

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  2012 years 2011 years
  Male Female Male Female
Retiring today 28.0 29.1 27.8 29.0
Retiring in 20 years’ time 30.6 31.2 30.5 31.1

The mean term of the current PSPS liabilities is around 17 years.

Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Xafinity Consulting for SAPS and Aon Hewitt Limited for the M&G scheme, the most recent full valuations have been updated to 31 December 2012, applying the principles prescribed by IAS 19.

4 Group economic and IAS 19 financial position

This section illustrates the financial position of the Group’s defined benefit pension schemes on an economic basis and the IAS 19 basis. The underlying position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. At 31 December 2012, the investments in Prudential insurance policies comprise £123 million (2011: £112 million) for PSPS and £169 million (2011: £165 million) for the M&G scheme.

Separately, the economic financial position also includes the effect of the application of IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. For PSPS, where there are constraints in the trust deed to prevent the company access, the surplus is not recognised and a liability to additional funding is established, where relevant (as previously described).

(i) Estimated pension scheme deficit – economic basis

Movements on the pension scheme deficit (determined on the economic basis) are as follows, with the effect of the application of IFRIC 14 being shown separately:

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  2012 £m
    (Charge) credit to income statement    
  Surplus
(deficit) in
scheme at
1 January
2012
Operating
results
(based on
longer-term
investment
returns)
Actuarial and
other gains
and losses
Contributions
paid
Surplus
(deficit)
in scheme
at 31 Dec
2012
All schemes          
Underlying position (without the effect of IFRIC 14)          
Surplus 1,543 (166) (311) 72 1,138
Less: amount attributable to PAC with-profits fund (1,083) 105 222 (31) (787)
Shareholders' share:          
Gross of tax surplus 460 (61) (89) 41 351
Related tax (117) 25 20 (9) (81)
Net of shareholders' tax 343 (36) (69) 32 270
Effect of IFRIC 14          
Derecognition of surplus and set up of additional funding obligation (1 Jan 2012 only) (1,607) 136 461 (1,010)
Less: amount attributable to PAC with-profits fund 1,124 (93) (322) 709
Shareholders' share:          
Gross of tax deficit (483) 43 139 (301)
Related tax 123 (22) (32) 69
Net of shareholders' tax (360) 21 107 (232)
With the effect of IFRIC 14          
(Deficit) surplus (64) (30) 150 72 128
Less: amount attributable to PAC with-profits fund 41 12 (100) (31) (78)
Shareholders' share:          
Gross of tax (deficit) surplus (23) (18) 50 41 50
Related tax 6 3 (12) (9) (12)
Net of shareholders’ tax (17) (15) 38 32 38
Underlying investments and liabilities of the schemes

On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the plan’s net assets at 31 December comprise the following investments and liabilities:

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  2012 £m 2011 £m
  PSPS
£m
Other
schemes
£m
Total
£m
% PSPS
£m
Other
schemes
£m
Total
£m
%

Note

  1. The PSPS scheme has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. This involved a reallocation from other investments to other assets with an interest and inflation swap overlay. In broad terms, the scheme is committed to making a series of payments related to LIBOR on a nominal amount and in return the scheme receives a series of fixed and inflation-linked payments which match a proportion of its liabilities. As at 31 December 2012, the nominal value of the interest and inflation-linked swaps amounted to £0.9 billion (2011: £0.9 billion) and £2.0 billion (2011: £2.0 billion) respectively.
Equities 43 321 364 5 210 273 483 7
Bonds 5,440 418 5,858 81 5,547 407 5,954 83
Properties 290 40 330 5 297 20 317 4
Other assetsnote(i) 627 18 645 9 378 31 409 6
Total value of assets 6,400 797 7,197 100 6,432 731 7,163 100
(ii) IAS 19 basis financial position as consolidated

The movements in the pension schemes’ surplus and deficit between scheme assets and liabilities as consolidated in the financial statements were:

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  2012 £m
  PSPS   Other schemes
  Total   Adjust for
investments
in Prudential
insurance
policies
  Total
  Asset/
(liability)
  Plan
assets
Present value
of benefit
obligations
  Economic
basis net
surplus
(deficit)
  IAS 19
basis net
deficit
Net deficit, beginning of year (19)   731 (776)   (64)   (165)   (229)
Current service cost       (11)   (11)       (11)
Other finance income     35 (37)   (2)   (8)   (10)
Cash costs and unwind of discount on opening provision for deficit funding for PSPS (17)         (17)       (17)
Benefit payments     (17) 17          
Contributions 36   36     72       72
Actuarial and other gains and losses 164   12 (26)   150   (5)   145
Transfer out of investment in Prudential insurance policies               9
  9
Net surplus (deficit), end of year 164   797 (833)   128   (169)   (41)

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  2011 £m
  PSPS   Other schemes
  Total   Adjust for
investments
in Prudential
insurance
policies
  Total
  Provision
of deficit
funding
  Plan
assets
Present value
of benefit
obligations
  Economic
basis net
surplus
(deficit)
  IAS 19
basis net
deficit
Net deficit, beginning of year (47)   653 (826)   (220)   (227)   (447)
Current service cost       (13)   (13)       (13)
Negative past service cost (RPI to CPI inflation measure change)       66   66       66
Other finance income     41 (45)   (4)   (15)   (19)
Cash costs and unwind of discount on opening provision for deficit funding for PSPS (22)         (22)       (22)
Benefit payments     (15) 15       5   5
Contributions 54   40 (1)   93   (21)   72
Actuarial and other gains and losses (4)   12 28   36   1   37
Transfer out of investment in Prudential insurance policies               92
  92
Net deficit, end of year (19)   731 (776)   (64)   (165)   (229)

The IAS 19 basis pensions deficit can be summarised as follows:

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  2012 2011   2010   2009   2008
  £m % £m %   £m %   £m %   £m %
  • * The IAS 19 basis plan assets at 31 December 2012 of £6,905 million is different from the economic basis plan assets of £7,197 million as show in section 4(i) above due to the exclusion of investment in Prudential insurance policies of £292 million comprising £123 million for PSPS and £169 million for the M&G scheme.
  • The M&G pension scheme invests in Prudential insurance policies. On Prudential Group consolidation these assets are eliminated against liabilities in the statement of financial position of UK insurance operations. Up until 2011 all of the M&G scheme assets were invested in this way thus giving rise to an unfunded status on a Prudential Group consolidated basis. At 31 December 2012 and 2011, only £169 million (2011: £165 million) out of the M&G scheme assets of £297 million (2011: £257 million) was invested in Prudential insurance policies, thereby switching its status to a partly funded scheme.
  • The experience adjustments on scheme liabilities in 2011 of £314 million related mainly to the ‘true-up’ reflecting improvements in data consequent upon the ongoing 2011 triennial valuations of PSPS and the Scottish Amicable pension scheme. The experience adjustments on scheme liabilities in 2008 of a gain of £145 million related mainly to the ‘true up’ reflecting improvements in data consequent upon the 2008 triennial valuation of PSPS.
Plan assets                          
(IAS 19 basis before effect of IFRIC 14):                          
Equities 202 5 336 5   610 11   917 18   875 17
Bonds 5,728 84 5,826 85   4,095 72   3,587 69   2,619 52
Properties 330 5 317 4   206 4   278 5   290 6
Other assets 645 6 407 6   748 13   442 8   1,273 25
Fair value of plan assets, end of year* 6,905 100 6,886 100   5,659 100   5,224 100   5,057 100
Present value of benefit obligation (6,059)   (5,620)     (5,438)     (4,951)     (4,493)  
Funded status (wholly or partly funded) 846   1,266     221     273     564  
Present value of unfunded obligations (M&G scheme)       (254)     (223)     (180)  
  846   1,266     (33)     50     384  
Effect of the application of IFRIC 14 for pension schemes                          
Derecognition of PSPS’ surplus (1,010)   (1,588)     (485)     (513)     (728)  
Set up obligation for deficit funding for PSPS   (19)     (47)     (75)     (65)  
Adjustment in respect of investment of PSPS in Prudential policies 123   112     118     101     103  
Deficit recognised in the statement of financial position (41)   (229)     (447)     (437)     (306)  
Experience adjustments:                          
Experience adjustments on scheme liabilities (4)   314     (4)     76     145  
Percentage of scheme liabilities at 31 December (0.07)%   (5.59)%     (0.07)%     1.47%     3.10%  
Experience adjustments on scheme assets (IAS 19 basis) (39)   998     287     100     (277)  
Percentage of scheme assets at 31 December (0.57)%   14.49%     5.07%     1.91%     (5.48)%  

The long-term expected rate of return has been taken to be the weighted average (by market value) of the long-term expected rates of return on each major asset class shown above.

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  2012 % 2011 %
Long-term expected rate of return:    
Equity 6.8 8.2
Bonds 3.0 4.6
Properties 5.6 6.9
Other assets 2.0 4.8
Weighted average long-term expected rate of return 3.1 5.1

The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and equity and other market conditions at the statement of financial position date.

The actual return on scheme assets was a gain of £189 million (gain of 2011: £1,290 million) on an IAS 19 basis.

None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.

(iii) Credit (charge) to the income statement

The components of the credit (charge) for the net periodic pension cost (comprising amounts attributable to the PAC with-profits fund and shareholder-backed operations) are as follows:

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  2012 £m 2011 £m

Notes

  1. Past service cost

    – RPI/CPI inflation measure change in 2011

    During 2011 the Group altered its inflation measure basis for future statutory increases to pension payments for certain tranches of its UK defined benefit pension schemes. This reflected the UK Government’s decision to replace the basis of indexation from RPI with CPI.

    The £282 million credit in 2011 shown above comprised £216 million for PSPS and £66 million for other schemes. As noted earlier, the PSPS scheme surplus was not recognised for accounting purposes due to the application of IFRIC 14. The £66 million for other schemes was allocated as £24 million to PAC with-profits fund and £42 million to shareholders as referred to in note C.

    – Exceptional discretionary pension increase for PSPS in 2012

    During the first half of 2012, an exceptional discretionary increase to pensions in payment of PSPS was awarded which resulted in a past service cost of £106 million.

    As the PSPS scheme surplus is substantially not recognised for accounting purposes, these two items had negligible impact on the Group’s results.
  2. Consistent with the derecognition of a substantial portion of the Company’s interest in the underlying IAS 19 surplus of PSPS, the charge to operating profit based on longer-term investment returns for PSPS reflects the cash cost of contributions for ongoing service of active members (2012: £17 million; 2011: £20 million). In addition, the charge to the operating results also includes a charge for the unwind of discount on the opening provision for deficit funding for PSPS (2012: £nil; 2011:£2 million).
  3. The net credit (charge) for actuarial and other gains and losses is recorded within the income statement. Within the Group’s supplementary analysis of profit, the shareholders’ share of actuarial and other gains and losses (ie net of allocation of the share to the PAC with-profits funds) of £50 million as shown in note ii above (2011:£21 million) is excluded from operating profit based on longer-term investment returns as shown in note B1.

    The 2012 actuarial and other gains reflects the positive impact of inflation rate movements in the period, offset by lower discount rates as interest rate falls, and partial recognition of actuarial surplus in PSPS described above.
  4. The adjustments for investments in Prudential insurance policies are consolidation adjustments with no net impact to the operating results.
Pension cost    
Current service cost (32) (35)
Past service cost:note(a)    
RPI to CPI inflation measure change in 2011 282
Exceptional discretionary pension increase for PSPS in 2012 (106)
Finance (expense) income:    
Interest cost (263) (299)
Expected return on assets – IAS 19 basis 227 283
Add: expected return on investments of scheme assets in Prudential insurance policies 8 25
Expected return on assets – economic basis 235 308
Total (charge) credit without the effect of IFRIC 14 (166) 256
Effect of the application of IFRIC 14 136 (229)
Pension cost – economic basisnote(i) above and note (b) (30) 27
Adjustment for investments in Prudential insurance policiesnote(d) (8) (15)
Pension cost – IAS 19 basis (as recognised in the income statement and referred to in note I3a) (38) 12
     
Actuarial and other gains and losses    
Actual less expected return on assets (34) 982
Losses on changes of assumptions for plan liabilities (273) (414)
Experience (losses) gains on liabilities (4) 314
Total (charge) credit without the effect of IFRIC 14 (311) 882
Effect of the application of IFRIC 14 461 (846)
Actuarial gains and losses – economic basisnote(i) above and note(c) 150 36
Adjustment for investments in Prudential insurance policiesnote(d) (5) 1
Actuarial gains and losses – IAS 19 basis (as recognised in the income statement and referred to in note I3a) 145 37
Net periodic pension cost (included within acquisition and other operating expenditure in the income statement) 107 49

Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2012 amounts to £56 million (2011: £94 million).

5 Sensitivity of the pension scheme liabilities to key variables

The total underlying Group pension scheme liabilities of £6,059 million (2011: £5,620 million) comprise £5,226 million (2011: £4,844 million) for PSPS and £833 million (2011: £776 million) for the other schemes. The table below shows the sensitivity of the underlying PSPS and the other scheme liabilities at 31 December 2012 and 2011 to changes in discount rates, inflation rates and mortality rates.

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  Assumption applied        
2012 2011 Sensitivity change in assumption Impact of sensitivity on scheme liabilities on IAS 19 basis 2012 2011
Discount rate 4.4% 4.7% Decrease by 0.2% Increase in scheme
liabilities by:
   
        PSPS 3.3% 3.3%
        Other schemes 4.9% 4.8%
Discount rate 4.4% 4.7% Increase by 0.2% Decrease in scheme
liabilities by:
   
        PSPS 3.1% 3.1%
        Other schemes 4.6% 4.5%
Rate of inflation RPI: 2.7% RPI: 2.9% RPI: Decrease by 0.2% Decrease in scheme
liabilities by:
   
        PSPS 0.6% 0.6%
  CPI: 2.0% CPI: 1.9% CPI: Decrease by 0.2% with consequent reduction in salary increases



Other schemes



4.3%



4.1%
Mortality rate     Increase life expectancy
by 1 year
Increase in scheme
liabilities by:
   
        PSPS 2.6% 2.7%
        Other schemes 2.4% 2.4%

The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality rates as shown above does not directly equate to the impact on the profit or loss attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and Scottish Amicable schemes to the PAC with-profits fund as described above.

The sensitivity to the changes in the key variables as shown in the table above has no significant impact on the pension costs included in the Group’s operating results. This is due to the pension costs charged in each of the periods presented being derived largely from market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within the supplementary analysis of profits.

6 Transfer value of PSPS scheme

At 31 December 2012, it is estimated that the assets of the scheme are broadly sufficient to cover the liabilities of PSPS on a ‘buy-out’ basis including an allowance for expenses. The ‘buyout’ basis refers to a basis that might apply in the circumstance of a transfer to another appropriate financial institution. In making this assessment, it has been assumed that a more conservative investment strategy applies together with a more prudent allowance for future mortality improvements and no allowance for discretionary pension increases.

ii Other pension plans

The Group operates various defined contribution pension schemes including schemes in Jackson and Asia. The cost of the Group’s contributions for continuing operations to these schemes in 2012 was £47 million (2011: £40 million).

I4: Share-based payments

a Description of the plans

The Group maintains a number of main share award and share option plans relating to Prudential plc shares, which are described below.

(i) Group Performance Share Plan, previously Restricted Share Plan

The Group Performance Share Plan (GPSP) is the incentive plan in which all executive directors and other senior executives within the Group can participate. This scheme was established as a replacement for the Restricted Share Plan (RSP) under which no further awards could be made after March 2006. Awards are granted either in the form of a nil cost option, conditional right over shares, or such other form that shall confer to the participant an equivalent economic benefit, with a vesting period of three years. The performance measure for the awards is that Prudential’s Total Shareholder Return (TSR) outperforms an index comprising of peer companies. Vesting of the awards between each performance point is on a straight-line sliding-scale basis. Participants are entitled to the value of reinvested dividends that would have accrued on the shares that vest. Beginning in 2010, newly issued shares have been used in settling the awards that vest and are released.

The RSP was, until March 2006, the Group’s long-term incentive plan for executive directors and other senior executives designed to provide rewards linked to shareholder return. Each year participants were granted a conditional option to receive a number of shares. There was a deferment period of three years, at the end of which the award vested to an extent that depended on the performance of the Group’s shares including notional reinvested dividends and on the Group’s underlying financial performance. After vesting, the option may be exercised at zero cost at any time, subject to closed period rules, in the balance of a 10-year period. Shares are purchased in the open market by a trust for the benefit of qualifying employees.

(ii) Business Unit Performance Plan

The Business Unit Performance Plan (BUPP) is an incentive plan created to provide a common framework under which awards would be made to senior employees in the UK, Jackson and Asia, including the chief executive officers. Awards under this plan were based on growth in shareholder capital value on the European Embedded Value basis with performance measured over three years. All awards made are settled in shares after vesting. Participants are entitled to receive the value of reinvested dividends over the performance period for those shares that vest. The growth parameters for the awards are relevant to each region, and vesting of the awards between each performance point is on a straight-line sliding-scale basis. Beginning in 2010, newly issued shares will be used in settling the awards that vest and are released. The BUPP awards for the UK business unit are based on the same relative TSR measure applied to GPSP awards. As a result, awards made under the UK BUPP reflect those TSR conditions applied to GPSP awards.

(iii) Savings-related options

The Group maintains four share option schemes satisfied by the issue of new shares: UK-based executive directors and eligible employees are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK savings-related share option scheme. Asia-based executive directors and eligible employees can participate in the equivalent International savings-related share option scheme. Dublin-based employees are eligible to participate in the Prudential International Assurance sharesave plan and Hong Kong-based agents can participate in the non-employee savings-related share option scheme.

The options are normally exercisable during the six month period following either the third or fifth anniversary of the start of the relevant savings contract. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.

(iv) Share Incentive Plan

UK-based executive directors and employees are also eligible to participate in the Company’s HMRC-approved Share Incentive Plan (SIP), which allows all UK-based employees to purchase shares of Prudential plc (partnership shares) on a monthly basis out of gross salary. For every four partnership shares bought, an additional matching share is awarded, purchased on the open market. Dividend shares accumulate while the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws from the plan within five years, the matching shares are forfeit, and if within three years, dividend shares are forfeit.

(v) Performance-related share awards

Jackson operates a performance-related share award which, subject to the prior approval of the Jackson Remuneration Committee, may grant share awards to eligible Jackson employees in the form of a contingent right to receive shares or a conditional allocation of shares. These share awards have vesting periods of four years and are at nil cost to the employee. Award holders do not have any right to dividends or voting rights attaching to the shares. The shares are held in the employee share trust in the form of American Depository Receipts which are tradable on the New York Stock Exchange.

(vi) Long-term Incentive Plan

The Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) is an incentive plan created in 2008 for senior employees and chief executive officers. Awards under this plan will vest after three years subject to the employee being in employment at the time of vesting without any performance conditions. Awards are discretionary and on a year-by-year basis determined by Prudential’s full year financial results and the employee’s contribution to the business. All awards will be in Prudential shares except for countries where share awards are not feasible due to securities and/or tax reasons, where awards will be replaced by the cash value of the shares that would otherwise have been transferred.

(vii) Annual Incentive Plan

Certain senior executives have Annual Incentive Plans (AIP) with awards paid in cash up to the target level of their plan. The portion of any award for above-target performance is made in the form of awards of shares deferred for three years, with the release of shares subject to close periods. The shares are held in the employee share trust and shares equivalent to dividends otherwise payable will accumulate for the benefit of award holders during the deferral period up to the release date.

(viii) Other Share awards

In addition, there are other share awards, including the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), Prudential Capital Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions attaching to these deferred bonus plans, and awards vest in full subject to the individual being employed by Prudential at the end of the vesting period. The other arrangements relate to various awards that have been made without performance conditions to individual employees, typically in order to secure their appointment or ensure retention.

b Outstanding options and awards

The following table shows movement in options outstanding under the Group’s share-based compensation plans at 31 December 2012 and 2011:

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  2012 2011
Options outstanding under SAYE schemes Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
Beginning of year: 13.3 3.55 12.8 3.4
Granted 2.4 6.29 2.1 4.66
Exercised (5.7) 2.99 (0.6) 3.98
Forfeited (0.2) 4.29 (0.2) 3.17
Cancelled (0.2) 4.32 (0.4) 3.56
Lapsed (0.2) 4.39 (0.4) 3.94
End of year 9.4 4.54 13.3 3.55
Options immediately exercisable, end of year 0.2 3.88 0.4 4.54

The weighted average share price of Prudential plc for the year ended 31 December 2012 was £7.69 compared to £6.86 for the year ended 31 December 2011.

Movements in share awards outstanding under the Group’s share-based compensation plans relating to Prudential plc shares at 31 December 2012 and 2011 were as follows:

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  2012 2011
Awards outstanding under incentive plans including conditional options Number
of awards
millions
Number
of awards
millions
Beginning of year: 26.7 23.9
Granted 8.8 10.3
Exercised (9.4) (4.2)
Forfeited (1.4) (0.1)
Expired (1.0) (3.2)
End of year 23.7 26.7

The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2012.

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  Outstanding   Exercisable
Range of exercise prices Number
Outstanding
millions
Weighted average remaining contractual
life
years
Weighted
average
exercise
prices
£
  Number
exercisable
millions
Weighted
average
exercise
prices
£
Between £2 and £3 2.8 2.0 2.88   0.1 2.88
Between £4 and £5 4.1 2.3 4.61   0.1 4.24
Between £5 and £6 0.1 0.6 5.60   5.67
Between £6 and £7 2.4 3.6 6.29  
  9.4 2.6 4.54   0.2 3.88

The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2011.

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  Outstanding   Exercisable
Range of exercise prices Number
Outstanding
millions
Weighted average remaining contractual
life
years
Weighted
average
exercise
prices
£
  Number
exercisable
millions
Weighted
average
exercise
prices
£
Between £2 and £3 8.2 1.6 2.88  
Between £3 and £4 0.8 3.73   3.43
Between £4 and £5 5.0 3.1 4.58   0.3 4.40
Between £5 and £6 0.1 0.9 5.58   0.1
5.53
  13.3 2.2 3.55   0.4 4.54

The years shown above for weighted average remaining contractual life include the time period from end of vesting period to expiration of contract.

c Fair value of options and awards

The weighted average fair values of Prudential plc options and awards granted during the period are as follows:

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  2012 £   2011 £
  Weighted average fair value   Weighted average fair value
  GPSP SAYE
Options
Awards   GPSP
SAYE
Options
Awards
  3.91 2.28 6.72   3.88 2.63 6.28

The fair value amounts estimated on the date of grant relating to all options including conditional nil cost options above were determined using the Black-Scholes and the Monte Carlo option-pricing models using the following assumptions:

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  2012   2011
  GPSP SAYE
Options
  GPSP
SAYE
Options
Dividend yield (%) 3.63   3.33
Expected volatility (%) 33.03 34.33   28.90 62.67
Risk-free interest rate (%) 0.31 0.39   1.32 0.89
Expected option life (years) 3.24   3.48
Weighted average exercise price (£) 6.29   4.66
Weighted average share price (£) 6.78 8.26   7.32 6.06

Compensation costs for all share-based compensation plans are determined using the Black-Scholes model, Monte Carlo model or other market consistent valuation methods. The compensation costs for all awards and options are recognised in net income over the plans’ respective vesting periods. The Group uses the Black-Scholes model to value all options and awards other than the GPSP and UK BUPP, for which the Group uses a Monte Carlo model in order to allow for the impact of the TSR performance conditions. These models are used to calculate fair values for share options and awards at the grant date based on the quoted market price of the stock at the measurement date, the amount, if any, that the employees are required to pay, the dividend yield, expected volatility, risk-free interest rates and exercise prices.

For the SAYE options, the expected volatility is based on the market implied volatilities for Prudential shares as quoted on Bloomberg. This change (from an estimate based on historic volatility) brings the methodology into line with the approach used to determine the volatility for the GPSP and UK BUPP awards. The Prudential specific at-the-money implied volatilities are adjusted to allow for the different term and discounted exercise price on SAYE options by using information on the volatility surface of the FTSE 100.

Risk-free interest rates are UK gilt rates with projections for three-year and five-year terms to match corresponding vesting periods. Dividend yield is determined as the average yield over a period of 12 months up to and including the date of grant. For the GPSP, volatility and correlation between Prudential and an index constructed from a simple average of the TSR growth of 10 companies is required. For grants in 2012, an average index volatility and correlation of 32 per cent and 76 per cent respectively, were used. For the GPSP, market implied volatilities are used for both Prudential and the components of the index. Changes to the subjective input assumptions could materially affect the fair value estimate.

d Share-based payment expense charged to the income statement

Total expense recognised in the year in the consolidated financial statements related to share-based compensation is as follows:

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  2012 £m 2011 £m
Share-based compensation expense 58 48
Amount accounted for as equity-settled 42 44
Carrying value at 31 December of liabilities arising from share-based payment transactions 24 15
Intrinsic value of above liabilities for which rights had vested at 31 December 16 6

I5: Key management remuneration

Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and controlling the activities of the Group.

Total key management remuneration can be broken down in the following table:

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  2012 £ 2011 £
Salaries and short-term benefits 13,793,000 12,192,000
Post-employment benefits 1,206,000 1,189,000
Share-based payments 11,787,000 9,734,000
  26,786,000 23,115,000

Post-employment benefits comprise the change in the transfer value of the accrued benefit relating to directors’ defined benefit pension schemes in the year and the total contributions made to directors’ other pension arrangements.

The share-based payments charge is the sum of £7,992,000 (2011: £6,571,000), which is determined in accordance with IFRS 2, ‘Share-based payments’ (see note I4) and £3,795,000 (2011: £3,163,000) of deferred share awards.

Total key management remuneration includes total directors’ emoluments of £18,505,000 (2011: £16,212,000) as shown in the directors’ remuneration table and related footnotes in the directors’ remuneration report, and additional amounts in respect of pensions and share-based payments. Further information on directors’ remuneration is given in the directors’ remuneration report.

I6: Fees payable to auditor

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  2012 £m 2011 £m
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 2.0 2.1
Fees payable to the Company’s auditor and its associates for other services:    
Audit of subsidiaries pursuant to legislation 6.5 6.1
Audit-related assurance services 3.2 2.6
Tax compliance services 0.5 0.6
Other assurance services 0.5 0.5
Services relating to corporate finance transactions 0.4 0.5
All other services 1.2 0.3
Total 14.3 12.7

In addition, there were fees incurred of £0.1 million (2011: £0.1 million) for the audit of pension schemes.

The above audit fees for 2012 and 2011, reflect the new disclosure requirements of SI2011/2198 – The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011.

The Audit Committee regularly monitors the non-audit services provided to the Group by its auditor and has developed a formal Auditor Independence Policy which sets out the types of services that the auditor may provide, consistent with the guidance in Sir Robert Smith’s report ‘Audit Committees – Combined Code Guidance’ and with the provisions of the US Sarbanes-Oxley Act.

The Audit Committee annually reviews the auditor’s objectivity and independence. More information on these issues is given in the corporate governance report within this Annual Report.

I7: Related party transactions

Transactions between the Company and its subsidiaries are eliminated on consolidation.

In addition, the Company has transactions and outstanding balances with certain unit trusts, Open-Ended Investment Companies (OEICs), collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position sheet at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge and administration fee. Further details of the aggregate assets, liabilities, revenues, profits or losses and reporting dates of entities considered to be associates under IFRS are disclosed in note H8.

Executive officers and directors of the Company may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

In 2012 and 2011, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of the directors’ financial positions. As indicated above, all of these transactions are on terms broadly equivalent to those that prevail in arm’s length transactions.

Apart from these transactions with directors, no director had interests in shares, transactions or arrangements that require disclosure, other than those given in the directors’ remuneration report. Key management remuneration is disclosed in note I5.

I8: Subsidiary undertakings

i Principal subsidiaries

The principal subsidiary undertakings of the Company at 31 December 2012, all wholly owned were:

  Main activity Country of incorporation

* Owned by a subsidiary undertaking of the Company.

The Prudential Assurance Company Limited Insurance England and Wales
Prudential Annuities Limited* Insurance England and Wales
Prudential Retirement Income Limited (PRIL)* Insurance Scotland
M&G Investment Management Limited* Asset management England and Wales
Jackson National Life Insurance Company* Insurance US
Prudential Assurance Company Singapore (Pte) Limited* Insurance Singapore

Each subsidiary has one class of ordinary shares and operates mainly in its country of incorporation, except for PRIL which operates mainly in England and Wales.

Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the next Annual Returns of Prudential plc filed with the UK Registrar of Companies.

ii Dividend restrictions and minimum capital requirements

Certain Group subsidiaries are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to the parent company. UK insurance companies are required to maintain solvency margins which must be supported by capital reserves and other resources, including unrealised gains on investments. Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained. Furthermore, without the prior regulatory approval, dividends cannot be distributed if all dividends made within the preceding 12 months exceed the greater of Jackson’s statutory net gain from operations or 10 per cent of Jackson’s statutory surplus for the prior year. In 2013, the maximum amount of dividends that could be paid by the US insurance sub-group, subject to the availability of earned surplus, without prior regulatory approval is US$352 million (£216 million) (in 2012: US$411 million (£264 million)). The Group’s subsidiaries in Asia may remit dividends to the Group, in general, provided the statutory insurance fund meets the capital adequacy standard required under local statutory regulations and has sufficient distributable reserves.

The Group capital position statement for life assurance businesses is set out in note D5, showing the available capital reflecting the excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the subsidiaries. In addition, disclosure is also provided in note D5 of the local capital requirement of each of the fund or group of companies.

I9: Commitments

i Operating leases

The Group leases various offices to conduct its business. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

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  2012 £m 2011 £m
Future minimum lease payments for non-cancellable operating leases fall due during the following periods:    
Not later than 1 year 74 66
Later than 1 year and not later than 5 years 199 173
Later than 5 years 116 72

The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the year ended 31 December 2012 were £18 million (2011: £18 million).

Minimum lease rental payments for the year ended 31 December 2012 of £73 million (2011: £74 million) are included in the consolidated income statement.

ii Capital commitments

The Group has provided, from time to time, certain guarantees and commitments to third parties including funding the purchase or development of land and buildings and other related matters. The contractual obligations to purchase or develop investment properties at 31 December 2012 were £5 million (2011: £9 million).

I10: Cash flows

Structural borrowings of shareholder-financed operations comprise of core debt of the parent company, the PruCap bank loan and Jackson surplus notes. Core debt excludes borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.

Structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

I11: Post balance sheet events

In January 2013, the Company issued US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities. The proceeds, net of costs, were US$689 million. The Company also repaid on maturity, the £250 million Medium-Term Notes 2013, included within operational borrowings in note H13 in January 2013.

 
 

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