37 PAYABLES AND OTHER FINANCIAL LIABILITIES.


Trail commission

The Group operates distribution agreements with intermediaries where further commission costs are payable in each period in which a relevant policy remains in-force. For relevant non-participating investment contracts, a liability for the present value of this future commission cost is recognised in the balance sheet on inception of the contract. The present value of future commission costs is deferred as an asset and amortised over the period during which the related revenue will be recognised. At each subsequent reporting date the liability is re-measured to fair value because this financial liability is part of a portfolio of unit linked assets and liabilities whose performance is evaluated on a fair value basis. Any increase in the liability is recognised as an additional deferred cost. Any change in lapse assumptions or revisions to the underlying assumptions for future cash flows will be reflected in the fair value movement for a period. If the future commission liability decreases, a corresponding adjustment is made to the amortisation of the asset.

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Note

2011
£m

2010
£m

Derivative liabilities

23

6,120

3,769

Collateral received from banks

 

165

288

Other

 

1,358

1,416

Payables and other financial liabilities

 

7,643

5,473

Settled within 12 months

 

7,148

5,190

Settled after 12 months

 

495

283

Other includes future commission payments which have contingent settlement provisions of £182m (2010: £178m). This liability has been determined using the net present value of the future commission which will be payable on fund values. This valuation technique uses assumptions which are consistent with the Group’s effective rate of interest, investment return assumptions and persistency assumptions used in other valuations, but it is not determined by reference to published price quotations.

The undiscounted value which is expected to be paid at maturity in respect of such commission is £259m (2010: £248m).

Payables and other financial liabilities settled after 12 months are expected to be settled within five years with the exception of derivative liabilities, as disclosed in Note 23.

Fair value hierarchy

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As at 31 December 2011

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Derivative liabilities1

6,120

309

5,608

203

Collateral received from banks

165

165

Other

1,358

132

116

182

928

Payables and other financial liabilities

7,643

606

5,724

385

928

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As at 31 December 2010

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

1.

Level 3 derivative liabilities of £203m (2010: £nil) comprise non profit non-linked interest rate contracts, which have been transferred into Level 3 during the year due to the use of measurement inputs that are not based on observable market data. The pricing of these derivatives is dependant on interest rate assumptions. Using reasonably alternative assumptions would result in an increase or decrease in fair value of £10m. Following review, the prior year disclosure has been amended to more appropriately reflect the measurement basis used, resulting in a reclassification of £1,662m of derivative liabilities from Level 1 to Level 2.

Derivative liabilities1

3,769

502

3,267

Collateral received from banks

288

288

Other

1,416

275

50

178

913

Payables and other financial liabilities

5,473

1,065

3,317

178

913

Trail commissions are modelled using expected cash flows, incorporating expected future persistency. They have therefore been classified as level 3 liabilities. The entire movement in the balance has been reflected in the income statement during the year. A reasonably possible alternative persistency assumption would have the effect of increasing or decreasing the liability by £5m (2010: £5m).

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