24 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.

(XLS:) Payables and other financial liabilities

 

Note

2012
£m

2011
£m

Derivative liabilities

11

5,729

6,120

Collateral received from banks

 

21

165

Other

 

2,333

1,358

Payables and other financial liabilities

 

8,083

7,643

Settled within 12 months

 

4,766

3,970

Settled after 12 months

 

3,317

3,673

Other includes future commission payments which have contingent settlement provisions of £189m (2011: £182m). 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 £248m (2011: £259m).

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 11.

Fair value hierarchy

(XLS:) Payables and other financial liabilities – fair value hierarchy 2012

As at 31 December 2012

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Derivative liabilities1

5,729

214

5,515

Collateral received from banks

21

21

Other

2,333

108

29

189

2,007

Payables and other financial liabilities

8,083

343

5,544

189

2,007

(XLS:) Payables and other financial liabilities – fair value hierarchy 2011

As at 31 December 2011

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

1.

In 2011, derivative liabilities of £203m classified as Level 3 comprised non profit non-linked interest rate contracts, which were transferred into Level 3 during the year due to the use of measurement inputs that were not based on observable market data. The pricing of these derivatives was dependant on interest rate assumptions. Using reasonably alternative assumptions would have resulted in an increase or decrease in fair value of £10m.

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

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 £6m (2011: £5m).