27 Payables and other financial liabilities.

27 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 remeasured 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

 

2013
£m

2012
£m

Derivative liabilities

3,119

5,729

Collateral received from banks

989

21

Other

4,823

2,333

Payables and other financial liabilities

8,931

8,083

 

 

 

Settled within 12 months

7,213

4,766

Settled after 12 months

1,718

3,317

Other includes future commission payments which have contingent settlement provisions of £176m (2012: £189m). 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 £247m (2012: £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 13.

Fair value hierarchy

(XLS:) Payables and other financial liabilities – Fair value hierarchy 2013

As at 31 December 2013

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Derivative liabilities

3,119

274

2,845

Collateral received from banks

989

989

Other

4,823

58

43

176

4,546

Payables and other financial liabilities

8,931

1,321

2,888

176

4,546

(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 liabilities

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

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 period. A reasonably possible alternative persistency assumption would have the effect of increasing or decreasing the liability by £5m (2012: £6m).

Significant transfers between levels

There have been no significant transfers between levels 1, 2 and 3 for the year ended 31 December 2013 (2012: No significant transfers between levels 1, 2 and 3).

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