23 Investment contract liabilities

Under current IFRS requirements, participating investment contract liabilities are measured using local GAAP, as permitted by IFRS 4. In the UK, participating investment contract liabilities are determined in accordance with FRS 27, including a value for guarantees, in the same way as participating insurance contracts.

Non-participating investment contracts are unit linked contracts. Unit linked liabilities are measured at fair value by reference to the value of the underlying net asset values of the group’s unitised investment funds at the balance sheet date.

Unitised liabilities are recognised when premiums are received and non-unitised liabilities are recognised when premiums are due.

Claims are not included in the income statement but are deducted from investment contract liabilities. The movement in investment contract liabilities consists of claims incurred in the year less the corresponding elimination of the policyholder liability originally recognised in the balance sheet and the investment return credited to policyholders.

IFRS 15, ‘Revenue from Contracts with Customers’, issued in May 2014, is effective, subject to EU endorsement, for annual periods beginning on or after 1 January 2017. This Standard provides clear guidance over when and how much revenue should be recognised. It provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. As IFRS 15 has only recently been issued a full assessment is currently on going to determine the impact upon the group, focussing in particular on our investment management business. The Standard does not apply to business classified as insurance contracts. The group does not intend to early adopt this Standard.

(i) Analysis of investment contract liabilities

 

Note

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

Participating investment contracts

 

7,667

14

7,493

Non-participating investment contracts

23(iii)

288,558

(324)

278,754

(295)

Investment contract liabilities

 

296,225

(310)

286,247

(295)

 

 

 

 

 

 

Expected to be settled within 12 months (net of reinsurance)

 

40,645

 

39,582

 

Expected to be settled after 12 months (net of reinsurance)

 

255,270

 

246,370

 

(ii) Movement in investment contract liabilities

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

As at 1 January

286,247

(295)

272,361

(213)

Reserves in respect of new business

30,645

(334)

30,816

(237)

Amounts paid on surrenders and maturities during the year

(53,311)

60

(47,055)

66

Investment return and related benefits

33,126

259

30,369

89

Management charges

(309)

(295)

Foreign exchange adjustments

(177)

51

Other

4

As at 31 December

296,225

(310)

286,247

(295)

Change in provisions for investment contract liabilities represents the total gross and reinsurance investment return and related benefits of £33,385m (2013: £30,458m).

Fair value movements of £33,198m (2013: £30,095m) are included within the income statement arising from movements in investment contract liabilities designated as fair value through profit and loss.

(iii) Non-participating investment contract liability fair value hierarchy

As at 31 December 2014

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Non-participating investment contracts

288,558

286,054

2,473

31

As at 31 December 2013

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Non-participating investment contracts

278,754

276,759

1,953

42

The fair value of financial liabilities are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data.

Non-participating unit linked investment contracts include £31m (2013: £42m) valued using significant unobservable inputs and have been classified as level 3. These liabilities have limited transactions and are backed by property investments.

There have been no significant transfers between any of the levels.

(iv) Expected investment contract liability cash flows

 

Date of undiscounted cash flow

 

 

As at 31 December 2014

0-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Carrying value
£m

Participating investment contracts

3,035

3,882

1,324

357

8,598

7,667

 

Date of undiscounted cash flow

 

 

As at 31 December 2013

0-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Carrying value
£m

Participating investment contracts

2,893

4,210

1,763

527

9,393

7,493

Investment contract undiscounted net cash flows are based on the expected date of settlement.

Amounts under unit linked contracts are generally repayable on demand and the group is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit linked policyholders to be met as they fall due. However, the terms of funds investing in less liquid assets permit the deferral of redemptions for predefined periods in circumstances where there are not sufficient liquid assets within the fund to meet the level of requested redemptions. Accordingly unit linked liabilities have been excluded from the reported cash flows.

A maturity analysis based on the earliest contractual repayment date would present investment contract liabilities as due on the earliest period of the table because policyholders can exercise cancellation options at their discretion. In such a scenario, the liability would be reduced due to the application of surrender penalties.