28 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 year. If the future commission liability decreases, a corresponding adjustment is made to the amortisation of the asset.

 

2014
£m

20131
£m

1.

Payables and other financial liabilities and fair value hierarchy have been restated to reflect the adoption by the group of IFRS 10, ‘Consolidated Financial Statements’. Further details are contained in Note 1.

2.

Other liabilities include obligations under repurchase agreements of £7.0bn in 2014 (2013: £3.2bn), amounts payables to brokers for the settlement of investment trades and net variation margins in 2014: £658m (2013: positive net variation margins of £306m) on derivative contracts which are maintained daily. Included within the variation margins are collateral held and pledged of £107m and £235m respectively (2013: £31m and £35m respectively). The repurchase agreements are presented gross, however they and their related assets are subject to master netting arrangements.

Derivative liabilities

6,877

3,119

Other2

9,254

6,186

Payables and other financial liabilities

16,131

9,305

 

 

 

Settled within 12 months

11,887

7,587

Settled after 12 months

4,244

1,718

Other includes future commission payments which have contingent settlement provisions of £186m (2013: £176m). 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 £252m (2013: £247m).

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 14.

Fair value hierarchy

As at 31 December 2014

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Derivative liabilities

6,877

593

6,284

Other

9,254

869

29

186

8,170

Payables and other financial liabilities

16,131

1,462

6,313

186

8,170

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

Other

6,186

1,421

43

176

4,546

Payables and other financial liabilities

9,305

1,695

2,888

176

4,546

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 (2013: £5m).

Significant transfers between levels

There have been no significant transfers between levels 1, 2 and 3 for the period ended 31 December 2014 (2013: No significant transfers between levels 1, 2 and 3).