GOVERNANCE REPORT
73
Significant judgements
Approach
Action
The length of time the Group’s Retirement Income customers and Lifetime Mortgage customers will live, and therefore the projected cash flows for Retirement Income and Lifetime Mortgage assets, are key assumptions when valuing the Group’s insurance liabilities and Lifetime Mortgages.
Longevity experience is a key area of focus for the Board and the Committee, and the Board receives regular reports on the actual against expected number of deaths and the likely causes, by condition, of any positive or negative divergence as well as the output of industry studies. The Committee reviewed the longevity assumptions and determined that the mortality improvements basis should be updated to replace the CMI 2017 model source with CMI 2019 for reporting as at 31 December 2020. The expected impact on future mortality rates (over both the short and long term) was considered and it was concluded that, given the level of uncertainty for the impact of COVID-19, future mortality improvement assumptions would not be adjusted for the impact of COVID-19 for the year ended 31 December 2020. The Committee reviewed the key assumptions and determined that they should remain unchanged. The potential impact of COVID-19 was considered and it was concluded that no adjustment was required for any elevated rate of default or downgrade from the economic effects of COVID-19 due to sufficient prudence within the existing methodology. The Committee reviewed and approved proposals to update maintenance expense assumptions in line with the latest expense forecasts provided by management, which included apportionment by categories of maintenance, acquisition, development and non-recurring, and by entity, and to revise the inflation rate to explicitly allow for expected increases linked to CPI, RPI and earnings to determine a weighted average inflation rate. The Committee reviewed both these key assumptions including detailed analyses frommanagement. It was determined that the assumption for property price volatility should remain unchanged from the 2019 year end and that the assumption for property price inflation should reduce by 50 basis points. This included consideration of the potential impact of the UK’s withdrawal from the European Union and the COVID-19 pandemic on UK property prices. The Committee reviewed, and challenged as appropriate, the detailed analysis and agreed with the proposals. During 2020 management also assessed the appropriateness of using the ONS indices to determine property prices and on reviewing the analysis the Committee concluded that it was appropriate to continue to use the ONS indices to determine property prices at the valuation date. The carrying value of this asset is assessed through the consideration of the in-force and new business cash flows of the underlying subsidiary companies. The Committee reviews assessments, the recoverability of the balances reported and appropriateness of accounting policies, as part of its work on financial reporting. As part of the preparation of the 2020 accounts, the Committee considered whether any of the investment in subsidiaries should be impaired. After reviewing the recoverable amounts for the Group’s investments in subsidiaries, an impairment of £14mwas recognised in respect of the investment relating to PLACL as a result of a dividend distribution to its parent, during the year.
LONGEVITY ASSUMPTIONS
Credit default assumptions are used to determine the valuation rate of interest used in the calculation of insurance contract liabilities. The Group’s asset portfolio includes a material amount of illiquid assets. For corporate bonds, credit default assumptions are calculated taking into account both historical default experience for each rating class and the current spread on the asset. For Lifetime Mortgages it is captured using the expected NNEG shortfalls. For other illiquid assets including infrastructure and ground rents, credit default assumptions are set to a proportion of the equivalent corporate bond default allowance. Future maintenance expenses are used in the measurement of the insurance contract liabilities. The assumptions reflect the expected future expenses that will be required to maintain the in-force policies at the balance sheet date, including an allowance for project costs and a margin for prudence (IFRS only). The values of the Group’s Lifetime Mortgages are reliant on a range of assumptions, of which the key ones are future house price growth and house price volatility. These assumptions determine the expected shortfall on redemption in respect of the NNEG which is given to all lifetime mortgage customers. Small changes in these assumptions (particularly future house price volatility) can have a significant impact on the overall asset valuation. Management use the Office of National Statistics (“ONS”) indices to determine current property prices. The ONS indices uses publicly available sales information.
CREDIT DEFAULT ASSUMPTIONS
EXPENSE AND EXPENSE INFLATION ASSUMPTIONS
PROPERTY ASSUMPTIONS USED TO VALUE THE GROUP’S LIFETIME MORTGAGES
Just Group plc’s investment in subsidiary undertakings is a significant asset and underpins the net equity reported by Just Group plc in its individual Parent Company financial statements. The Group’s policy is to hold investments at cost and assess annually for indicators of impairment.
INVESTMENT IN SUBSIDIARIES
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