Some of the Group’s products give potentially valuable guarantees, or give options to change policy benefits which can be exercised at the policyholder’s discretion. These products are described below. Where the contracts are non-profit contracts, appropriate quantification is given of any potentially significant guarantees.
Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death before that date or dates. For pensions contracts, the specified date is the policyholder’s chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with-profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with-profit contracts usually increase the guaranteed amount.
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There are guaranteed surrender values on a small number of older contracts.
Some pensions contracts include guaranteed annuity options which expose the Group to interest rate and longevity risk. The total liabilities included in the with-profit funds in respect of these guarantees for Life Division South are £1,093 million and for Life Division North are £343 million.
With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder to commute the annuity benefit into cash on guaranteed terms.
There is a block of immediate and deferred annuities within the non-profit business for Life Division South where benefits are linked to changes in the Retail Price Index (RPI) but with contractual maximum or minimum increases. In particular, most of these annuities have a provision that the annuity will not reduce if the RPI falls. The liabilities in respect of such annuities in payment at 31 December 2006 was £474 million.
29. Borrowings
Non-current liabilities
2006 2005 £m £m Bank loans 435.0 65.0 Subordinated loans 221.8 –Deposits received from reinsurers 458.1 25.3
1,114.9 90.3
Current liabilities
2006 2005 £m £m Bank overdrafts – 0.5 Bank loans 496.1 20.0 Subordinated loans 124.9 –Deposits received from reinsurers 24.2 2.5
645.2 23.0
Total borrowings 1,760.1 113.3
Bank loans comprises two separate loans. The first loan of £380 million is repayable in June 2007 and carries an annual interest rate of between 30 and 70 basis points above LIBOR and is currently charged at a rate of 40 basis points above LIBOR. The second loan of £550 million comprises “Facility A” of £350 million and “Facility B” of £200 million. Facility A is a term loan repayable in instalments of £115 million in April 2007, £115 million in April 2008 and £120 million in April 2009. Facility B is a revolving credit facility with a termination date of April 2009. Both facilities carry an annual interest rate of between 30 and 70 basis points above LIBOR and are currently charged at a rate of 45 basis points above LIBOR. The aggregate carrying value of the loans reflects the unamortised value of the transaction costs and accrued interest to 31 December 2006. All interest payments have been made when due.
Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001. The earliest repayment date of the notes is 25 March 2021, and thereafter on each fifth anniversary so long as the notes are outstanding. The Group has entered into interest rate swap agreements with Abbey National Treasury Services plc, the effects of which are to convert the fixed interest expense on the notes to a floating rate expense. In the event of the winding-up of the Group, the right of payment under the notes shall be subordinated to the rights of the higher-ranking creditors (principally policyholders). All interest payments due under the notes have been made when
Notes to the consolidated
financial statements
(continued)
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29. Borrowings (continued)
due. The carrying value is based on the fair value of the borrowing at the date of acquisition of Abbey’s life businesses, after allowing for amortisation and accrued interest to 31 December 2006.
SPI Finance plc issued £125 million 8.75% undated subordinated guaranteed bonds in 1997. The earliest repayment date of the bonds is 13 May 2007 and thereafter on each fifth anniversary so long as the bonds are outstanding. In the event of the winding-up of the Company, the right of payment under the debt shall be subordinated to the rights of higher-ranking creditors (principally policyholders). All interest payments due under the debt have been made when due. The Group intends to repay the bonds on 13 May 2007.
As at the end of the year the aggregate unused overdraft facility from various banks amounted to £78.2 million (2005: £21.0 million).
30. Deferred income
2006 2005
£m £m
Amount due for recovery after 12 months 72.5 101.4
31. Trade and other payables
2006 2005
(restated)
£m £m
Trade and other creditors 505.6 249.7
Collateral creditors 149.2 213.6
654.8 463.3
Amount due for settlement after 12 months 165.5 215.5
Information on the collateral creditors is given in note 39.
32. Pension schemes
(a) Defined contribution schemes
The Group participates in the defined contribution section of the Resolution (formerly Britannic) Group pension scheme and, since 6 September 2005 the defined contribution section of the Phoenix Life Group pension scheme, which merged with the Resolution Group pension scheme on 31 July 2006.
Former staff of the Abbey life businesses who were either in the Abbey matching stakeholder scheme or were not in a pension scheme are eligible to join the Resolution stakeholder scheme, a matching scheme. Former staff of Abbey’s life businesses who were in a defined benefits pension scheme have been offered an enhanced defined contribution pension scheme which commenced on 1 March 2007. Prior to this date these staff were eligible to join the Resolution stakeholder (non-matching) scheme.
Contributions to defined contribution schemes amounted to £8.6 million (2005 £1.2 million).