M&G Regulatory News (MNG)

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION ON THE COMPANY'S INTENTION

TO CARRY OUT A SHARE BUY-BACK

8 March 2022

M&G plc full year 2021 results

Continued strengthening of operational performance

Strong capital generation to support £500m share buy-back programme

Improved fund flows and investment in growth underpin longer-term confidence

John Foley, Chief Executive, said:

"It has been another year of robust operational and financial performance, as we have delivered on all our demerger commitments including total capital generation of £2.8 billion over two years, well ahead of our original target.

"In light of this performance and our strong capital generation we are able to announce today £500 million to be returned to shareholders by way of a buy-back programme, expected to start shortly. Together with dividends paid, we will have returned £1.8 billion of capital to shareholders, equivalent to 32% of M&G's market value at demerger. Alongside this, we have achieved our annual shareholder cost savings target of £145 million one year ahead of schedule.

"We have also accelerated our strategy for growth in Asset Management and M&G Wealth through a series of targeted investments and strategic acquisitions in the UK and Europe. These included an agreement for majority control of Swiss sustainable private assets manager responsAbility, the purchase of independent adviser Sandringham and a digital consumer partnership with Moneyfarm.

"Our focus remains on delivering long-term sustainable growth and attractive returns to shareholders through a balanced approach to capital management, while investing in priority areas alongside further internationalisation and modernisation of the business. I am confident that 2022 will be an inflection point for us."

Operational improvements underpin encouraging financial performance

- Adjusted operating profit before tax of £721 million (2020: £788 million), with the reduction in part due to lower benefits from changes to longevity assumptions

- Assets under management and administration increased 0.8% year on year to £370 billion, including strong net client inflows of almost £6 billion from the Institutional Asset Management franchise and continued improvement in Retail Asset Management flows

- Shareholder Solvency II coverage ratio strengthened to 218%, its highest level since demerger

- £500 million to shareholders by way of a share buy-back programme, which is expected to start shortly

- Second interim dividend of 12.2 pence per share, in line with our policy of stable or increasing dividends

- Key demerger targets completed ahead of schedule: capital generation of £2.8 billion over two years, versus original target of £2.2 billion by end 2022. Annual shareholder cost savings of £145 million achieved a year earlier than planned

Investing for growth: expanding wealth & asset management in UK and Europe

- In early 2022 we strengthened M&G Wealth with the acquisition of IFA Sandringham Financial Partners, a partnership with digital wealth platform Moneyfarm, and the acquisition of TCF Investment, a provider of model portfolio services

- Building sustainable investing capability following agreement to acquire leading impact investor responsAbility (AUMA: £3 billion) as announced in January 2022

- Expanding in Italy through the launch of Future+, a European version of our UK PruFund proposition

Governance

- Edward Braham will become Chair of the Board from 14 March 2022, and subject to regulatory approval, Kathryn McLeland will join as Chief Financial Officer in May 2022

Outlook

- Growth prospects strengthened by pipeline of new propositions, including sustainable investment offerings and Future+ in Europe - competitive differentiators to deepen relationships with key distributors

- Latest target for operating capital generation of £2.5 billion over the next three years to the end of 2024

- Shareholder Solvency II coverage ratio and operating capital generation underpin future dividend policy

Enquiries:

Notes to Editors

1. The results in this preliminary announcement are prepared in accordance with UK-adopted international accounting standards, and are based on the consolidated financial statements of M&G plc.

2. The shareholder view and regulatory view of the Solvency II coverage ratio as at 31 December 2021 assumes transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

3. Total number of M&G plc shares in issue as at 31 December 2021 was 2,599,906,866

4. A Q&A webcast will be hosted by John Foley (CEO) and Paul Cooper (Interim CFO) on Tuesday 8 March at 10:30 GMT. You can register for the Q&A and view the investor presentation here (the presentation will be available from 07:00 GMT):https://mngresults.connectid.cloud/register. Dial in: UK freephone 0800 640 6441/ All other locations +44 203 936 2999Participant code: 209007

5. The person responsible for arranging the release of this announcement on behalf of M&G plc is Alan Porter, General Counsel and Company Secretary.

6. Dividend to be paid in April 2022

7. About M&G plcM&G plc is a leading international savings and investments business, managing money for both individual savers and institutional investors in 28 markets. As at 31 December 2021, we have £370 billion of AUMA, over 5 million retail customers and more than 800 institutional clients. With a heritage dating back more than 170 years, M&G plc has a long history of innovation in savings and investments, combining asset management and insurance expertise to offer a wide range of solutions. We serve our savings and insurance customers under the Prudential brand in the UK and Europe, and under the M&G Investments brand for asset management clients globally.

8. Additional InformationM&G plc, a company incorporated in the United Kingdom, is the ultimate parent company of The Prudential Assurance Company Limited. The Prudential Assurance Company Limited is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.

9. Forward-Looking StatementsThis announcement may contain certain 'forward-looking statements' with respect to M&G plc and its affiliates (the "M&G Group"), its plans, its current goals and expectations relating to its future financial condition, performance, results, operating environment, strategy and objectives. Statements that are not historical facts, including statements about M&G plc's beliefs and expectations and including, without limitation, statements containing the words 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'seeks', 'outlook' and 'anticipates', and words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore persons reading this announcement are cautioned against placing undue reliance on forward-looking statements.By their nature, all forward-looking statements involve inherent assumptions, risk and uncertainty, as they generally relate to future events and circumstances that may be beyond the M&G plc Group's control. A number of important factors could cause M&G plc's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement.Such factors include, but are not limited to, UK domestic and global economic and business conditions (including the political, legal and economic effects of the UK's decision to leave the European Union); market-related conditions and risk, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, corporate liquidity risk and the future trading value of the shares of M&G plc; investment portfolio-related risks, such as the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the impact of competition, economic uncertainty, inflation and deflation; the effect on M&G plc's business and results from, in particular, mortality and morbidity trends, longevity assumptions, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal projects and other strategic actions, such as transformation programmes, failing to meet their objectives; the impact of operational risks, including risk associated with third party arrangements, reliance on third party distribution channels and disruption to the availability, confidentiality or integrity of M&G plc's IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which the M&G plc Group operates; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits.Any forward-looking statements contained in this document speak only as of the date on which they are made. M&G plc expressly disclaims any obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, or other applicable laws and regulations. Nothing in this announcement shall be construed as a profit forecast, or an offer to sell or the solicitation of an offer to buy any securities.

LEI: 254900TWUJUQ44TQJY84 Classification: 1.1 Annual Financial and Audit Reports

Chief Executive's review

Delivering on our strategy

While the world is still far from normal, we've remained focused on delivering our strategic commitments to customers, clients and shareholders.

It's safe to say that when we demerged from Prudential plc in October 2019, none of us anticipated that our first two full years of life as an independent company would be dominated by a global pandemic, and more recently, the tragedy of the Russian invasion of Ukraine.

It is a testament to the resilience of our business model and the determination of our people that we have nonetheless delivered another robust performance, demonstrating our consistent strength in capital generation and increasing our shareholder Solvency II ratio.

We've delivered on our commitments to shareholders at demerger, and are now making good progress on some of our newer commitments such as our pivot to sustainability, and on the recovery of our retail asset management business.

Meeting our commitments

In 2019 we set ourselves ambitious targets. The most significant of these was a three-year total capital generation target of £2.2 billion - which we have achieved a year early with a total of £2.8 billion generated in total capital since January 2020.

We also promised shareholders a stable or increasing dividend policy, and we have kept that promise throughout the pandemic. With the 2021 second interim dividend of 12.2 pence per share, we will have returned 52 pence per share to shareholders in dividends since 2019.

Given the strength of our capital position, and our confidence in the capital generative nature of our business, we are pleased to announce our intention to return £500 million to shareholders by way of a share buy-back programme, which is expected to start shortly and to complete within 12 months.

Together, the interim dividend and share buy-back programme announced today will result in us returning a total of £1.8 billion of capital generated to shareholders since the establishment of M&G as an independent listed company just over two years ago, roughly equivalent to 32% of the Company's market capitalisation at the time of demerger.

We are also continuing to modernise our business, progressing with our five-year plan to invest in customer experience, scalability, efficiency and capability while also delivering our shareholder annual run rate cost savings of £145 million. I am pleased to say we have also delivered this savings target a year early.

However, in our legacy business the complexity and scale of replacing old systems mean some of our customers received poor levels of service in 2021. We are sincerely sorry for their experiences and we have made a significant investment to get the issues resolved.

Progress towards sustainable growth

At the end of the year, our total assets under management and administration were £370 billion, £2.8 billion increase from 2020. While market conditions have not always been easy during 2021, we have taken every opportunity to execute on our plan to return to sustainable growth.

Institutional asset management had an excellent year, with assets under management up and net client inflows of £5.8 billion, largely due to growth in mandates from European financial institutions. Building on our strong market position in the UK to internationalise this business has been, and remains, a key strategic priority for us. In January 2022, we announced plans to acquire a controlling stake in responsAbility, a Swiss-based asset manager that has been specialising in emerging market impact investing for two decades. We are seeing growing demand for impact products from clients and believe we have a great opportunity to build on our existing capability in this space.

Eighteen months ago we announced a series of measures to improve investment outcomes and offer better value to our retail asset management customers and clients. We are seeing the positive effects of these steps on fund performance and flows, which were much improved during the year, with international wholesale business returning to growth in the second half.

At home, net client outflows from PruFund, our smoothed solution for UK retail savers, were £1.4 billion, due to competitive pressure and pandemic related restrictions on face-to-face advice. During the year, we launched our new PruFund Planet proposition, giving customers the opportunity to access the same smoothed returns and risk profile as PruFund with additional positive environmental and societal outcomes from their investment. We are also delighted to have launched Future+, a new smoothed savings proposition similar to PruFund, in two European wholesale markets.

M&G Wealth

At a time of rising inflation and negative real interest rates, many people are increasingly concerned about financial planning and need access to good quality, affordable financial advice.

Eighteen months ago, we launched M&G Wealth, a new wealth management business to meet the rising demand for investment advice and wealth solutions. We continued to invest in this business, with the completion of our acquisition of Sandringham Financial Partners in January 2022, to accelerate the growth of our advisory capability across the UK.

Sandringham brings more than £2.5 billion of assets under advice to M&G Wealth's existing advice, platform and investment businesses, and relationships with around 180 IFA Partners acting on behalf of more than 10,000 individual clients.

While many customers still want in-person investment advice, we cannot ignore the rapid growth of digital investment services, which now account for almost one in five UK direct customers. To capitalise on this growing segment, we have launched a hybrid advice proposition for our advised customers with digital specialist Ignition, and in January 2022 also announced a new partnership with digital investment specialist Moneyfarm. This will provide technology and guidance to support the development of a new M&G Wealth direct digital investment service, and also potentially offer us opportunities to enter the European direct investment market. To complete our offering, we have also acquired TCF Investment, a provider of model portfolio services.

South Africa

During the year, we took advantage of an opportunity to add to our 49.99% stake in our South African associate, Prudential Portfolio Managers South Africa (PPMSA), to become majority shareholders in the business, which in November was rebranded M&G South Africa. South Africa joins Paris, Chicago, Singapore, London and shortly, Zurich, as one of our global investment hubs, and we look forward to the perspectives and opportunities our colleagues there will contribute, as we help them support their clients with our global capabilities. We are delighted to welcome our colleagues in Johannesburg and Cape Town.

Continuing to embed sustainability

Last year, we committed to embedding sustainability across everything we do in our business, to help us deliver better long-term outcomes for our customers and clients, and stronger, more resilient returns to shareholders.

In May 2021, we published our 10 point Sustainability Plan, which sets out how we intend to achieve this, covering everything from our targets to be carbon net zero by 2030 as a business and by 2050 as an investor, to how we are aligning our people behind our ambition.

One of the stand-out achievements in 2021 has been the growth in our range of Planet+ sustainability-focused investment products to 20 funds, covering a wide variety of themes and asset classes. Some of these are brand new strategies, such as the M&G Better Health Solutions Fund, while others have been part of our major programme to convert our SICAV fund range to become SFDR Article 8 and 9-classified.

Another sustainability highlight has been the first year of our Catalyst strategy, which is investing up to £5 billion from the With-Profits Fund into innovative privately-owned businesses working to create a more sustainable world.

By the end of 2021, Catalyst had deployed over £651 million in investments and committed a further £633 million into sustainable solutions such as carbon neutral transport, recycled thermoplastics, and carbon capture and storage.

Executive and organisational changes

To position us for our next phase of strategic delivery, we took the decision in 2021 to restructure part of our organisation, bringing the Heritage, Wealth and other savings operations together to form our Retail and Savings business - a change you will see reflected in our segmental reporting for this year's financial results.

Clare Bousfield, our Chief Financial Officer since 2018, has moved to a new role as Managing Director of the Retail and Savings business, while Jack Daniels continues to lead our Asset Management business. A new Chief Financial Officer, Kathryn McLeland, will join us from Barclays plc in May.

Following the sad and untimely death of Roddy Thomson in the spring, we have appointed Vanessa Murden to fill his role as Chief Operating Officer, who will join us from the Lloyds Banking Group in May.

I look forward to welcoming Kathryn and Vanessa, subject to regulatory approval, and would like to record my thanks to Clare for her great support to me as Chief Financial Officer.

I am also delighted that Edward Braham, formerly the senior partner at Freshfields Bruckhaus Deringer, will become Chair of the Board on 14 March 2022. I would like to put on record my gratitude to Fiona Clutterbuck who has ably served as Interim Chair over the past 15 months and now returns to her role as Senior Independent Director.

Outlook

I am pleased with the momentum we are seeing across our business towards sustainable growth, but there is still a considerable amount of work to do.

While we press ahead with exciting digital investment and advice opportunities, we know there is still much more to do on modernising and digitalising our legacy business.

There is also much more to do on sustainability: navigating the complex issues involved in finding the surest path to net zero; improving the sustainability reporting that gives our customers confidence in our delivery; and developing meaningful approaches as an investor to global challenges such as biodiversity, water security and social inequality.

We have demonstrated exceptionally disciplined capital management since demerger, and we need to continue this. Having already achieved our three-year total cumulative capital generation target of £2.2 billion to the end of 2022, we are committed to meet a £2.5 billion operating capital generation target by the end of 2024. This comfortably covers expected dividend costs, and will allow us to continue to deploy capital to scale our capabilities in growing markets with resilient and attractive margins.

Business and financial review

Our results for 2021 demonstrate our consistent strength in proactively and efficiently managing our balance sheet, with total capital generation of £1,822 million (2020: £995 million).

This strong performance has resulted in the achievement of our total capital generation target of £2.2 billion by the end of 2022, a year earlier than planned. The increase in total capital generation has led to an increase in our shareholder Solvency II coverage ratio to 218% (2020: 182%) after paying dividends of £466 million, with other capital movements providing a net benefit of £32 million in the year. We have also announced a new target to deliver £2.5 billion of cumulative operating capital generation by 2024.

Adjusted operating profit before tax of £721 million (2020: £788 million) demonstrates the benefits from our diversified sources of earnings resulting from being an asset manager and an asset owner against the back drop of an increasingly competitive environment.

Total AUMA increased to £370.0 billion (2020: £367.2 billion) with positive market and other movements offsetting the £9.6 billion transfer to Rothesay Life PLC. We returned to net client inflows (excluding Heritage) of £0.6 billion compared to net client outflows (excluding Heritage) of £6.6 billion in 2020. The main driver of the improvement being £2.0 billion of net client inflows in our Asset Management business in the year, a significant increase on 2020 which saw a £6.8 billion net client outflow.

We have surpassed our £145 million target by achieving £167 million of annual run-rate shareholder cost savings at the end of the year, delivering one year early against our commitment to deliver by the end of 2022 through our five-year merger and transformation programme. Since 2017 when we made the commitment we have continued to carefully balance additional savings potential with the associated investment to achieve, recognising the changes in the dynamics of the business. As a consequence, we have invested further in the business beyond the original scope of the merger and transformation programme, resulting in the over-achievement of the target one year earlier than anticipated. The shareholder investment over four years has been £385 million against an expected initial investment of approximately £250 million, driven by the incremental cost saving initiatives identified, and reflecting both additional projects and some unanticipated costs of delivering the original merger and transformation programme. We will remain focused on driving operational efficiencies across the business as we continue to deliver against our strategic priorities.

Adjusted operating profit before tax

The following table shows adjusted operating profit before tax split by segment and source of earnings:

Adjusted operating profit before tax was £721 million for the year ended 31 December 2021 (2020: £788 million).

In Asset Management, revenue and operating expenses have remained relatively stable, and the reduction in adjusted operating profit to £315 million (2020: £330 million) is mainly driven by lower performance fees and carried interest.

In Retail and Savings, the total with-profits shareholder transfer net of hedging and other gains/losses has increased by £47 million to £268 million, primarily as a result of improved market conditions leading to positive unit price adjustments being made to PruFund and higher outflows from Retirement Account. However, this has been offset by a lower benefit from longevity assumption changes on annuities leading to a reduction in Retail and Savings adjusted operating profit to £660 million (2020: £701 million).

Head office costs of £95 million (2020: £101 million) have remained broadly stable and the movement in Corporate Centre is largely driven by adverse foreign exchange movements on the USD subordinated debt.

Adjusted operating profit before tax to IFRS profit after tax

The following table shows a reconciliation of adjusted operating profit before tax to IFRS profit after tax:

IFRS profit after tax

IFRS profit after tax attributable to equity holders decreased to £92 million compared to £1,142 million in 2020. This £1,050 million variance is reflective of a £537 million loss in the year (2020: £678 million gain) from short-term fluctuations and an increase of £73 million in restructuring and other costs, offset by profit on corporate transactions in the year and a reduction in tax attributable to equity holders.

Market conditions have led to losses from short-term fluctuations in investment returns in 2021 as financial markets recover and the sizeable gains seen in 2020 from the derivatives held to protect the Solvency II capital position are reversed. These losses primarily comprise a £99 million loss (2020: £286 million gain) from the annuity portfolio, including fair value movements on the surplus assets and a £103 million loss (2020: £118 million gain) on interest rate swaps purchased to protect PAC's Solvency II capital position against falls in interest rates, both due to rising yields in the period. In addition, there was a £248 million loss (2020: £235 million gain) as stock markets recovered in the period on the equity hedges used to protect the value of future shareholder transfers from the With-Profits Fund on PAC's Solvency II balance sheet. While these hedges protect the Solvency II balance sheet, there is no corresponding item to protect the IFRS balance sheet, and therefore when the fair value of the derivatives fall as interest rates increase and equity markets improve, there are no offsetting fair value gains on an IFRS basis.

Profit on corporate transactions relates to the gain on acquisition of a controlling interest in PPMSA, previously an associate, of £51 million in July 2021 and a £16 million loss in respect of the Part VII transfer of annuities to Rothesay Life PLC.

Restructuring and other costs includes costs that relate to the transformation of our business. In the year to 31 December 2021, these costs include £48 million in respect of changes required to adapt to future ways of working, of which £29 million is an impairment of the lease for one of our offices. Restructuring and other costs also include £45 million in relation to the integration of Ascentric as we build out the new capabilities across our business and £35 million relating to the merger and transformation programme.

The equity holders' effective tax rate for the year ended 31 December 2021 was negative 13.6% (resulting in a tax credit) compared to a positive rate of 18.3% for the year to 31 December 2020. The equity holders' effective tax rate of negative 13.6% is lower than the UK statutory rate of 19% (2020: 18.3%). The basis for a tax credit (negative effective tax rate) when the Group is profitable is due to beneficial tax adjustments for both recurring and non-recurring items. Excluding non-recurring items, the equity holders effective tax rate is 9.9% (2020: 18.8%) which is primarily due to the utilisation of tax capital losses on which no deferred tax was previously recognised and non-taxable income, partially offset by adverse effects from non-deductible expenses. The impact of the beneficial tax adjustments on the effective tax rate is more significant than the prior period due to the lower profit base. Further information on tax is provided in Note 6 of the IFRS financial information.

Capital generation

The following table shows an analysis of total capital generation:

Total capital generation was £1,822 million for the year ended 31 December 2021 (2020: £995 million). Market movements in 2021 have resulted in a positive impact of £917 million (2020: negative £118 million) as a result of improved equity market conditions and increased yields; offset by a loss on the surplus assets in the annuity portfolio.

Underlying capital generation fell to £484 million (2020: £577 million). This was primarily driven by Retail and Savings which was impacted by lower expected returns on surplus assets in the annuity portfolio given the falls in yields over 2020, and higher new business strain due to a change in our hedging strategy during the year.

Other operating capital generation has benefited from management actions of £468 million (2020: £408 million) and a release of capital driven by a reduction in the SCR following the Major Model Change approved by the PRA in December and other smaller model changes. However, these have been partly offset by lower benefit from assumption changes over 2021, a reduced contribution from the Corporate Centre due to the impact of updates to the measurement approach of the Group's leases in 2020, and provision releases in 2020 which have not repeated in 2021, leading to other operating capital generation of £633 million (2020: £735 million).

Restructuring and other costs of £181 million reflects the impact on the capital position of transformation costs, including the integration of Ascentric and changes to our future ways of working and associated changes to our office space.

Capital position

M&G plc's Solvency II surplus increased to £6.2 billion as at 31 December 2021 (2020: £4.8 billion), equivalent to a shareholder Solvency II coverage ratio of 218% (2020: 182%), driven by total capital generation of £1,822 million (2020: £995 million) combined with a deduction of £466 million (2020: £562 million) from dividends paid to shareholders in the year, and an increase of £32 million (2020: £121 million) from other capital movements.

Our With-Profits Fund continues to have a strong Solvency II coverage ratio of 302%. This is higher than the 242% reported at 31 December 2020, driven by a £357 million increase in surplus from management actions over the year.

The regulatory Solvency II coverage ratio of M&G plc as at 31 December 2021 was 168% (2020: 144%). This view of solvency combines the shareholder position and the With-Profits Fund but excludes all surplus within the With-Profits Fund.

The shareholder, With-Profits Fund, and regulatory views of the Solvency II position presented above assume transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions as at the valuation date.

Financing and liquidity

The following table shows key financing and liquidity information:

The key metric we use to manage our debt is the leverage ratio, defined as nominal value of debt as a percentage of M&G plc's shareholder Solvency II own funds. Our leverage ratio of 28% at 31 December 2021 has fallen from 30% at 31 December 2020 as shareholder Solvency II own funds increased.

The following table shows the movement in cash and liquid assets held by the Parent Company during the period:

i Closing cash and liquid assets at 31 December 2021 included a £1,651 million (2020; £1,001 million) inter-company loan asset with Prudential Capital plc, which acts as M&G plc's treasury function.

Movements in cash and liquid assets held by the Parent Company for the year ended 31 December 2021 represent the remittances and payments that arise in the normal course of business. Total cash and liquid assets have increased with cash remittances of £1,458 million (2020: £737 million) received from our subsidiaries, more than covering the cash dividend payments to equity holders of £466 million (2020: £562 million) and interest paid on structural borrowings of £186 million (2020: £189 million).

The remittance received from PAC in the year to 31 December 2021 was higher than the prior year, driven by PAC's higher solvency ratio at 31 December 2020 than the year before, and in line with our Active Capital Management policy.

The current levels of capital and liquidity reflect the continued market uncertainty. We continue to monitor the short-term volatility in the strength of the balance sheet to make sure we deploy this capital in the best interests of our shareholders. In line with this, we have announced our intention to return £500 million to shareholders by way of a share buy-back programme, which is expected to start shortly and to complete within 12 months.

Dividends

We paid dividends of 12.2 pence per share, equal to £310 million, on 28 April 2021. In addition, we paid an interim ordinary dividend of 6.1 pence per share, equal to £156 million, in line with our policy of paying one-third of the previous year total dividend, on 29 September 2021. A second interim dividend of 12.2 pence per share, equal to roughly £311 million, will be paid on 28 April 2022.

Asset Management

Our Institutional Asset Management business continues to perform strongly with net client inflows of £5.8 billion and we have made good progress in repositioning our Retail Asset Management business for sustainable growth.

Assets under management and administration and net client flows

i £7.9 billion of total asset management AUMA relates to assets under advice (2020: £6.5 million).

Our Asset Management business saw a significant improvement in net client flows with net client inflows of £2.0 million compared to net client outflows of £6.8 billion in 2020.

Retail Asset Management flows improved in 2021 with a reduction in net client outflows to £3.8 billion (2020: £11.9 billion), of which only £0.8 billion were attributable to the second half of 2021. There were two one-off outflows in 2021 with the re-opening of the M&G Property Portfolio Fund in May resulting in initial net client outflows of £0.9 billion, and a further £0.9 billion of one-off outflows from our European Strategic Value fund due to withdrawals by Prudential plc. The improvement in Retail flows in the year was largely driven by a reduction in net client outflows in the international channel, which together with UK wholesale accounted for the majority of outflows in both periods. This was supported by positive flows into the impact and sustainability focused fund ranges - with net client inflows of £0.2 billion and £1.1 billion respectively. Investment performance also improved year on year. In addition, our partnerships with European distributors continued to deliver strong inflows within our Investment Solutions business, with net inflows of £1.1 billion in the year.

Retail Asset Management AUMA decreased £5.4 billion to £52.7 billion due to the net client outflows in the year, and in part due to the partial reallocation of PPMSA to Institutional Asset Management based on a reassessment following the acquisition of a controlling stake.

Institutional Asset Management AUMA increased to £103.1 billion driven by net client inflows of £5.8 billion, as well as market and other movements including the acquisition of a controlling interest in PPMSA. Our Institutional business has continued to perform strongly, with some large wins in the year in our Public Debt business, with £4.4 billion of net client inflows in 2021 and solid investment performance in 2021.

Our expertise in private assets, which offers private fixed income, alternatives, real estate and infrastructure equity offerings, is a key component of our institutional investment capability, and represents a resilient, high-margin source of revenues. Our private assets under management increased 15% to £71.8 billion of AUMA as at 31 December 2021 (2020: £62.3 billion).

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

i £303m of the fee based revenue is in respect of assets managed on behalf of Retail and Savings (2020: £228m).

Adjusted operating profit before tax from our Asset Management activities has decreased 5% to £315 million in the year ended 31 December 2021 (2020: £330 million) primarily driven by lower carried interest received on Infracapital funds in 2021, offset by favourable market returns on seed capital investments and units held to hedge management incentive schemes.

Revenue earned by Institutional Asset Management has increased to £539 million (2020: £481 million) as AUMA continues to grow. However, we have continued to experience the impact of downward pressure on retail margins and net client outflows on the revenue earned by Retail Asset Management which has fallen to £414 million (2020: £466 million). The lower pricing structure applied to our UK OEICs in February 2021 contributed to a £41 million reduction along with a £13 million fall following the lower administration fees on our SICAVs applied in November 2020.

Adjusted operating expenses are broadly stable year on year.

The Asset Management average fee margin of 32 basis points (bps) was 4 bps lower at 31 December 2021 compared to 31 December 2020. This reduction largely reflects the new sustainable pricing structure implemented in Retail Asset Management, resulting in a decrease of 11 bps to 39 bps at 31 December 2021. Average revenue margins in the Institutional Asset Management business remained broadly stable at 27 bps (2020: 28bps).

The cost/income ratio for Asset Management business decreased slightly to 70% (31 December 2020: 71%) with fee based revenues and operating expenses broadly stable in the year.

In July 2021, we acquired a controlling interest in PPMSA - the share of profit on joint ventures and associates represents the profit on PPMSA up to the date of acquisition. Post-acquisition, PPMSA is presented within fee based revenues and operating expenses, with non-controlling interests removed to arrive at adjusted operating profit before tax.

Capital generation

The following table shows an analysis of operating capital generation:

Operating capital generated by Asset Management increased marginally to £328 million (2020: £309 million) as a result of increases in other operating capital generation. This increase reflects a reduction in capital requirements as a result of a decrease in fixed cost base over 2020.

Retail and Savings

The Heritage business continues to provide a solid foundation for our results, as we expand our wealth management business.

Assets under management and administration and net client flows

i  £169 billion of AUMA is managed internally by the Group's Asset Management business (2020: £140 billion).

Wealth AUMA increased to £84.2 billion with positive market and other movements offsetting net client outflows of £1.4 billion. Wealth net client outflows were driven by an increase in drawdowns as the retirement products mature, as well as impacts from increased transfers out due to changes in market dynamics, such as consolidation in the market and a shift to digital post COVID-19.

The trends underscore the importance of broadening the proposition offered in our Wealth business. The acquisition of Sandringham will provide our customers with access to whole of market advice, and our partnership with Moneyfarm will provide direct investment services to our UK customers. To complete our offering, we have also acquired TCF Investment, a provider of model portfolio services.

Heritage AUMA decreased to £117.8 billion driven by the £9.6 billion transfer to Rothesay Life PLC following successful appeal in November 2021 and net client outflows of £6.9 billion in the year (2020: £6.6 billion), in line with expectations, as the Heritage business continues to run-off.

Other Retail and Savings AUMA increased to £9.1 billion (2020: £8.4 billion) benefiting from positive market movements.

PruFund is an investment solution offered to customers of both Wealth and Other Retail and Savings. PruFund AUMA increased by 5% to £58.4 billion as a result of positive investment returns, offset partially by net client outflows of £1.3 billion.

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

Adjusted operating profit before tax from our Retail and Savings business reduced to £660 million (2020: £701 million) primarily driven by a reduction in the annuity margin.

Fee based revenues relate primarily to revenues from Ascentric, M&G Wealth Advice (formerly Prudential Financial Planning) and the unit-linked business. The increase of £47 million to £278 million includes an additional £24 million due to the recognition of a full year of revenue from Ascentric compared to four months in 2020.

Annuity margin is down £69 million predominantly due to a lower benefit from longevity assumption changes in 2021 than those reflected in 2020.

The With-profits shareholder transfer increased to £366 million (2020: £308 million), primarily as a result of improved market conditions leading to upward unit price adjustments being made within PruFund and increased claims on our Retirement Account product.

This increase was offset by larger fair value losses of £60 million (2020: £57 million loss) on the derivative instruments used to mitigate the equity risk in respect of shareholder transfers in the year, and an expense overrun of £38 million in 2021 (2020: £31 million) on new business written in the With-Profits Fund due to recent lower sales volumes.

Adjusted operating expenses have increased £46 million to £296 million of which £30 million reflects a full year of costs for Ascentric.

Other shareholder profit is down on 2020 which benefited primarily from insurance reserve releases in relation to a number of legacy remediation programmes and other one off items that were not repeated in 2021.

The following table shows adjusted operating profit before tax split by source of earnings:

Adjusted operating profit before tax from our Wealth business increased to profit of £41 million (2020: £11 million loss) driven by an improvement in the net result from business written in PruFund to £63 million (2020: £22 million). The with-profits shareholder transfer in respect of PruFund was £115 million (2020: £54 million), which was partially offset by fair value losses on hedges and the expense overrun on new business. Wealth also benefitted from a reduction in the losses on its unit-linked and other businesses. However, the loss from its platform and advice business increased slightly to £4 million (2020: £2 million loss) which includes the full year results from Ascentric.

Heritage adjusted operating profit decreased 11% to £620 million (2020: £699 million) largely driven by the reduction in the annuity margin.

Traditional with-profits business net result was stable in the year at £205 million (2020: £202 million).

Other Retail and Savings is down £14 million, primarily driven by a £16 million cost in 2021 in relation to an estimated future shareholder payment to reimburse the with-profits fund for its contribution to the cost to set-up and grow the business written in Poland.

The following table provides further analysis of the annuity margin:

Recurring sources of earnings from the annuity book, primarily the return on assets held to back capital requirements and the release of the margins held in respect of credit risk, mortality and expenses, decreased by 9% to £172 million (2020: £188 million). This was mainly due to a switch from debt securities held in surplus assets of the annuity portfolio to cash to pay remittances to the holding company.

During 2021, we earned £10 million from asset trading and portfolio management actions, a reduction from 2020 impacted by losses on property disposals in the year due to the impact on the valuation of annuity liabilities.

Longevity assumption changes are down £92 million on 2020 due to the significant favourable benefits in 2020 not being repeated in 2021.

Other includes a £31 million benefit from the release of the annuity sales practices review provision in the year compared to £38 million of additional costs in 2020.

Capital generation

The following table shows an analysis of operating capital generation:

Underlying capital generation for the year ended 31 December 2021 fell to £459 million (2020: £552 million), with a reduction in contribution from both Wealth and Heritage businesses.

In Wealth, the contribution from in-force with-profits business increased to £112 million (2020: £99 million) due to the gap between expected return and risk-free rates widening as yields fell during 2020. This increase was offset by a reduction from new with-profits business driven by increased new business strain as a result of changes in our hedging strategy. Capital generation across the remainder of the Wealth business also fell marginally over the period, mainly reflecting a full year of Ascentric losses. The combined impact across the Wealth business was a reduction in capital generation to £49 million (2020: £75 million).

Within the Heritage business, traditional with-profits business generated underlying capital of £142 million during the year to 31 December 2021 (2020: £105 million) again increasing as a result of the widening of the gap between expected returns and risk-free rates, partly offset by a reduction in the value of equity hedges as equity markets improved.

There also continued to be significant, although reduced, capital generation from the shareholder annuity and other business, contributing £236 million (2020: £342 million). The reduction in underlying capital generation for the annuity business is driven by a reduction in the expected return on surplus assets in the annuity portfolio as a result of falls in yields over 2020.

Other operating capital generation decreased to £621 million (2020: £649 million), reflecting lower impacts from assumptions changes over 2021 than over the previous year. This reduction is primarily in relation to longevity assumption changes as discussed in the adjusted operating profit section, which were not as high in 2021.

Management actions and other generated capital of £487 million, including a £287 million impact from asset trading in the annuity portfolio, a £91 million impact from the rebalance of the equity and interest rate hedges, and the release of counterparty credit risk of £153 million following the Part VII transfer to Rothesay Life PLC. This was partially offset by a reduction in capital generation of £21 million following the merger of the SAIF with-profits sub fund with the main with-profits sub fund in April.

Additionally, there was a reduction in capital of £26 million as a result of credit downgrades. In 2020 there was significant benefit of £413 million from a series of management actions taken to strengthen the solvency position in response to adverse market conditions.

Consolidated Financial Statements

Consolidated income statement

i This measure is the profit before tax measure under UK-adopted IAS but it is not the result attributable to equity holders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the company under UK-adopted IAS. Consequently, profit before tax is not representative of pre-tax profits attributable to equity holders. Profit before tax is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the With-Profits Fund after adjusting for taxes borne by policyholders.

Consolidated statement of comprehensive income

Consolidated statement of financial position

i Assets held for sale on the consolidated statement of financial position as at 31 December 2021 includes £127m (2020: £18m) of seed capital and £896m of investment property (2020: £24m) that are expected to be divested within 12 months. Additionally, in 2020 £96m of assets held for sale and £75m of liabilities held for sale are in relation to the Group's consolidated infrastructure capital private equity vehicles.

Consolidated statement of changes in equity

Consolidated statement of cash flows

i  Other non-investment and non-cash assets and Policyholder liabilities (including unallocated surplus) for the year-ended 31 December 2021 includes the impact of the Part VII transfer of annuities business to Rothesay Life PLC. See Note 2.1 for further details.

ii Tax paid for the year ended 31 December 2021 includes £173m (2020: £264m) paid on profits taxable at policyholder rather than shareholder rates.

iii Cash flows in respect of other borrowings of the With-Profits Fund, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

iv Net divestment/(investment) in subsidiaries includes further investment, or divestment, by the Group's consolidated private equity vehicles. For the year ended 31 December 2021, £250m related to divestment by these vehicles, with an additional £13m cash acquired in relation to the acquisition of PPMSA. For the year ended 31 December 2020, £50m related to investments made by these vehicles, and also includes total cash paid in respect of the acquisition of Ascentric for £86m, of which £49m represented a repayment of loan to Royal London.

1 Basis of preparation and significant accounting policies

1.1 Basis of preparation

The consolidated results in this preliminary announcement have been taken from the M&G plc Group's 2021 Annual Report and Accounts which are planned to be made available on the Company's website on 22 March 2022.

The consolidated financial statements for the year ended 31 December 2021 comprise the financial statements of M&G plc (''the Company'') and its subsidiaries (together referred to as ''the Group''). The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards (IAS). The consolidated financial statements have been prepared under the historical cost basis except for investment property measured at fair value, certain financial assets and financial liabilities (including derivative instruments) that are measured at fair value through profit and loss (FVTPL), insurance contract liabilities that are measured in accordance with the requirements of IFRS 4: Insurance contracts, and defined benefit assets and liabilities, measured at the fair value of plan assets less the present value of the defined benefit obligations. Assets and disposal groups held for sale are stated at the lower of the previous carrying amount and fair value less costs to sell.

The basis of preparation and significant accounting policies applicable to the consolidated financial statements can be found in the basis of preparation and significant accounting policies section of the 2021 Annual Report and Accounts.

The preliminary announcement for the year ended 31 December 2021 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The statutory results under UK-adopted international accounting standards for full-year 2021 and under International Financial Reporting Standards (IFRS) for 2020 have been audited by KPMG LLP (''KPMG''). KPMG have reported on the 2021 consolidated financial statements and their audit report is unqualified and does not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

All acquisition of entities under common control prior to demerger from Prudential plc have been accounted for under merger accounting principles. Under merger accounting, the results and statement of financial position for entities acquired prior to demerger are presented as if the entities had always been combined.

Unless otherwise noted, the consolidated financial statements are presented in million pounds sterling (£m), the Group's functional and presentation currency.

Going concern

The Directors have reasonable expectation that the Group as a whole has adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the consolidated financial statements.

To satisfy themselves of the appropriateness of the use of the going concern assumptions in relation to the consolidated financial statements, the Directors have considered the liquidity projections of the Group, including the impact of applying specific liquidity stresses. The Directors also considered the ability of the Group to access external funding sources and the management actions that could be used to manage liquidity.

In addition, the Directors also gave particular attention to the solvency projections of the Group under a base scenario and its sensitivity to various individual economic stresses and certain stressed scenarios.

The impact of the following individual stresses on solvency were considered as part of the assessment:

• 20% fall in equity prices

• 20% fall in property prices

• (50bps) parallel shift in nominal yields

• 20% of the credit portfolio downgrading by one full letter

• +100bps spread widening (A-rated assets)

The scenarios considered as part of the assessment included a range of different COVID scenarios (base, optimistic and pessimistic) taking into account the global roll out of the vaccination programme and the impact on global economic recovery. We also assessed the resilience of our financial position in a high inflationary environment scenario and the economic implications resulting from it.

The results of the assessment demonstrated the ability of the Group to meet all obligations, including payments to shareholders and debtholders, and future business requirements for the foreseeable future. In addition, the assessment demonstrated that the Group was able to remain above its regulatory solvency requirements in a stressed scenario.

For this reason, the Directors continue to adopt the going concern basis in preparing the consolidated financial statements.

1.2 New accounting pronouncements

1.2.1 New accounting pronouncements adopted by the Group

In preparing these consolidated financial statements the Group has adopted the following standards, interpretations and amendments that became effective during the year:

Amendments to IFRS 4, IFRS 7, IFRS 16 and IAS 39: Interest rate benchmark reform - Phase 2 amendments

The Phase 2 amendments allow a practical expedient where any changes in the fair value of financial instruments as a direct consequence from the Interbank offered rate (IBOR) reform are managed by updating the effective interest rate, therefore removing the recognition of gains or losses in the income statement as a result of the reform. This is also applicable for leases accounted for under IFRS 16, where a revised discount rate is applied to reflect the change in interest rates. These amendments also allow relief from applying specific hedge accounting and financial instrument de-recognition requirements which would result from the IBOR reform. However, similar to the Phase 1 amendments, there is no exception from the measurement requirements that apply for the hedged items and hedging instruments under IFRS 9 or IAS 39 Financial Instruments: Recognition and Measurement. Once the new benchmark rate is in place, the hedged items and hedging instruments are remeasured based on the new rate and any hedge ineffectiveness will be recognised in profit or loss.

The Group has a formal programme in place to facilitate the transition of all impacted instruments to the alternative benchmark rate. The main exposure of the Group is to the phase out of sterling LIBOR rates which was the benchmark rate for various derivative and non-derivative financial positions.

In relation to derivative positions, the Group had signed up to the ISDA LIBOR fallbacks protocol and this resulted in the vast majority of its sterling LIBOR linked positions transitioning at the end of 2021 as per the ISDA fallbacks. A small number of sterling LIBOR derivative positions were not covered by the protocol and will be transitioned separately. These may make use of Synthetic LIBOR where transition is not completed ahead of the next fixing date.

In regards to non-derivative assets, transition of those referencing sterling LIBOR has been partial as dependencies exist on instrument issuers and on authority approvals in the case of infrastructure lending. The instruments that have not transitioned can make use of "Synthetic LIBOR" at least within 2022 until they complete transition. The transitioned instruments have used replacement rates and spreads that result in valuations not changing significantly.

The transition to the alternative benchmark rates did not have a significant impact on the consolidated financial statements for the year ended 31 December 2021.

1.2.2 New accounting pronouncements not yet effective

The following standards, interpretations and amendments have been issued but are not yet effective for the Group. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the consolidated financial statements are discussed.

IFRS 9: Financial Instruments

In July 2014, the International Accounting Standards Board (IASB) published IFRS 9: Financial Instruments (IFRS 9) which is mandatorily effective for annual periods beginning on or after 1 January 2018, except as described below, with early application permitted.

IFRS 9 replaces the existing standard, IAS 39: Financial Instruments-Recognition and Measurement. The standard provides new principles for determining classification and measurement of financial instruments, introduces a new forward-looking impairment model based on expected losses (replacing the existing incurred loss model) and provides new guidance on application of hedge accounting.

In September 2016, the IASB published amendments to IFRS 4, "Applying IFRS 9 Financial Instruments with IFRS 4: Insurance Contracts" to address the temporary consequences of the different effective dates of IFRS 9 and IFRS 17: Insurance Contracts. The amendments include an optional temporary exemption from applying IFRS 9 and the associated amendments until IFRS 17 comes into effect. This temporary exemption is available to companies whose predominant activity is to issue insurance contracts based on meeting the eligibility criteria as at 31 December 2015 as set out in the amendments. In June 2020, the IASB amended IFRS 17 so that the revised effective date of the standard is for periods beginning on or after 1 January 2023. The IASB also confirmed through this amendment that IFRS 9 could be delayed for insurers to keep the effective dates of IFRS 9 and IFRS 17 aligned.

As the Group met the required eligibility criteria for temporary exemption, the adoption of IFRS 9 has been deferred to coincide with the adoption of IFRS 17.

The Group is assessing the impact of IFRS 9 and implementing this standard in conjunction with IFRS 17. The adoption of IFRS 9 may result in the reclassification of certain of the Group's financial assets, resulting in a change in measurement basis from amortised cost to fair value. Furthermore, a revised impairment approach based on expected credit losses will need to be developed for financial assets that will continue to be carried at amortised cost. The Group is currently assessing the scope of assets to which these requirements will apply.

The Group does not currently apply hedge accounting.

Presented below are disclosures required by the amendments to IFRS 4 for entities deferring the adoption of IFRS 9. These are provided to enable users to compare results with those entities that have adopted IFRS 9. As required by the amendment, the table shows the fair value of the Group's directly held financial assets at 31 December 2021, distinguishing those financial assets which have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") as defined by IFRS 9.

i Financial assets classified as held for trading or that are managed and whose performance is evaluated on a fair value basis do not require an SPPI test to be performed. These assets are reported in the "All other financial assets" column of the table above.

IFRS 17: Insurance Contracts

In May 2017, the IASB issued IFRS 17: Insurance Contracts (IFRS 17) to replace the existing interim standard, IFRS 4 Insurance Contracts. The standard initially applied to annual periods beginning on or after 1 January 2021, subsequently, the IASB issued an exposure draft in June 2019 that proposed to delay the effective date to 1 January 2022. Thereafter, in March 2020, the IASB decided to delay the effective date further to 1 January 2023, which was duly affected through an amendment in the standard in June 2020. Early application is permitted; provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. The Group intends to adopt the new standard on its mandatory effective date, alongside the adoption of IFRS 9.

The Group has an ongoing project to implement IFRS 17 which is finalising technical interpretations and the related operational capabilities to implement the standard by the revised adoption date of 1 January 2023. The financial impact from adoption of the standard is currently being assessed and understood by management, however it will lead to significant changes to the presentation and disclosure in the consolidated financial statements.

Other

In addition to the above, the following new accounting pronouncements have also been issued but are not yet effective or have not yet been adopted for use in the UK:

- Reference to the Conceptual Framework (Amendments to IFRS 3), issued in May 2020 and effective from 1 January 2022

- Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16), issued in May 2020 and effective from 1 January 2022

- Onerous Contracts - Costs of Fulfilling a Contract (Amendments to IAS 37), issued in March 2018 and effective from 1 January 2022

- Classification of Liabilities as Current or Non-current (Amendments to IFRS 1), issued in January 2020 and effective from 1 January 2023, although it is anticipated that the effective date will be pushed back to no earlier than 1 January 2024

- Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - (Amendments to IFRS 10 and IAS 28), issued in December 2015 and effective date pending completion of the research project on equity method accounting

- The Disclosure Initiative: Accounting Policy Requirements (Amendments to IAS 1), issued in February 2021 and effective from 1 January 2023

- Definition of accounting estimates (Amendments to IAS 8), issued in February 2021 and effective from 1 January 2023

- Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12), issued in May 2021 and effective from 1 January 2023

The Group has assessed the impact of these pronouncements on the consolidated financial statements, none of which are expected to have material impact on the Group.

2 Group structure and products

2.1 Corporate transactions

2.1.1 Sale of annuity portfolio to Rothesay Life PLC

On 14 March 2018, Prudential plc announced the reinsurance of a portion of PAC's shareholder-backed annuity portfolio to Rothesay Life PLC by way of a collateralised reinsurance arrangement to be followed by an insurance business transfer scheme (the "Scheme") under Part VII of Financial Services and Markets Act 2000. The terms of the reinsurance arrangement transferred substantially all of the economic risk and capital requirements associated with the annuity portfolio to Rothesay Life PLC, subject to a residual counterparty credit risk attaching to reinsurance receivables.

On 17 May 2019, the independent expert who was appointed to report to the High Court concluded that the transfer would have no material adverse effect on the security of benefits or the reasonable benefit expectations of PAC's policyholders. However, on 16 August 2019, the High Court declined to sanction the Scheme. PAC and Rothesay Life PLC successfully appealed that decision in the Court of Appeal. A further sanction hearing was held in the High Court between 8 and 10 November 2021. On 24 November 2021 the Scheme was sanctioned by the High Court and became effective on 15 December 2021. On this date £9,558m of Insurance contract liabilities were transferred via Part VII and the reinsurance agreement was terminated. During the year, a loss of £16m was recognised in relation to additional premium payable under the terms of the collateralised reinsurance arrangement prior to the Part VII transfer.

2.1.2 PPMSA acquisition

On 4 July 2021, M&G FA Limited, a wholly-owned subsidiary of the Group acquired a further 0.13% of the share capital of Prudential Portfolio Managers (South Africa) (Pty) Ltd (PPMSA) - now known as MandG Investments Southern Africa (Pty) Ltd, for a cash consideration of £0.2m. The transaction increased M&G FA Limited's direct holding in PPMSA from 49.99% to 50.12%, requiring PPMSA's results to be consolidated in the Group's financial statements from 4 July 2021.

Prudential Staff Investment Company (RF) Proprietary Limited (PSI), a company established to manage and administer a staff share scheme for employees of PPMSA, holds 28.01% of the shares of PPMSA. This arrangement meets the definition of other long-term employment benefit scheme as dividends paid out to PSI are all paid on to the employees of PPMSA for services rendered to PPMSA. As a result, the dividends paid out on the 28.01% are classified as employee costs in the profit and loss account. Consequently, amounts attributable to non-controlling interests exclude the 28.01% holding.

The Group previously accounted for the investment as an associate using the equity method. As the Group now has a controlling interest, the acquisition has been accounted for using the acquisition accounting method with the Group electing to fair value both the Group's and non controlling interests' share at the date of acquisition.

At the date of acquisition, the carrying value of the investment in PPMSA was £34m and the fair value of the Group's existing stake was £85m, resulting in a gain of £51m being recognised and reported in other income in the year to 31 December 2021.

The acquisition of PPMSA builds on the Group's international capability, with Cape Town becoming our fifth global investment centre and provides the Group with further sales opportunities and synergies from the business being integrated within the Group.

As at the acquisition date, the consideration, net assets acquired and resulting goodwill and intangible assets from the acquisition were as follows:

i Of the £123m fair value at the acquisition date, £38m is attributable to non-controlling interests.

Customer-related intangibles relate to existing customer relationships in place at the acquisition date have been recognised at fair value. For equity securities and pooled investment funds, and assets linked to unit-linked contracts, fair values have been based on market observable inputs. The value of the Investment contract liabilities without discretionary participation features is based on the fair value of the underlying assets that back these liabilities.

As part of the transaction, M&G Group Limited has provided a guarantee in respect of an existing bank facility of the transaction counterparty amounting to ZAR 220m, which will be secured against a further 7% shareholding that the seller retains in PPMSA.

The goodwill of £38m arising from the acquisition represents the benefits of the acquisition in complementing M&G's strategy to grow its business and expand its range of services internationally. None of the goodwill recognised is expected to be deductible for income tax purposes. The full goodwill method has been used to account for the transaction and therefore the amount recorded includes the non-controlling interest share of the goodwill amount.

The revenue and profit before tax included in the consolidated statement of comprehensive income since the date of acquisition was £34m and £20m respectively. The revenue and profit before tax for the year ended 31 December 2021 for PPMSA was £61m and £34m respectively.

2.2 Insurance and investment contracts written by the Group's insurance entities

A description of the main contract types written by the Group's insurance entities is provided below.

The Group's with-profits contracts are written in the With-Profits Fund in which policyholders share in the profit of the fund. Up until 1 April 2021 there were three with-profits sub-funds: the With-Profits Sub-Fund (WPSF), the Defined Charge Participating Sub-Fund (DCPSF) and the Scottish Amicable Insurance Fund (SAIF). On 1 April 2021 SAIF merged with WPSF and the assets and liabilities of SAIF were combined with those of the WPSF.

Shareholder-backed business represents all insurance and investment contracts in the Group other than contracts written in the With-Profits Fund. The profit on these contracts accrues directly to the Group's shareholders.

2.2.1 With-profits contracts

With-profits contracts provide returns to policyholders through bonuses that are smoothed to reduce the impact of volatility of the investment performance of the assets in the fund.

2.2.1.1 Conventional and accumulating with-profits contracts written in WPSF and DCPSF

Conventional and accumulating with-profits policyholders receive their share of profit by way of regular and final bonuses.

Regular bonus rates are determined for each type of policy primarily by targeting the bonus level at a prudent proportion of the long-term expected future investment return on underlying assets, reduced as appropriate for each type of policy to allow for items such as expenses, charges, tax and shareholder transfers.

In normal investment conditions, the Group expects changes in regular bonus rates to be gradual over time. However, the Group retains the discretion whether or not to declare a regular bonus each year, and there is no limit on the amount by which regular bonus rates can change.

A final bonus which is normally declared annually, may be added when a claim is paid. The rates of final bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences or each premium is paid. These rates are determined by reference to the asset shares of representative sample policies and are subject to smoothing.

Regular bonuses are typically declared once a year, and once credited are guaranteed in accordance with the terms of the particular product. Final bonus rates are guaranteed only until the next bonus declaration.

Contracts are predominantly written in the WPSF, where the shareholders are entitled to an amount up to one-ninth of the bonus declared, which is payable as a cash transfer from the With-Profits Fund.

For the business written in the DCPSF, the charges accrue to shareholders who also meet the corresponding expenses. Profits arising in the DCPSF are attributed wholly to DCPSF policyholders. The shareholders' profit arises as the difference between charges and expenses.

2.2.1.2  With-profits contracts with a PruFund investment option ("PruFund contracts")

These are a range of with-profits contracts offering policyholders a choice of investment profiles ("PruFund funds"). Unlike the with-profits contracts described above, no regular or final bonuses are declared. Instead, policyholders participate in profits by means of an increase in their investment, which grows in line with an Expected Growth Rate (EGR). The EGR is adjusted for significant market movements.

The EGR may be applied for each of the different PruFund funds within the range, varying depending on the individual asset mix of that fund. The applicable EGR, net of the relevant charges, is applied to calculate the 'smoothed unit value' of policyholder funds. The EGRs are reviewed and updated quarterly, with the smoothed unit value calculated daily. In normal investment conditions, the EGR is expected to reflect PAC's view of how the funds will perform over the longer term.

Policyholders are protected from some of the extreme short-term ups and downs of direct investments by using an established smoothing process. Prescribed adjustments are made to the smoothed unit value if it moves outside a specified range relative to the value of the underlying assets.

PruFund contracts are predominantly written in the WPSF, where the shareholder is entitled to an amount up to one-ninth of the difference between the smoothed unit value on withdrawal and the initial investment. The DCPSF also contains PruFund contracts, and for these contracts the shareholders receive profits or losses arising from the difference between the charges and expenses on this business.

2.2.1.3 SAIF with-profits contracts

SAIF was a ring-fenced with-profits sub-fund which merged with WPSF on 1 April 2021. As SAIF was a closed sub-fund, no new business was written in SAIF, although regular premiums and top-ups were still being collected on in-force policies. The fund was solely for the benefit of policyholders of SAIF, and at the date of the merger, surplus assets of the SAIF fund were allocated to the SAIF policyholders, with the enhancement due to be paid through a terminal bonus at the point of claim. Shareholders have no entitlement to the profits of this fund.

The Group's main exposure to guaranteed annuity options arises through SAIF with-profits contracts. More detail on the provisions held in respect of guaranteed annuity options is provided in Note 11.1.1.

2.2.2 Unit-linked contracts

Unit-linked contracts are contracts where the value of the policy is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investments or indices. Investment risk associated with the product is primarily borne by the policyholder. Some unit-linked contracts provide an element of insurance coverage, such as a benefit payable on death in excess of the value of the units, and these contracts are classified as insurance contracts and accounted for under IFRS 4 (see Note 11).

Charges are deducted from the unit-linked funds for investment and administration services, and for certain contracts, insurance coverage. Benefits payable will depend on the price of the units prevailing at the time of surrender, death or the maturity of the product.

2.2.3 Annuities

Annuities are contracts which offer policyholders a regular income over the policyholder's life, in exchange for an upfront premium, and may be immediate or deferred. For immediate annuities, the regular income starts immediately after the premium payment, but for deferred annuities, the regular income is delayed until a specified date in the future. There are various types of annuity contracts written across the Group: level, fixed increase, inflation-linked (referred to as "non-profit annuities") and with-profits annuities. Some non-profit annuities have been written in the With-Profits Fund, and profits relating to this business accrue to the With-Profits Fund.

- Level annuities: provide a regular (for example, monthly) fixed annuity payment over the policyholder's life.

- Fixed increase annuities: provide for a regular annuity payment which incorporates automatic increases in annuity payments by fixed amounts over the policyholder's life.

- Inflation-linked annuities: provide for a regular annuity payment to which an additional amount is added periodically based on the increase in an inflation index.

- With-profits annuities: are written in the With-Profits Fund. These combine the income features of annuity contracts with the investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the With-Profits Fund.

3 Segmental analysis

The Group's operating segments are defined and presented in accordance with IFRS 8: Operating Segments on the basis of the Group's management reporting structure and its financial management information. The Group's primary reporting format is by customer type, with supplementary information being given by product type. The Chief Operating Decision Maker for the Group is the Group Executive Committee.

The financial management information was updated during the year to reflect a change in management structure. The Group's operating segments have been revised as a result. Our previous operating segments, "Savings and Asset Management" and "Heritage", have been replaced with two new operating segments: "Asset Management" and "Retail and Savings". Comparatives for 2020 are re-presented on the new segment basis.

3.1 Operating segments

The Group's operating segments are:

Asset Management

The Group's investment management capability is offered to both retail customers and institutional clients. The Group's retail customers invest through either UK domiciled Open Ended Investment Companies (OEICs) or Luxembourg domiciled Sociétés d'Investissement à Capital Variable (SICAVs) and have access to a broad range of actively managed investment products, including Equities, Fixed Income, Multi-Asset and Real Estate. The Group serves these customers through its many business-to-business relationships both in the UK and overseas, which include independent financial advisers, high-street banks and wealth managers. The Group's institutional investors, include pension funds, insurance companies and banks from around the world, who invest through segregated mandates and pooled funds into a diverse range of Fixed Income and Real Estate investment products and services.

The Asset Management segment generates revenues by charging fees which are typically based on the level of assets under management. The Asset Management segment also earns investment management revenues from the significant proportion of Retail and Savings assets it manages.

Retail and Savings

Our Retail and Savings operating segment includes M&G Wealth, our Heritage business, which was previously a stand-alone operating segment, and Other Retail and Savings business which primarily relates to our international savings business.

i Wealth

M&G Wealth provides a range of retirement, savings and investment management solutions to its retail customers. These products are distributed to retail customers through the wrap platform, intermediaries and advisers, and include the Retirement Account (a combined individual pension and income drawdown product), individual pensions, ISAs, collective investments and a range of on-shore and off-shore bonds.

All of the Group's products that give access to the UK PruFund investment proposition are included in M&G Wealth. The UK PruFund investment proposition gives retail customers access to savings contracts with smoothed investment returns and a wide choice of investment profiles. Unlike the conventional and accumulating with-profits contracts in the Heritage business, no regular or final bonuses are declared. Instead, policyholders participate in profits by means of an increase in their investment, which grows in line with an expected growth rate.

ii Heritage

Our Retail and Savings segment also includes that element of the business that was previously reported in a separate segment as Heritage.

The Heritage business includes individual and corporate pensions, annuities, life, savings and investment products. The majority of the products in the Heritage business are closed to new customers but may accept further contributions from existing policyholders. The annuity contracts include: level annuities, which provide a fixed annuity payment; fixed increase annuities, which incorporate a periodic automatic fixed increase in annuity payments; and inflation-linked annuities, which incorporate a periodic increase based on a defined inflation index. Some inflation-linked annuities have minimum and/or maximum increases relative to the corresponding inflation index.

The life products in Heritage are primarily whole of life assurance, endowment assurances, term assurance contracts, lifetime mortgages, income protection, and critical illness products. Investment products include unit-linked contracts and the Prudential bond offering, which mainly consists of single-premium-invested whole of life policies, where the customer has the option of taking ad-hoc withdrawals, regular income or the option of fully surrendering their bond.

Some of the Group's Heritage products written through conventional and accumulating with-profits contracts, in the With-Profits Sub-Fund, provide returns to policyholders through "regular" and "final" bonuses that reflect a smoothed investment return.

The Heritage business includes the closed SAIF business which participates in profits on a 100:0 basis with no shareholder profit transfers. Shareholders are entitled to asset management fees. This business is now included in PAC's main with-profits sub fund following the merger with the SAIF with profits sub fund on 1 April 2021 as discussed in Note 2.3.1.3.

iii Other Retail and Savings

Our savings businesses based in Ireland (Prudential International Assurance Limited) and Poland are included within Other Retail and Savings.

The Group's other reportable segment is:

Corporate Centre

Corporate Centre includes central corporate costs and debt costs.

3.2 Adjusted operating profit before tax methodology

Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure, which complements IFRS GAAP measures and is key to decision-making and the internal performance management of operating segments.

For the Group's fee-based business, adjusted operating profit before tax includes fees received from customers and operating costs for the business including overheads, expenses required to meet regulatory requirements and regular business development/restructuring and other costs. Costs associated with fundamental one-off Group-wide restructuring and transformation are not included in adjusted operating profit before tax.

For the Group's business written in the With-Profits Fund, adjusted operating profit before tax includes the statutory transfer to shareholders gross of attributable shareholder tax. Derivative instruments are held to mitigate the risk to the shareholder of lower future shareholder transfers, and can be separated into two types:

(i) Cash flow hedges1: those instruments that are held to mitigate volatility in the Group's IFRS results by being explicitly matched to the expected future shareholder transfers.

(ii) Capital hedges: instruments that hedge the economic present value of shareholder transfers on a Solvency II basis, to optimise the capital position.

1 These cash flow hedges do not constitute hedge accounting arrangements under IAS 39.

The realised gains or losses on the cash flow hedges are allocated to adjusted operating profit before tax in line with emergence of the corresponding shareholder transfer within IFRS profit. Any short-term temporary movements in the fair value of these instruments, not relating to the current year's shareholder transfer are excluded from adjusted operating profit before tax. As the capital hedges do not explicitly hedge future IFRS profits, all movements in the fair value of these instruments are excluded from adjusted operating profit before tax.

For the Group's shareholder annuity products written by the Retail and Savings segment, adjusted operating profit before tax excludes the impact of short-term components of credit risk provisioning, the impact of credit risk experience variances over the period, and total fair value movement on surplus assets backing the shareholder annuity capital, that are not reflective of the longer-term performance of the business.

Certain adjustments that are considered to be non-recurring or strategic, or due to short-term movements not reflective of longer-term performance are made to IFRS profit before tax. Adjustments are in respect of short-term fluctuations in investment returns, costs associated with fundamental one-off Group-wide restructuring and transformation, profits or losses arising on corporate transactions and profit/(loss) before tax from any discontinued operations, and impairment and amortisation in respect of acquired intangibles.

The key adjusting items between IFRS profit before tax and adjusted operating profit before tax are:

Short-term fluctuations in investment returns

The adjustment for short-term fluctuations in investment returns represents:

(i) Short-term temporary movements in the fair value of instruments held to mitigate equity risk in the with-profits shareholder transfer, including both cash flow and capital hedges.

(ii) Total fair value movements on other capital hedges, which are held solely to optimise the Solvency II capital position.

(iii) Total fair value movements on surplus assets backing the shareholder annuity capital, and the impact of short-term credit risk provisioning and experience variances over the period which are not reflective of the longer-term performance of the business, specifically:

- The impact of credit risk provisioning for short-term adverse credit risk experience;

- The impact of credit risk provisioning for actual upgrades and downgrades relative to best estimate assumptions. This is calculated by reference to current interest rates;

- Credit experience reflecting the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring;

- The impact of market movements on bond portfolio weightings and the subsequent impact on credit provisions.

Items relating to investment returns which are included in adjusted operating profit before tax are:

- The net impact of movements in the value of policyholder liabilities and fair value of the assets backing these liabilities, excluding the items included in short-term fluctuations above. The fair value movements of the assets backing the liabilities are closely correlated with the related change in liabilities;

- The unwind of the credit risk premium, which is the opening value of the assets multiplied by the credit risk premium assumption, with an adjustment for claims paid over the year. The credit risk premium assumption is the difference between the total long-term credit allowance and a best estimate credit allowance (both of which allow for the combination of defaults and downgrades);

- Actual income received in the year, such as coupon payments, redemption payments and rental income, on surplus assets backing the shareholder annuity capital, less an allowance for expenses;

- The net effect of changes to the valuation rate of interest due to asset trading and portfolio rebalancing;

- The impact of changes in the long-term component of credit provisioning.

Profit/(loss) on disposal of businesses and corporate transactions

A gain of £35m was recognised as an adjusting item in the year ended 31 December 2021 in respect of the fair value gain of £51m on the acquisition of PPMSA, offset by a £16m loss from the transfer of the annuity portfolio to Rothesay. Further details on the PPMSA acquisition and transfer to Rothesay are included in Note 2. There were no such adjusting items for the year ended 31 December 2020.

Restructuring and other costs

Restructuring and other costs primarily reflect the shareholder allocation of costs associated with the transformation of our business. These costs represent fundamental one-off Group-wide restructuring and transformation and are therefore excluded from adjusted operating profit before tax.

Amortisation and impairment of intangible assets acquired in business combinations

Amortisation and impairment of intangible assets acquired in business combinations are excluded from adjusted operating profit before tax.

3.3 Analysis of Group adjusted operating profit before tax by segment

i Of the fee-based revenues, £303m (2020: £228m) relates to revenues that Asset Management earned from the Retail and Savings segment. Other presentational differences when compared to the fee income in Note 4 include the netting of certain items that have a nil profit impact in adjusted operating profit, and the inclusion of certain revenue presented elsewhere within the IFRS income statement.

ii The with-profits shareholder transfer is paid to the shareholder net of tax. The shareholder transfer amount is grossed up for tax purposes with regard to adjusted operating profit.

iii  Excludes adjusted operating profit from joint ventures in the With-Profits Fund.

iv Restructuring and other costs excluded from adjusted operating profit includes costs that relate to the transformation of our business which are allocated to the shareholder. These differ to Restructuring costs included in the analysis of administrative and other expenses in Note 5 which include costs allocated to the Policyholder. In the year to 31 December 2021, restructuring and other costs includes £48m in respect of our future ways of working and associated changes to our office space, and £45m of costs in relation to the integration of Ascentric. The £48m cost for future ways of working and associated changes to our office space includes an impairment of £29m which is presented in impairment of property, plant and equipment in the analysis of administrative and other expenses in Note 5.

The Group has a widely diversified customer base. There are no customers whose revenue represents greater than 10% of fee-based revenues.

Each reportable segment reports adjusted operating income as its measure of revenue. Fee-based revenues represents asset management charges, transactional charges and annual management charges on unit-linked business. The annuity margin reflects the margin earned on annuity business and includes net earned premiums, claims and benefits paid, net investment return for assets backing the liabilities, net investment income for surplus assets backing the annuity capital, actuarial reserving changes, investment management expenses and administrative expenses. The with-profits shareholder transfer reflects the statutory transfer gross of attributable tax net of hedging gains or losses on cash flow hedges held to match those transfers.

Adjusted operating expenses includes shareholders operating expenses incurred outside of the annuity and with-profits portfolios. Other shareholder profit/(loss) includes non-recurring costs, movements in provisions that are an expense to the shareholder and shareholder investment return earned outside of the annuity portfolio. Share of profit from joint ventures and associates represents the Group's share of the profits of PPMSA, which was accounted for under the equity method until its acquisition on 4 July 2021. See Note 2.1.2 for further details.

4 Fee income

The following table disaggregates management fee revenue by segment:

5 Administrative and other expenses

i  Includes impairment recognised in respect of our future ways of working of £29m (2020: £nil) included in 'restructuring and other costs' within the Segmental Analysis in Note 3, and of certain property, plant and equipment held by the Group's infrastructure capital private equity vehicles of £73m (2020: £95m).

In addition to the interest expense shown above of £161m (2020: £153m), the interest expense incurred in respect of subordinated liabilities for the year ended 31 December 2021 was £160m (2020: £167m). This is shown as finance costs in the consolidated income statement. Total finance costs incurred for the year ended 31 December 2021 were £321m (2020: £320m).

6 Tax

6.1 Tax charged to the consolidated income statement

The tax charge above, comprising current and deferred tax, can be analysed as follows:

6.1.1 Allocation of profit before tax and tax charge between equity holders and policyholders

The profit before tax reflected in the consolidated income statement for the year ended 31 December 2021 of £707m (2020: £1,605m) comprises profit attributable to equity holders and pre-tax profit attributable to policyholders of unit-linked and with-profits funds and unallocated surplus of the With-Profits Fund. This is the formal measure of profit before tax under UK-adopted IAS but it is not the result attributable to equity holders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Group under IAS 12. Consequently, this measure of profit before all taxes is not representative of pre-tax profits attributable to equity holders.

The tax charge attributable to policyholder returns is removed from the Group's total profit before tax in arriving at the Group's profit before tax attributable to equity holders. As the net of tax profits attributable to policyholders is zero, the Group's pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge attributable to policyholders included in the total tax charge.

6.1.2 Tax reconciliation

i  Profit before tax includes the Group's share of profits after tax from the joint ventures and associates. Therefore, the actual tax charge does not include tax arising from profit or loss of joint ventures and associates and is reflected as a reconciling item.

ii In June 2021, the standard rate of Corporation Tax in the UK was changed from 19% to 25% with effect from 1 April 2023. Accordingly, the UK deferred tax balances were revalued to reflect the change in rate.

iii Non-taxable income during the year ended 31 December 2021 relates to the £51m gain recognised on the acquisition of the additional 0.13% shareholding in PPMSA, see Note 2.1.2.

The Group's profits are taxed at different rates depending on the country or territory in which the profits arise. The key applicable tax rate for 2021 is the UK Corporation tax rate of 19% as the majority of the Group's profits are earned and taxed in the UK.

6.1.3 Factors that may impact the future tax rate

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. On 10 June 2021, the UK Government's proposal to increase the rate of UK corporation tax from 19% to 25% with effect from 1 April 2023 was enacted into UK law. In line with the rate increase, there will be an increase to our effective tax rate for periods from 2023 onwards. The majority of the Group's profits are generated in the UK. Taking into account recurring tax adjusting items, the underlying effective tax rate for equity holders' portion of profits is expected to be marginally higher than the statutory rate in the UK. The Group has unused tax losses carried forward of £512m, primarily UK capital losses, on which no deferred tax is recognized. Should appropriate capital gains arise in future periods it will result in tax benefits thereby reducing the future effective tax rate in the relevant periods.

After years of negotiations, the OECD announced on 8 October 2021 that 136 countries out of 140 members had reached agreement on a sweeping overhaul of the international tax system. The G-20 leaders endorsed the plan on 30 October during the Leader's Summit. The plan follows a Two-Pillar framework which sets out the principles of an ambitious solution to tackle the tax challenges arising from an increasingly globalised and digital global economy. Pillar One addresses taxing rights and distribution of profits, and Pillar Two the imposition of a global minimum tax. On 20 December 2021, the OECD published "Global ANTI-Base Erosion Model Rules (Pillar Two)" ("model rules"). Pillar Two will introduce a global minimum tax rate of 15% on large companies. The OECD will continue to develop the Pillar Two model rules for bringing it into domestic legislation during 2022, to be effective in 2023. The Two-Pillar framework is legally and technically complex and represents a significant departure from the current international tax framework. The published rules provide for a mix of accounting and tax concepts, and will, in effect, require large businesses to keep a third set of books for Pillar Two calculation purposes. The Group generates its profits predominantly in the UK and the remainder mainly in jurisdictions with a tax rate higher than 15%.

Whilst the Two-pillar framework is not expected to have a significant impact on the future effective tax rate much will depend upon the final scoping and basis of enacted legislation and the impact on the insurance and asset management industries, in particular, treatment of investment in fund structures and policyholder attributes.

6.1.4 Use of accounting estimates and judgements

The calculation of the Group's tax charge involves a degree of estimation and judgement. The two principal areas of judgement that could impact the reported tax position are the recognition and measurement of deferred tax assets and the level of provisioning for uncertain tax positions.

The recognition of a deferred tax asset relies on an assessment of the probability of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

The provisions for uncertain tax positions cover a wide range of issues, only a fraction of these are expected to be subject to challenge by a tax authority at any point in time. The Group engages constructively and transparently with tax authorities with a view to early resolution of uncertain tax matters. Estimated positions are based on the probability of potential challenge within certain jurisdictions and the possible outcome based on relevant facts and circumstances. The judgements and estimates made to recognise and measure the effect of uncertain tax positions are reassessed whenever circumstances change or when there is new information that affects those judgements.

The Group does not consider there to be a significant risk of a material adjustment in the next financial year to the deferred and current tax balances from either recognition and measurement of deferred tax assets or the level of provisioning for uncertain tax positions.

6.2 Deferred tax

Deferred tax assets and liabilities

Under IAS12, deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period. Deferred tax assets are recognised as recoverable only to the extent it is considered probable, based on all available evidence, that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted or tax losses utilised. Deferred tax assets and liabilities are only offset when there is both a legal right to set-off and an intention to settle on a net basis.

Deferred tax in the statement of financial position

The deferred tax balances, after netting, arise in the following parts of the Group:

6.2.1 Unrecognised deferred tax