Aviva 2014 Annual Report Download - page 310

Aviva plc Annual report and accounts 2014
Shareholder information continued
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professional employees. Competition for such key employees is
intense. Our ability to attract and retain key employees is
dependent on a number of factors, including prevailing market
conditions, working environment and compensation packages
offered by companies competing for the same talent.
There are inherent funding risks associated with our
participation in defined benefit staff pension schemes.
We operate both defined benefit and defined contribution staff
pension schemes. In the UK, we operate two main pension
schemes: the Aviva Staff Pension Scheme (“ASPS”) and the RAC
(2003) Pension Scheme. The defined benefit section of the ASPS
was closed to new members in 2002 other than on an
exceptional basis, and closed to future accruals for all existing
members from 1 April 2011. The defined benefit section of the
RAC (2003) Pension Scheme was also closed to new members
and closed to future accrual in April 2011.
Closure of the defined benefit schemes removes some of the
volatility associated with additional future accrual for active
members.
There are still inherent funding risks associated with the
defined benefit schemes. Events could result in a material
reduction in the funding position of such schemes and may
result in a materially increased deficit between the pension
scheme’s assets and liabilities. The factors that affect the
scheme’s position include: poor performance of pension fund
investments; greater life expectancy than assumed; adverse
changes in interest rates or inflation or discount rates; and other
events occurring that increase the costs of past service benefits
over the amounts predicted in the actuarial assumptions. In the
short term, the funding position is inherently volatile due to
movements in the market value of assets. Where a funding
deficit or surplus arises, the position will be discussed with the
scheme trustees to agree appropriate actions. This may include
a plan to fund the deficit over a period of years. Any surplus or
deficit in the defined benefit pension scheme will affect
shareholders’ equity, although the IFRS position may diverge
from the scheme funding position.
The UK pension schemes are subject to statutory
requirements with regards to funding and other matters relating
to the administration of the schemes. Compliance with these
requirements is subject to regular review. A determination that
we have failed to comply with applicable regulations could have
an adverse impact on our results of operations or our
relationship with current and potential contributors and
employees, and adverse publicity.
The determination of the amount of allowances and
impairments taken on our investments is highly subjective.
Our process for valuing investments may include
methodologies, estimations and assumptions which require
judgement and could result in changes to investment
valuations. If our business does not perform well, we may be
required to recognise an impairment of our goodwill or
intangibles with indefinite and finite useful lives, which could
adversely affect our results of operations or financial
condition.
The determination of the amount of allowances and
impairments varies by investment type and is based upon our
periodic evaluation and assessment of known risks associated
with the respective asset class. Such evaluations and
assessments are revised as conditions change and new
information becomes available and additional impairments may
need to be taken or allowances provided for in the future. If the
carrying value of an investment is greater than the recoverable
amount, the carrying value is reduced through a charge to the
income statement in the period of impairment. There can be no
assurance that management has accurately assessed the level of
impairments taken and allowances reflected in our financial
statements.
We value our fair value securities using designated
methodologies, estimations and assumptions. These securities,
which are reported at fair value on the consolidated statement
of financial position, represent the majority of our total cash and
invested assets. We have categorised the measurement basis for
assets carried at fair value into a ‘fair value hierarchy’ in
accordance with the valuation inputs and consistent with
IFRS 13: Fair Value Measurement. The fair value hierarchy gives
the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1); the middle priority to fair
values other than quoted prices based on observable market
information (Level 2); and the lowest priority to unobservable
inputs that reflect the assumptions that we consider market
participants would normally use (Level 3). The majority of our
financial assets are valued based on quoted market information
(Level 1) or observable market data (Level 2). At 31 December
2014, 17% of total financial investments, loans and investment
properties at fair value were classified as Level 3, amounting to
£40,459 million. Where estimates were used for inputs to Level
3 fair values, these were based on a combination of
independent third-party evidence and internally developed
models, intended to be calibrated to market observable data
where possible.
An asset or liability’s classification within the fair value
hierarchy is based on the lowest level of significant input to our
valuation.
Goodwill represents the excess of the amounts paid to
acquire subsidiaries and other businesses over the fair value of
their net assets at the date of acquisition. We test goodwill and
intangible assets with indefinite useful lives at least annually for
impairment or when circumstances or events indicate there may
be uncertainty over this value. We test intangibles with finite
lives when circumstances or events indicate there may be
uncertainty over this value. For impairment testing, goodwill and
intangibles have been allocated to cash-generating unit by
geographical reporting unit and business segment.
The fair value of the reporting unit is impacted by the
performance of the business. Goodwill, negative unallocated
divisible surplus and indefinite life intangibles are written down
for impairment where the recoverable amount is insufficient to
support our carrying value. Such write downs could have a
material adverse effect on our results of operations or financial
condition.
Systems errors or regulatory changes may affect the
calculation of unit prices or deduction of charges for unit-
linked products which may require us to compensate
customers retrospectively.
A significant proportion of our product sales are unit-linked
contracts, where product benefit are linked to the prices of
underlying unit funds. While comprehensive controls are in
place, there is a risk of error in the calculation of the prices of
these funds due to human error in data entry, IT-related issues
or other causes. Additionally, it is possible that policy charges
which are deducted from these contracts are taken incorrectly,
or the methodology is subsequently challenged by policyholders
or regulators and changed retrospectively. Any of these can give
rise to compensation payments to customers. Controls are in
place to mitigate these risks, but errors could give rise to future
liabilities. Payments due to errors or compensation may
negatively impact our results of operations or financial
condition.
Moves to simplify the operating structure and activities of
the Group increases the reliance placed on core businesses
and is subject to execution risk.
As part of our move to a more simplified structure, a number of
business disposals and operational restructures have taken
place, and may continue to occur in the future. This includes the
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