Capital management
Sensitivity analysis
The sensitivity of the group’s total equity on an MCEV basis and IFRS basis at 30 June 2009 to a 10% fall in global equity markets, a rise of 1% in global interest rates or a 0.5% increase in credit spreads is as follows:
| MCEV basis | Equities down 10% | |||||
|---|---|---|---|---|---|---|
| Restated 31 December 2008 £bn |
30 June 2009 £bn |
Direct £bn |
Indirect £bn |
Interest rates up 1% £bn |
0.5% increased credit spread £bn |
|
| 19.8 | Long-term savings1 | 18.8 | (0.3) | (0.4) | (0.3) | (1.4) |
| 5.5 | General insurance and other | 4.6 | (0.3) | – | (0.5) | 0.4 |
| (7.6) | Borrowings2 | (8.1) | – | – | – | – |
| 17.7 | Total equity | 15.3 | (0.6) | (0.4) | (0.8) | (1.0) |
| IFRS basis | |||||
|---|---|---|---|---|---|
| 31 December 2008 £bn |
30 June 2009 £bn |
Equities down 10% |
Interest rates up 1% £bn |
0.5% increased credit spread £bn |
|
| 16.6 | Long-term savings1 | 16.2 | (0.3) | (0.8) | (0.4) |
| 5.5 | General insurance and other | 4.6 | (0.3) | (0.5) | 0.4 |
| (7.6) | Borrowings2 | (8.1) | – | – | – |
| 14.5 | Total equity | 12.7 | (0.6) | (1.3) | – |
- Assumes MCEV assumptions adjusted to reflect revised bond yields.
- Comprising internal, external and subordinated debt, net of corporate tangible net assets.
These sensitivities assume a full tax charge/credit on market value assumptions.
The tables above incorporates the effect on the value of the pension scheme assets and liabilities of a 10% decrease in equity markets, a 1% increase in fixed income bond yields and a 0.5% increase in credit spreads.
The interest rate sensitivity also assumes an equivalent movement in both inflation and discount rate (ie no change to real interest rates) and therefore incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate has the effect of reducing the pension scheme liability by £1.6 billion.
The 0.5% increased credit spread sensitivities for MCEV and IFRS do not make an allowance for any adjustment to risk-free interest rates. MCEV sensitivities assume that the credit spread movement relates to credit risk and not liquidity risk; in practice, credit spread movements may be partially offset due to changes in liquidity risk. Life IFRS sensitivities provide for any impact of credit spread movements on liability valuations. The MCEV and IFRS sensitivities also include the allocation of staff pension scheme sensitivities, which assume inflation rates and government bond yields remain constant. In practice, the sensitivity of the business to changes in credit spreads is subject to a number of complex interactions. The impact of the credit spread movements will be related to individual portfolio composition and may be driven by changes in credit or liquidity risk; hence, the actual impact may differ substantially from applying spread movements implied by various published credit spread indices to these sensitivities.
Group IGD
The sensitivity of the group’s IGD surplus reflects the impact of the hedges we have put in place as part of our long-term strategy to protect the group from extreme market movements. At 30 June 2009 the sensitivity to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows:
| 30 June 2009 £bn |
Equities down 10% £bn |
Interest rates up 1% £bn |
|
|---|---|---|---|
| IGD Group surplus | 3.2 | (0.1) | (0.5) |
We continue to actively manage our exposure to further market volatility, with ongoing hedging strategies in place. Protection against equity market falls has been increased further from year end levels, and a 40% fall in equity markets at 30 June 2009 would reduce IGD by only £0.3 billion. By contrast, we have retained upside exposure and a 40% rise in equity markets would improve IGD by £0.7 billion.
| £bn | |
|---|---|
| Equities down 10% | (0.1) |
| Equities down 20% | (0.2) |
| Equities down 30% | (0.3) |
| Equities down 40% | (0.3) |
| Equities up 40% | 0.7 |
