Critical accounting judgements and key sources of estimation uncertainty

12 Months Ended

Dec. 31, 2025

Note 3: Critical accounting judgements and key sources of estimation uncertainty

The preparation of the Group’s financial statements in accordance with IFRS Accounting Standards requires management to make

judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income

and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts

which differ from those estimates.

Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including

expectations of future events that are believed to be reasonable under the circumstances. In preparing the financial statements, the Group

has considered the impact of climate-related risks on its financial position and performance. While the effects of climate change represent

a source of uncertainty, the Group does not consider there to be a material impact on its judgements and estimates from the physical,

transition and other climate-related risks in the short term.

The significant judgements, apart from those involving estimation, made by management in applying the Group’s accounting policies in

these financial statements (critical judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a

material adjustment to the carrying amount of assets and liabilities within the next financial year (key sources of estimation uncertainty),

which together are considered critical to the Group’s results and financial position, are disclosed within the following notes:

•Insurance business (note 8(I))

•Retirement benefit obligations (note 12)

•Tax (note 15)

•Fair value of financial assets and liabilities (note 17(D))

•Allowance for expected credit losses (note 21)

•Provisions (note 28)

Consideration of climate change

Financial statement preparation includes the consideration of the impact of climate change on the Group’s financial statements. There has

been no material impact identified on the financial reporting judgements and estimates. In particular, the directors considered the impact

of climate change in respect of the:

•Going concern of the Group for a period of at least 12 months from the date of approval of the financial statements

•Assessment of impairment of non-financial assets

•Carrying value and useful economic lives of property, plant and equipment

•Fair value of financial assets and liabilities. These are generally based on market indicators which include the market’s assessment of

climate risk

•Assessments on expected credit loss, focusing on specific climate-related macroeconomic, physical and transition risk impacts on credit

quality at a sector and segment level

•Forecasting of the Group’s future UK taxable profits, which impacts deferred tax recognition

Whilst there is currently no material short-term impact of climate change expected, the Group acknowledges the long-term nature of

climate risk and continues to monitor and assess climate risks highlighted in the risk management section on pages 150 to 152.


Critical judgements:	Determining the characteristics which make a product illiquid, the level of illiquidity premium to apply to the discount rate of different products and how the illiquidity premium is determined
Key sources of estimation uncertainty:	Increase in illiquidity premia and widening of credit default spreads


		2025		2024
	Change in variable	Increase (reduction) in profit before tax £m	Increase (reduction) in equity £m	Increase (reduction) in profit before tax £m	Increase (reduction) in equity £m
Key sources of estimation uncertainty
Risk free rate, including illiquidity premia	1% reduction	271	157	272	204
	1% increase	(237)	(136)	(227)	(171)
Widening of credit default spreads on corporate bonds and other credit risky assets	0.25% addition	(186)	(140)	(174)	(131)
Other market exposure
Equity	10% reduction	64	145	137	103
	10% increase	(58)	(144)	(127)	(95)
Inflation	50bps reduction	(77)	(58)	(88)	(66)
	50bps increase	84	63	98	73
Other accounting estimates
Annuitant mortality	5% reduction	33	25	48	36
	5% increase	(37)	(28)	(45)	(33)
Future maintenance and investment expenses	10% reduction	29	22	30	23
	10% increase	(31)	(23)	(30)	(23)
Non-annuitant mortality and morbidity	5% reduction	31	24	17	13
	5% increase	(26)	(20)	(10)	(8)
Lapse rates	10% reduction	8	6	5	4
	10% increase	(9)	(6)	(4)	(3)


Critical judgement:	Determining whether a present obligation exists and whether it is more likely than not that an outflow of resources will be required to settle that obligation
Key sources of estimation uncertainty:	Populations impacted, level of remediation and response rates