PSO Pearson Plc

PART I

For convenience, the Group has translated the 2020 amounts into US dollars at the rate of £1.00 = $1.37, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2020.

Notes:

Dividend information

The Group pays dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. The board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. The board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders’ approval at the annual general meeting. At the Group’s annual general meeting on April 30, 2021 shareholders will be asked to approve a final dividend of 13.5p per ordinary share for the year ended December 31, 2020.

The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated and is translated into cents per ordinary share at the noon buying rate in The City of New York on

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each of the respective payment dates for interim and final dividends. The final dividend for the 2020 fiscal year will be paid on May 7, 2021 (subject to shareholder approval).

Future dividends will be dependent on the Group’s future earnings, financial condition and cash flow, as well as other factors affecting the Group. The dividend was rebased in 2017 to reflect portfolio changes, increased product investment, and the outlook for 2017.

Risk Factors

You should carefully consider the risk factors described below, as well as the other information included in the rest of this document. The Group’s business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that it presently cannot identify.

Our business, results of operations and financial condition have been and could further be adversely affected by the effects of the global COVID-19 pandemic.

In March 2020 a global pandemic was declared by the World Health Organization (WHO). Since then, COVID-19 has spread globally, to include the United Kingdom, United States and other countries where we operate. The spread of COVID-19 resulted in the worldwide spread of a new and at the time, untreatable disease. Many countries around the world subsequently imposed quarantines and restrictions on travel and large gatherings to slow the spread of the virus, that included the closures of non-essential businesses. We activated our crisis plan and in line with scientific advice and government requirements, the majority of staff continues to work from their homes, whilst we also closely monitor developments on a day-by-day basis, adjusting and protecting our front-line operations. Our primary focus is on ensuring the safety and well-being of our employees, customers and learners. We continue to manage the incident via our incident management framework across eight regional teams, commanded by a central team in London. In addition, we invoked our business resilience plans to help support our customers and maintain our business operations.

As local jurisdictions put restrictions in place, our ability to continue to operate our business was and remains in part disrupted for an indefinite period of time. As the COVID-19 outbreak continued to spread, we maintained operations globally, in line with local shutdowns as mandated by respective governmental authorities.

In addition, the spread of COVID-19, which has caused a broad impact globally, materially affected us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our ordinary shares.

The COVID-19 pandemic has impacted our colleagues, customers and business in terms of revenue and profits. In 2020 we saw a significant trading impact as a result of COVID-19. The challenging nature of COVID-19 has impacted all our businesses but has been felt most acutely across our International and Global Assessment

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businesses due to test center and school closures, exam cancelations, reduced global mobility and international economic pressure on spending. The ongoing uncertainty in 2021 gives rise to potential commercial risks that are actively being monitored by our business and finance teams. The impact from tougher lockdowns, increased infection rates and further operating constraints could restrict access to test centers and affect parts of our International and other businesses. The global outbreak of COVID-19 continues to trend and evolve. The extent to which COVID-19 may continue to impact our business and operations will depend on future developments, including the success of current vaccination programs, the continued duration of the outbreak, travel restrictions and social distancing in the United Kingdom, the United States and other countries where we operate. We are also reliant on the effectiveness of actions taken by governmental authorities to contain and treat the disease and whether additional countries where we operate are required to move to additional and deeper lock-down status. There is a risk that certain countries or regions where we operate may experience difficulties in containing COVID-19, or it may be more difficult to contain if the outbreak reaches a larger population or broader geography, in which case the risks described herein could be elevated significantly. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence. COVID-19 is expected to remain a primary global health and safety concern throughout 2021 and beyond.

The accelerated pace and scope of our business transformation initiatives increase our risk to execution timelines and to business adoption of change. The risk is that benefits may not be fully realized, costs may increase, or that the Group’s business as usual activities are adversely impacted.

Business transformation and change initiatives in support of the Group’s strategic goals to accelerate its digital transition and to simplify its business continued throughout 2019 and 2020. A range of transformation initiatives were successfully completed during 2020. In 2021, the Group announced a new strategy which has the potential for increased risk as the organisational structure and financial reporting processes are realigned in order to pursue the new strategy. The pace and scope of change potentially increases the risk that not all these changes will deliver within anticipated timeframes, and that the costs of these changes may increase. In addition, as a result of the increased pressure of transformational change, business as usual activities may not perform in line with plans, or the level of customer service may not meet expectations. In parallel with the business transformation, as the Group responds to the transition to digital and virtual learning, it will continue to look at opportunities to develop business models and further refine organization structures. Resistance to change could restrict the organization from making the necessary changes to the business model.

Failure to prevent or detect a malicious attack on the Group’s systems has in the past and could in future result in a breach of confidentiality, integrity and/or availability of sensitive information.

Information security and cyber risk is continually evolving and comprises many complex external drivers: increasing customer demand to demonstrate a strong security posture, external compliance requirements, ongoing digital revolution, increasing use of the cloud and increasingly sophisticated attack strategies. Across its businesses, the Group holds large volumes of personally identifiable information including that of employees, customers, students and citizens, and other highly sensitive business critical data such as financial data, internal sensitive information, and intellectual property. Despite its implementation of security measures, threat actors of all types, including individuals, criminal organizations and state sponsored operatives, have from time to time gained access and may in the future gain access to the Group’s data through unauthorized means in order to misappropriate such information for fraudulent or other purposes. A significant breach can result in a devastating impact on the Group’s reputation, customer loyalty, and student experience. Inability to prove due diligence can result in severe penalties and a loss of business (existing and future).

From time to time, the Group’s business has experienced, and may continue to experience in the future, an unauthorized disclosure of personal information despite best efforts to prevent it. Such an incident, together with a failure to comply with data privacy regulations, could result in damage to the customer experience and the Group’s reputation and in financial loss.

Across its businesses, the Group holds large volumes of personally identifiable information (PII), including that of employees, customers, students and citizens. Any perceived or actual unauthorized disclosure of PII,

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whether through breach of the Group’s network by an unauthorized party, employee theft, misuse or error or otherwise, could harm the Group’s reputation, impair its ability to attract and retain its customers, or subject the Group to regulatory investigations and/or to claims or litigation arising from damages suffered by individuals, and thereby harm its business and operational results. Failure to adequately protect PII could potentially lead to regulatory penalties, litigation damages, significant remediation costs, reputational damage, cancelation of some existing contracts and difficulty in competing for future business, among other things. In addition, the Group could incur significant costs in complying with the relevant laws and regulations regarding the unauthorized disclosure of personal information, payments due to cyber extortion or to responding to regulatory investigations into such matters. Changes to data privacy legislation must also be monitored and acted upon to ensure the Group remains in compliance across different markets.

Failure to use the Group’s data effectively to enhance the quality and scope of current products and services in order to improve learning outcomes could adversely affect the Group’s business.

The Group seeks to maximize data to enhance the quality and scope of current products and services in order to improve learning outcomes while managing associated risks. The Group’s ability to continue to do so may be subject to factors beyond the Group’s control. In addition, the unavailability of timely, complete and accurate data limits informed decision-making and increases the risk of non-compliance with legal, regulatory and reporting requirements. Business change and transformation success is dependent on migration of a significant number of datasets and our inability to effectively accomplish this could adversely affect the Group’s results.

If the Group fails to attract, retain and develop appropriately skilled employees, it may limit its ability to achieve its strategic and operational goals and its business may be harmed.

The Group’s success depends on the skill, experience and engagement of its employees. If it is unable to attract, retain and develop sufficiently experienced and capable staff, especially in technology, product development, sales and leadership, its business and financial results may suffer. When talented employees leave, the Group may have difficulty replacing those skills, and its business may suffer. There can be no assurance that the Group will be able to successfully attract and retain the skills that it needs.

The Group’s business depends on a strong brand, and any failure to maintain, protect and enhance its brand would hurt its ability to retain or expand its business.

Protecting the Pearson brand is critical to expanding the Group’s business and will depend largely on its ability to maintain its customers’ trust in its solutions and in the quality and integrity of its products and services. If the Group does not successfully maintain a strong brand, its business could be harmed. Beyond protection, strengthening the Pearson brand will enable the Group to more effectively engage with governments, administrators, teachers, learners and influencers.

Failure to successfully invest in and deliver the right products and services and respond to competitive threats could result in lower-than-expected sales and profits.

A common trend facing all the Group’s businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. The digital migration brings the need for change in product and content distribution, consumers’ perception of value and the publisher’s position between consumers, retailers and authors.

This is a highly competitive market that is subject to rapid change. The Group faces competitive threats both from large media players and from smaller businesses, online and mobile portals and operators in the digital arena that provide alternative sources of content. Alternative distribution channels, e.g. digital format, the internet, online retailers, growing delivery platforms (e.g., e-readers or tablets), pose both threats and opportunities to traditional publishing business models, potentially impacting both sales volumes and pricing.

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Students are seeking cheaper sources of content, e.g. second hand and rental copies, online discounters, file sharing and use of pirated copies. This change in behavior puts downward pressure on textbook prices in major markets, and this could adversely impact the Group’s results.

If the Group does not adapt rapidly to these changes, it may lose business to ‘faster’ and more ‘agile’ competitors, who increasingly are non-traditional competitors, making their identification all the more difficult. The Group may be required to invest significant resources to further adapt to the changing competitive environment.

There are multiple competing demands for educational funds and there is no guarantee that new courseware or testing or training programs will be funded, or that the Group will win or retain this business.

A control breakdown or service failure in the Group’s school assessment and qualification businesses could result in financial loss and reputational damage.

The Group’s professional services and assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. The Group’s financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed or face increased competitive pressures.

There are inherent risks associated with the Group’s assessment and qualification businesses, both in the US and the UK. A service failure caused by a breakdown in testing and assessment processes could lead to a mis-grading of student tests and/or late delivery of test results to students and their schools. In either event the Group may be subject to legal claims, penalty charges under contracts, non-renewal of contracts and/or the suspension or withdrawal of its accreditation to conduct tests. A late delivery of qualification results could result in a potentially significant regulatory fine in addition to the contractual penalties. It is also possible that such events would result in adverse publicity, which may affect the Group’s ability to retain existing contracts and/or obtain new customers.

The Group’s investment in inherently riskier emerging markets may deliver returns that are lower than anticipated.

The Group has invested in a number of emerging markets, some of which are inherently riskier than its traditional markets. Political, regulatory, economic and legal systems in emerging markets may be less predictable than in countries with more developed institutional structures. Political, regulatory, economic, currency, reputational and corporate governance and compliance risks (including fraud, sanctions, bribery and corruption) as well as unmanaged expansion are all factors which could limit returns on investments made in these markets.

Changes in government policy and/or regulations have the potential to affect the Group’s business model and/ or decisions across all markets.

The Group’s educational services and assessment businesses may be adversely affected by changes in government funding resulting from either trends that are beyond the Group’s direct control, such as general economic conditions, changes in government educational funding, programs, policy decisions, legislation and/or changes in the procurement process, or the Group’s failure to successfully deliver previous contracts.

The results and growth of the Group’s US educational services and assessment businesses are dependent on the level of federal and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. State, local and municipal education funding pressures remain, competition from low price and disruptive new business models continues and open source is promoted as a way to keep costs down for customers. The current challenging environment could impact the Group’s ability to collect education-related debt.

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State and local government leadership changes and resultant shifts in education policy can also affect the funding available for educational expenditure, which include the impact of educational reform. Similarly, changes in the government procurement process for textbooks, learning material and student tests, and vocational training programs can also affect the Group’s markets. Political pressure on testing, changes in curricula, delays in the timing of the adoptions and changes in the student testing process can all affect these programs and therefore the size of the market in any given year. Uncertainty remains over the longer term impact of international trading arrangements and general economic conditions in the UK as a result of Brexit, and globally as a result of the COVID-19 pandemic, among other examples of wider uncertainty and instability in the rest of the world, any of, which can affect governments education policy and decisions.

Global economy and cyclical market factors may adversely impact the Group’s financial performance.

With the continued pressure and uncertainty in the worldwide economies, particularly in light of the continuing COVID-19 pandemic, there remains a risk of a weakening in trading conditions, which could adversely impact future financial performance. The effect of continued deterioration or lack of recovery in the global economy will vary across different businesses and will depend on the depth, length and severity of any economic downturn. The education market can be affected by cyclical factors which, although they can have a positive impact for many of the Group’s businesses, could for others lead to a reduction in demand for the Group’s products and services.

A significant deterioration in the Group’s profitability and/or cash flows caused by prolonged economic instability could reduce its liquidity and/or impair its financial ratios and trigger a need to raise additional funds from the capital markets and/or renegotiate its banking covenants.

To the extent that worldwide economic conditions materially deteriorate, as a result of the COVID-19 pandemic or otherwise the Group’s sales, profitability and cash flows could be significantly reduced as customers could be unable to purchase products and services in the expected quantities and/or pay for them within normal agreed terms.

Disruption in capital markets or potential concerns about the Group’s credit rating, for instance manifested in downgrades or negative outlooks by the credit rating agencies, may mean that this capital may not be available on favorable terms or may not be available at all.

All the Group’s businesses depend on Information Technology (IT) systems and technological change. Failure to maintain and support customer facing services, systems, and platforms, including addressing quality issues and execution on time of new products and enhancements, could negatively impact the Group’s sales and reputation.

All the Group’s businesses, to a greater or lesser extent, are dependent on information technology. It either provides software and/or internet services to its customers or uses complex IT systems and products to support its business activities, including customer-facing systems, back-office processing and infrastructure. The Group faces several technological risks associated with software product development and service delivery, information technology security (including viruses and cyber-attacks), e-commerce, enterprise resource planning system implementation and upgrades. Although plans and procedures are in place to reduce such risks, from time to time the Group has experienced verifiable attacks on its systems by unauthorized parties. To date, such attacks have not resulted in any material damage, but the Group’s businesses could be adversely affected if its systems and infrastructure experience a significant failure or interruption.

Operational disruption to its business, including those caused by third party providers, a major disaster and/or external threats, could restrict the Group’s ability to supply products and services to its customers.

Across all its businesses, the Group manages complex operational and logistical arrangements including distribution centers, data centers, and educational and office facilities, as well as relationships with third party

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print sites. It has also outsourced some support functions, including information technology, warehousing and logistics to third party providers. The failure of third parties to whom it has outsourced business functions could adversely affect its reputation or financial condition. Failure to recover from a major disaster, (e.g. fire, flood, etc.) at a key facility or the disruption of supply from a key third party vendor or partner (e.g. due to bankruptcy) could restrict the Group’s ability to service its customers and meet the terms of its contractual relationships with both government agencies and commercial customers. Penalty clauses and/or the failure to retain these contracts at the end of the contract term could adversely impact future revenues.

Environmental, social and governance risks may also adversely impact the Group’s business.

The Group considers environmental, social and governance (ESG) risks no differently to the way it manages any other business risk. These include ethical business behavior, compliance with UN Global Compact standards, environmental impact, people and editorial standards. A failure to comply with such standards could adversely affect the Group’s reputation and have a negative impact on its relations with employees, vendors and customers.

Failure to adequately protect the health, safety and well-being of the Group’s employees, learners and other stakeholders could adversely impact the Group’s reputation, profitability and future growth.

Although the Group has invested in global health and safety procedures and controls to safeguard the health, safety and wellbeing of its employees and other stakeholders, accidents or incidents could still occur due to unforeseen risks, causing injury or harm to individuals and impacting the Group’s business operations. The effects of the COVID-19 pandemic may exacerbate the risk. This has the potential to lead to criminal and civil litigation, business disruption leading to operational loss, reduction in profitability and impact on the Group’s reputation.

Failure to adequately protect learners could result in significant harm to one or more learners.

Incidents may occur where learners are abused or harassed. For example, where the Group has direct learner contact via online learning, or in its direct delivery businesses where it is operating, either directly or in a third-party partnership. These incidents can cause harm to learners, which is something the Group takes extremely seriously, and could also have a negative financial, legal and reputational impact to the business.

Failure to ensure security for the Group’s staff, learners, assets and reputation, due to increasing numbers of and variety of local and global threats.

Pearson is a global business with locations in diverse, sometimes high-risk, locations worldwide. Although it has protective measures in place to secure its staff, learners and assets, the Group could still be impacted by external threats, such as localized incidents, terrorist attacks, strikes or extreme weather. Future occurrences could cause harm to individuals and/or disrupt business operations. These have the potential to lead to operational loss, a reduction in profitability and impact on the Group’s global reputation.

The Group generates a substantial proportion of its revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuations could adversely affect the Group’s earnings and the strength of its balance sheet.

As with any international business, the Group’s earnings can be materially affected by exchange rate movements. The main exposure is to movements in the US dollar to sterling exchange rate as approximately 69% of the Group’s total revenue is generated in US dollars. The Group also has exposure to a range of other international currencies including emerging market currencies. Operating profit for 2020, translated at 2019 average rates, would have been £1m lower.

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A lack of sufficient capital resources could adversely impact the Group’s ability to operate.

If the global economy weakens further and/or the global financial markets collapse, as a result of the COVID-19 pandemic or otherwise, the Group may not have access to or could lose its bank deposits or suffer a significant increase in customer bad debts. Lack of sufficient capital resources could significantly limit the Group’s ability to take advantage of business and strategic opportunities. If replacement funds are not available, the Group may be required to delay, reduce the scope of, or eliminate material parts of its business strategy, including potential additional acquisitions or development of new products, services and technologies.

Changes in tax law or perceptions on tax planning strategies may lead to a higher effective tax rate or negative reputational impact.

Changes in corporate tax rates and/or other relevant tax laws in the UK, US or other jurisdictions could have a material impact on the Group’s future reported tax rate and/or its future tax payments. The application of tax legislation can be complex and tax authorities may take a different view to management. The Group has been subject to audit by tax authorities. In particular, the Group is under assessment from the tax authorities in Brazil challenging the deduction for tax purposes of goodwill amortisation for the years 2012 to 2017 (similar assessments may be raised for other years). In addition, the Group has lodged an appeal against the European Commission’s decision that the United Kingdom controlled foreign company group financing partial exemption (FCPE) partially constitutes State Aid. Although the Group believes its tax provision is reasonable, the final determination of its tax liability could be materially different from its historical income tax provisions, which could have a material effect on the Group’s financial position, results of operations or cash flows.

The Group’s tax strategy reflects its business strategy and the locations and financing needs of its operations. In common with many companies, the Group seeks to manage its tax affairs to protect value for its shareholders, in line with its broader fiduciary duties. The Group is committed to complying with all statutory obligations, to undertake full disclosure to tax authorities and to follow agreed policies and procedures with regard to tax planning and strategy.

Failure to effectively manage risks associated with compliance to global and local anti-bribery and corruption (ABC) legislation could result in costly legal investigations and/or adversely impact the Group’s reputation.

Although the Group is committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to its business, there is a risk that the Group’s management, employees or representatives may take actions that violate applicable laws and regulations prohibiting the making of improper payments for the purposes of obtaining or keeping business, including laws such as the US Foreign Corrupt Practices Act or the UK Bribery Act. Responding to investigations is costly and requires a significant amount of management’s time and attention. In addition, investigations may adversely impact the Group’s reputation, or lead to litigation and financial impacts.

Failure to comply with antitrust and competition legislation and/or legal or regulatory proceedings could result in substantial financial cost and/or adversely impact the Group’s reputation.

The Group is subject to global and local antitrust and competition law and although it is committed to conducting business in compliance with local and international laws, there is a risk that management, employees or representatives may act in a way that violates applicable antitrust or competition laws. Further, the Group and its subsidiaries are and may be in the future subject to legal and regulatory proceedings in the countries in which the Group operates. These proceedings could result in greater scrutiny of the Group’s operations in other countries for anti-competitive behavior and, in the worst case, incur a substantial financial cost. This would also have an adverse impact on the Group’s reputation.

If the Group does not adequately protect its intellectual property and proprietary rights, its competitive position and results may be adversely affected and its ability to grow restricted.

The Group’s products and services largely comprise intellectual property delivered through a variety of print and digital media, online software applications and platforms. The Group relies on trademark, patent, copyright and other intellectual property laws to establish and protect its proprietary rights in these products and services.

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Failure to adequately manage, procure, register or protect intellectual property rights (including trademarks, patents, trade secrets and copyright) in the Group’s brands, content and technology, may (1) prevent the Group from enforcing its rights, and (2) enable bad actors to illegally access and duplicate the Group’s content (print and digital counterfeit, digital piracy), which will reduce sales and/or erode sales.

The Group’s intellectual property rights (IPR) in brands and content — historically its core assets — are generally well established in key markets. As technology has become an increasingly critical component of the Group’s business strategy, it has also been steadily increasing investment in its patent program to expand its protection of high value inventions in the US and key international markets.

Online copying and security circumvention have become increasingly sophisticated and resistant to available countermeasures. Notably, in recent years “digital counterfeit” web sites have sold or attempted to sell unprotected PDF files of many of Pearson’s titles, at scale, using modern and sophisticated ecommerce methods, with a professional and polished look and feel. From an IP perspective, increasing the Group’s digital business exposes it to more trademark, copyright and patent infringement risks.

The Group’s forward-looking IP strategy includes maintaining a global patent footprint in key markets outside the US. However, the Group also conducts business in other countries where its protection efforts have been limited or inconsistent and the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect future growth. Where the Group has registered or otherwise established its IPR, it cannot guarantee that such rights will provide competitive advantages due to: the challenges and costs of monitoring and enforcement in jurisdictions where competition may be intense; the limited and/or ineffective IPR protection and enforcement mechanisms available to it in many countries; the potential that its IPR may lapse, be invalidated, circumvented, challenged, or abandoned, or that it may otherwise lose the ability to assert its intellectual property rights against others. The loss or diminution in value of these proprietary rights or the Group’s intellectual property could have a material adverse effect on the Group’s business and financial performance.

Failure to generate anticipated sales growth, synergies and/or cost savings from acquisitions, mergers and other business combinations, could lead to goodwill and intangible asset impairments.

The Group periodically acquires and disposes of businesses to achieve its strategic objectives and will continue to consider both as means to pursue its strategic priorities.

Acquisitions may involve significant risks and uncertainties, including difficulties in integrating acquired businesses in order to realize anticipated sales growth, synergies and/or cost savings; diversion of management attention from other business concerns or resources; use of resources that are needed in other parts of our business. Acquisitions could lead to goodwill and intangible asset impairments. In addition, divestitures involve risks and uncertainties that could adversely affect our business, results of operations and financial condition. These include, among others, the inability to find potential buyers on favorable terms, disruption to our business and/or diversion of management attention from other business concerns, loss of key employees and possible retention of certain liabilities related to the divested business.

The Group’s reported earnings and cash flows may be adversely affected by changes in its pension costs and funding requirements.

The Group operates a number of pension plans throughout the world, the principal ones being in the UK and the US. The major plans are self-administered with the plans’ assets held independently of the Group. Regular valuations, conducted by independent qualified actuaries, are used to determine pension costs and funding requirements. As these assets’ valuations can fluctuate, the plans may require additional funding from the Group, which could have an adverse impact on its results.

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It is the Group’s policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. The UK Group plan expects to be able to provide benefits (in accordance with the plan rules) with a very low level of reliance on future funding from the Group. The Group’s earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in its defined benefit plans. The Group’s greatest exposure relates to the UK defined benefit pension plan, which is valued every three years. Pension fund deficits may arise because of inadequate investment returns, increased member life expectancy, changes in actuarial assumptions and changes in pension regulations, including accounting rules and minimum funding requests.

Although the UK defined benefit plan is significantly de-risked (given, in addition to a de-risked investment policy, it was also in significant surplus as at 1 January 2018, being the date of the last valuation) the ability to achieve and maintain this standard remains subject to market conditions, meaning that additional funding could still be required from the Group in the future. The next valuation of the UK defined benefit plan as at 1 January 2021 is currently underway and is expected to be completed during the course of 2021.

Recent developments

On March 8, 2021, the Group announced a new strategy including a new divisional structure. Going forward the new structure will impact segmental reporting and may impact the Group’s cash generating units.

On March 5, 2021, the Group announced the disposal of its Brazilian K-12 Sistemas, COC and Dom Bosco — in Brazil, subject to securing regulatory approval and closing.

On February 26, 2021, the Group acquired Spotlight Education, a company that utilizes technology to convert education data into personalized video reports in 30 languages. Consideration payable is c$6m.

On February 5, 2021, the Group completed the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa to a consortium of Stellenbosch Graduate Institute (SGI) and EXEO Capital for nominal consideration.

The Group’s strategy

The Group’s mission is to help people achieve their potential through learning and its vision is to be the world’s preeminent learning company, delivering the world’s most valuable learning products to more people than ever before. This is simultaneously good for our business, and good for the world, because when we demonstrate the power of learning, we grow our business and transform lives.

Following the appointment of a new CEO in October 2020, the Group announced a new strategy on March 8, 2021. The new strategy reflects evolving consumer habits, in particular the way that COVID-19 has accelerated the trend to digital-first and virtual learning. The new strategy will enhance the existing priorities and capitalize on the opportunities presented by evolving trends in our market, which the Group is well positioned to seize through its experience and expertise across the entire lifelong learning spectrum.

The strategy, based on a simpler, more agile operating model, is focused on three global market opportunities - the rise in online and digital learning tools, the workforce skills gap and the growing demand for accreditation and certification. These represent a balance between profitable markets where Pearson has a leading position, and new high growth markets where we believe we have the capabilities to grow market share rapidly.

Our strategy focuses on three priorities to unlock growth and to ensure we can quickly and effectively respond to change globally:

We are reorganizing Pearson to focus on five new business divisions, all supported by our Direct to Consumer group. Each division will have full responsibility for its overheads, product development, and operations to enable a more agile and transparent operating model, and each will be linked to the others through our shared IP and capabilities.

Reorganizing our business and operations to focus on five business divisions to release untapped value and potential within the company.

Our five new business divisions are Virtual Learning, Higher Education, English Language Learning, Workforce Skills, and Assessment & Qualifications – all of which will be supported by our new Direct to Consumer group. These five divisions will form the foundation of the company. They are great businesses with excellent growth potential. They reinforce each other and will be the platform on which we build our direct to consumer vision. We want everyone in the world to realize the value and joy of learning, and we will help the world’s learners at every stage of life to unlock their potential in a rapidly changing world.

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Streamlining our portfolio to become a truly digital company

Pearson has made good progress in rationalizing its portfolio over recent years but there is still further potential. We will therefore streamline our portfolio to focus on the priorities of our five new businesses, and on our mission to become a globally scalable digital company. We will ensure that any disposals or new acquisitions support the strategic focus of the company, maintain the health of our balance sheet and deliver the best return for our shareholders. We are currently undertaking a strategic review of our international courseware local publishing businesses.

Strengthening our culture

In any organization, the internal always determines the external. At Pearson we have committed employees who really care about education and learners, who understand every dimension of learning and who understand how learning improves people’s lives. We see exciting opportunities to evolve our culture to capture the full potential of the talented people who work at Pearson, based around the four key themes of: putting the consumer at the center of everything we do; embracing diversity, equity & inclusion; collaborating across businesses and territories as one global company; and increasing our speed, agility and focus on quality.

Increasing our societal impact

Pearson has an important role to play when it comes to helping address the inequality of opportunity in learning around the world. Our recent work to promote access and inclusion in learning includes the launch of our social bond earlier this year, tied to improving learning outcomes for people across the world who need it most. We are continuing our efforts to achieve diversity across both our employee base and within our content through representation. We have developed a roadmap to become net carbon zero; and we are also enhancing our reporting structures and are reporting according to Sustainability Accounting Standards Board (SASB) for the first time this year. Being a sustainable business will contribute to Pearson’s future growth and we are committed to making a positive impact.

Our strategy reflects a new vision for Pearson and incorporates a simpler, more agile operating model focused on three global market opportunities where we can leverage our existing expertise, build on our investments in technology, and strengthen our areas of competitive advantage to reposition Pearson towards sectors and opportunities that offer strong inherent growth characteristics. All of this will be achieved with our new guiding principles:

Operating divisions

Pearson is one of the leading providers of educational courseware, assessment and digital services. The Group provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. The Group publishes across the curriculum and provides a range of education services including teacher development, educational software and system-wide solutions.

In 2020, the reporting segments have been reorganized to reflect the management structure and operating model in place during the year. The primary segments for management and reporting purposes are Global Online

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Learning (consisting of Virtual Schools and Online Program Management), Global Assessment (consisting of Pearson VUE, US Student Assessment and Clinical Assessment), North American Courseware (consisting of courseware and services businesses in the US and Canada) and International (consisting of the courseware and other businesses outside North America and including UK Qualifications and English). The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate (PRH) to the point of disposal in April 2020.

Operating divisions have been affected by the COVID-19 pandemic. Sales declined in the Global Assessment, North American Courseware and International divisions due to school and test center closures, the cancelation of Spring testing and budgetary pressures which impacted courseware purchasing. The pandemic accelerated the shift to digital learning which had a positive effect on Global Online Learning due to enrolment growth in Virtual Schools and growth in OPM. For details on the impact of COVID-19 on the Group’s financial results see Item 5 —“Operating and Financial Review and Prospects”

Global Online Learning

The demand for online learning is steadily rising and management see this area as one of the fastest growing parts of the market with demand expected to increase significantly over the next few years both in schools and higher education.

Pearson’s Online Learning Services (POLS) business provides higher education institutions with course design, marketing and enrolment, and course administration services for their online degree programs. These services are often referred to as Online Program Management (OPM). Pearson is a leader in the OPM market, running more than 470 programs across 34 partners globally, delivering more than 350,000 course enrolments per year across graduate and undergraduate degree programs. Demand for high quality online degree programs is increasing, and provides institutions with the valuable tools, services and guidance required to meet this demand.

Pearson’s Online and Virtual Schools consist of K12 virtual public schools across 37 states through Connections Academy, virtual private schools through Pearson Online Academy, and access to K12 online curriculum and tools directly to school districts through District Partnerships. The Pearson virtual schools system equips schools with teaching, access to proprietary curriculum and technology, and other academic and non-academic services. The business has experienced significant enrolment growth in the 2020/21 school year as a result of the COVID-19 pandemic which has accelerated the already strong growth in demand for high quality, personalized online learning. Virtual Schools now serve more than 100,000 students.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Global Online Learning” for a discussion of developments during 2020 with respect to this segment.

Global Assessment

School testing plays an integral role in understanding what students know and can do. The business is one of the largest providers of educational assessment services in the US; providing services for the U.S. Department of Education; 20 US states; Puerto Rico; large school districts, including New York City; non-profit organizations; and strategic industry partners. The business operates at scale, developing, delivering, scoring, and reporting on millions of online and paper tests each year. Working with educators and education advocates, School’s experts help develop next-generation assessments that feature technology-enhanced items, performance-based assessments, and adaptive testing to understand where students are and help them on their journey as critical thinkers ready to compete in the global economy. With a strong emphasis on equity and access for all students, especially those most at risk, Pearson experts have provided states with a roadmap to assess students fairly and validly, regardless of their instructional circumstances.

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The clinical assessment businesses’ solutions include learning assessments to help  gage how students learn, talent assessments to help companies develop their workforce, and clinical assessments to help psychologists and speech/ language/ hearing/ occupational and physical therapists diagnose and monitor patients.

The professional certification business, Pearson VUE (VUE), is a leading provider  of electronic testing for regulatory and certification boards, providing a full suite of services from test development to test delivery and data management. Pearson VUE offers exams through an extensive network of over 20,000 test centers across the globe as well as delivering remotely proctored exams online via its OnVUE offering. The business delivers the NCLEX exam for the National Council of State Boards of Nursing, the GMAT for the Graduate Management Admissions Council and numerous IT exams such as Cisco, Microsoft, Amazon and CompTIA.

Pearson VUE also includes Certiport, the world-leader in IT performance-based exams delivered through a global network of academic test centers, and GED Testing Service, a joint venture with the American Council on Education to deliver a leading high school equivalency exam.

In the UK, the professional certification business, Pearson VUE, works with professional and government bodies including the Driving and Vehicle Standards Agency (DVSA), Chartered Institute of Management Accountants (CIMA) and the Construction Industry Training Board (CITB).

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Global Assessment” for a discussion of developments during 2020 with respect to this segment.

North America Courseware

The North American business serves educators and students in the US and Canada from early education through elementary, middle and high schools and into higher education and beyond with a wide range of products and services: courseware including curriculum textbooks and other learning materials; assessments including test development and scoring; and services including the provision of online learning services. The Group has a leading position in each of these areas and a distinctive strategy of connecting each element to support institutions and personalize learning. Across the US the business works with states, schools and colleges to help make education more effective, accessible and affordable for a diverse community of learners.

US Higher Education Courseware digital registrations including eBooks are more than 12 million. The use of these digital homeworking platforms and integrated digital courseware provides a wealth of data and analytics to improve the performance of individual students. The business’s advanced capabilities in data, analytics and adaptive learning, and its leading efficacy research, enable it to design a smart learning path for every student.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — North America Courseware” for a discussion of developments during 2020 with respect to this segment.

International

The International business operates in many markets outside North America. These are markets where the business works closely with educators and policy makers to improve learning through creating curriculum, designing assessments and developing digital learning systems.

Pearson is the UK’s largest awarding organization, offering academic and vocational qualifications that are globally recognized and benchmarked, with educational excellence rooted in names like Edexcel and BTEC. Learners take the business’s qualifications in many countries worldwide. Online marking technology is used to

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mark most examination papers and the ResultsPlus service provides detailed analysis of every learner’s examination results. Innovation is also being driven through digital products such as ActiveLearn, and through supporting skills for employability for progression in study, work and life.

In English, the Pearson Test of English supports visa applications to the Australian Department of Immigration and Border Protection and is also sold in markets such as India and China for study and immigration purposes to Australia and other countries. Pearson ELT courseware (institutional English language courses) is a significant player in the global English market, with products such as MyEnglish Lab. Our business in Brazil includes English language school franchises as well as serving primary and secondary education with its ‘sistemas’ or learning systems which include COC, Dom Bosco and NAME.

Following our announcement in March 2021, the Group is in the process of selling its Brazilian Sistemas business.

In South Africa, Italy and Hong Kong the business is one of the largest players in the school textbook market. We are currently launching a strategic review of our international courseware local publishing businesses.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — International” for a discussion of developments during 2020 with respect to this segment.

Penguin Random House

On July 1, 2013 Penguin Random House was formed, upon the completion of an agreement between Pearson and Bertelsmann to merge their respective publishing companies, Penguin and Random House, with the parent companies owning 47% and 53% respectively. The Group completed the sale of 22% of Penguin Random House to Bertelsmann on October 5, 2017. The Group announced the sale of its remaining 25% stake in Penguin Random House to Bertelsmann in December 2019, accounting for the investment as held for sale as at December 31, 2019. The transaction was completed on April 1, 2020.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Penguin Random House” for a discussion of developments during 2020 with respect to Penguin Random House.

Operating cycles

The Group determines a normal operating cycle separately for each entity/cash generating unit with distinct economic characteristics. The “normal operating cycle” for each of the Group’s education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs. The operating cycles for the courseware markets are typically longer than one year as described below.

Particularly for the North American businesses, there are well established cycles operating in the courseware market:

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Historically a development phase of typically 12 to 18 months for Higher Education and up to 24 months for School precedes the period during which the Company receives and delivers against orders for the products it has developed for the program.

The International courseware markets operate in a similar way although often with less formal ‘adoption’ processes.

The operating cycles in respect of the Group’s professional and clinical content are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training and IT sectors). Nevertheless, in these markets, there is still a regular cycle of product renewal, in line with demand which management monitor. Typically, the life cycle is 5 years for Professional content and 7 years for Clinical content. Elsewhere in the Group, operating cycles are typically less than one year.

Competition

The Group’s businesses operate in highly competitive environments.

The Group competes with other publishers and creators of educational materials and services. These companies include publishers such as Cengage Learning, McGraw-Hill Education and Houghton Mifflin Harcourt.

In services, the Group competes with companies such as Stride in virtual schools and 2U Inc. in Online Program Management, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology.

In Global Assessment, the Group competes with other companies offering test development and administration including Educational Testing Service (ETS), American Institute for Research (AIR), Measured Progress Inc, and others. The Professional Certification business competes with Prometric globally and a number of other smaller players in local markets.

In International student assessment, the UK qualifications business competes with AQA and OCR in general qualifications and a number of smaller players in vocational qualifications.

In English language teaching (ELT) courseware, the Group competes with Oxford University Press, Macmillan and other publishers. In English language testing Pearson Test of English Academic competes with alternative tests including iELTS and TOEFL.

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Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the student, organizations, school boards, educators and government officials making purchasing decisions.

Intellectual property

The Group’s principal intellectual property assets consist of its:

The Group believes it has taken all reasonable legal steps to protect its key brands in its major markets and copyright in its content and has taken appropriate steps to develop a comprehensive patent program to ensure appropriate protection of emerging inventions that are critical to its new business strategies.

Raw materials

Paper remains the principal raw material used by the Group. The Group purchases most of its paper through its global outsourcing partner LSC Communications located in the United States. The Group has not experienced and does not anticipate difficulty in obtaining adequate supplies of paper for its operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, the Group has not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, the Group has a number of alternatives to minimize the impact on its operating margins, including modifying the grades of paper used in production.

Government regulation

The manufacture of certain products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which the Group conducts these operations maintain controls on the repatriation of earnings and capital and restrict the means available for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material. Accordingly, these controls have not significantly affected the Group’s international operations. Regulatory authorities may have enforcement powers that could have an impact. The Group believes, however, that in light of the nature of its business the risk of these sanctions does not represent a material threat.

Licenses, patents and contracts

The Group is not dependent upon any particular licenses, patents or new manufacturing processes that are material to its business or profitability. Likewise, it is not materially dependent upon any particular contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature. Notwithstanding the foregoing, the Group’s education business is dependent upon licensed rights since most textbooks and digital learning tools include content and/or software that is licensed to it by third parties (or assigned subject to royalty arrangements). In addition, some software products in various business lines, particularly those of its Clinical business, rely upon patents licensed from third parties.

Legal proceedings

The Group and its subsidiaries are from time to time the subject of legal proceedings incidental to the nature of its and their operations. These may include private litigation or arbitrations, governmental proceedings and

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investigations by regulatory bodies. Pearson is one of several defendants named in 14 US lawsuits and one Canadian antitrust lawsuit related to the Group’s Inclusive Access programmes. These lawsuits, purporting to be class actions, have been brought on behalf of students and off campus retailers alleging, among other things, that Pearson’s Inclusive Access programmes violate US and Canadian antitrust laws and state or provincial laws by reducing competition from the secondary market and off campus retailers. Motions to dismiss have been filed by all defendants in the US lawsuits and a ruling is expected later in 2021. The Group does not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on its financial position or profitability nor have any such proceedings had such effect in the recent past. The Group is not aware of material proceedings in which any member of senior management or any of its affiliates is a party adverse to it or any of its subsidiaries or in respect of which any of those persons has a material interest adverse to it or any of its subsidiaries.

Organizational structure

Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of its significant subsidiaries as at December 31, 2020, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

In October 2017, the Group disposed of 22% of Penguin Random House to Bertelsmann, and in December 2019 it announced the sale of its remaining 25% interest to Bertelsmann. The disposal completed on April 1, 2020.

On May 5, 2017, the Group announced that it was undertaking a strategic review of its US K12 courseware business. The US K12 business was classified as held for sale on the Group’s balance sheet as at December 31, 2017 and December 31, 2018. On March 29, 2019 the Group completed the sale of its US K12 courseware business to Nexus Capital Management LP resulting in a pre-tax profit on sale of $13m.

On November 27, 2017 the Group announced that it had agreed to the sale of Wall Street English (WSE) to a consortium consisting of funds affiliated with Baring Private Equity Asia and CITIC Capital. Consequently, WSE was classified as held for sale on the Group’s balance sheet as at December 31, 2017. The disposal completed on March 15, 2018.

In November 2020, the Group announced the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa. The business was classified as held for sale on the Group’s balance sheet as at December 31, 2020. The sale completed on February  5, 2021.

Property, plant and equipment

The Group’s headquarters are located at leasehold premises in London, England. As at December 31, 2020 it owned or leased approximately 740 properties, including approximately 594 testing/teaching centers in over 58 countries worldwide, the majority of which are located in the United Kingdom and the United States. Approximately 80 properties, primarily testing/teaching centers in China, were disposed in March 2018 as part of the WSE disposal.

The properties owned and leased by the Group consist mainly of offices, distribution centers and computer testing/ teaching centers.

In some cases properties leased by the Group are then sublet to third parties. These properties are not included in the list below as they are not considered to be principal properties.

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The vast majority of printing is carried out by third party suppliers. The Group operates a small digital print operation as part of its Pearson Assessment & Testing businesses which provides short-run and print-on-demand products, typically custom client applications.

The Group owns the following principal properties at December 31, 2020:

The Group leased the following principal properties at December 31, 2020:

Capital Expenditures

See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure.

From January 1, 2020, the Group has reorganized and is reporting for the first time new segmental analysis to reflect the management structure and operating model in place during the year. The primary segments for management and reporting purposes are Global Online Learning (consisting of Virtual Schools and Online Program Management), Global Assessment (consisting of Pearson VUE, US Student Assessment and Clinical Assessment), North American Courseware (consisting of courseware and services businesses in the US and Canada) and International (consisting of the courseware and other businesses outside North America and including UK Qualifications and English). The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate (PRH) to the point of disposal in April 2020.

All figures for 2019 and 2018 have been restated to reflect 2020 segments.

General overview

Introduction

The Group’s primary segments for management and reporting are as follows:

The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate to the point of disposal in April 2020.

On March 15, 2018, the Group completed the sale of Wall Street English (WSE) to a consortium of funds affiliated with Baring Private Equity Asia and CITIC Capital realizing a profit before tax of £207m. The business had been classified as held for sale at December 31, 2017.

On March 29, 2019, the Group completed the sale of the US K12 courseware business (K12) to Nexus Capital Management LP for headline consideration of $250m comprising an initial cash payment of $25m and an unconditional vendor note for $225m expected to be repaid in three to seven years. The K12 business had been held for sale on the balance sheet following a strategic review and discussion with potential buyers since the end of 2017 until the disposal in 2019.

In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. At the end of December 2019, the Group’s share of the assets of PRH was classified as held for sale on the balance sheet. In April 2020, the Group completed the sale of the remaining 25% interest in Penguin Random House to Bertelsmann, generating net proceeds of £531m and resulting in a pre-tax profit of £180m.

In November 2020, the Group announced the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa. At the end of December 2020, the assets and liabilities of PIHE have been classified as held for sale on the balance sheet. The sale completed on February 5, 2021 for nominal consideration.

None of the disposals referred to above were significant enough to meet the definition of a discontinued business and their results to the date of disposal are included in continuing operations.

The Group’s total sales decreased from £3,869m in 2019 to £3,397m in 2020, a decrease of £472m or 12%. This year on year decrease was impacted by currency movements, primarily the comparative weakness of the US

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dollar relative to sterling during the year. In 2020 currency movements decreased sales by £31m when compared to the equivalent figures at constant 2019 rates. When measured at 2019 constant exchange rates, the Group’s sales declined by 11%. Part of the decrease is due to the absence of sales from businesses sold during 2019 and 2020. The Group estimates that after excluding the impact of disposals sales in 2020 declined by 10% compared to 2019 at constant exchange rates. Sales decline was seen across all business segments except for Global Online Learning which saw strong growth year on year.

In 2020, the Group reported an operating profit of £411m compared to an operating profit of £275m in 2019. The increase in profit of £136m is mainly due to the gain on sale of PRH, the reduction in restructuring costs and the reduction in intangible charges, which were more than enough to offset the impact of COVID-19 on trading profits. After stripping out the effect of the sale of businesses, intangible charges, restructuring costs and the impact of currency movements, profits from trading decreased by around £210m. This underlying trading decrease was primarily due to the impact of COVID-19 on trading in the Global Assessment and International segments, continued pressure in the US Higher Education Courseware market, partly offset by growth in the Global Online Learning segment and cost savings in the Enabling Functions.

In May 2017, we announced a restructuring program, to run between 2017 and 2019, to drive significant cost savings. This program began in the second half of 2017 and costs incurred relate to delivery of cost efficiencies in our enabling functions and US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies. The restructuring program was largely completed at the end of 2019.

Operating profit in 2020 includes a gain of £178m which largely relates to the sale of the remaining interest in PRH (£180m gain) and impairments of assets and other costs relating to the disposal of Pearson Institute of Higher Education (£8m loss). In 2019, gains of £16m largely relate to the sale of the US K12 business.

Currency movements increased 2020 operating profit by £1m when compared to the equivalent figures translated at constant 2019 exchange rates.

The profit before taxation in 2020 of £354m compares to a profit before taxation of £232m in 2019. The increase in profit of £122m reflects the £136m increase in the reported operating profit identified above offset by an increase in net finance costs of £14m, from £43m in 2019 to £57m in 2020.

The Group’s net interest payable increased from £41m in 2019 to £61m in 2020. The increase is mainly due to interest on tax with credits recorded in 2019 not being repeated in 2020, and interest charges on the bond raised in June 2020. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2020 the total of these items was a gain of £4m compared to a loss of £2m 2019. Net finance income relating to retirement benefits decreased from £13m in 2019 to £6m in 2020 reflecting the comparative funding position of the plans at the beginning of each year and lower prevailing discount rates. In 2020, finance income of £26m relating to the revaluation of the US K12 disposal proceeds was recorded and there were increases in losses on long-term interest rate hedges and increases in foreign exchange losses on unhedged inter-company loans and cash and cash equivalents in 2020 compared to 2019.

The reported tax charge in 2020 was £44m (12.5%) compared to a credit of £34m (14.7%) in 2019. The statutory tax credit in 2019 was primarily due to US tax losses generated on the disposal of the US K12 business.

Net cash generated from operations decreased to £450m in 2020 from £480m in 2019. The decrease in cash generated from operations is largely explained by the drop-through of reduced profit due to COVID-19, offset by improved working capital.

Net interest paid at £50m in 2020 compares to £64m in 2019 and reflects a reduction in interest on lease liabilities and a reduction in payments relating to FX contracts. Tax received in 2020 was £2m compared to tax paid of £30m in 2019 with the decrease mainly explained by refunds received in the US and UK relating to historical periods, the settlement of a historical tax audit and the impact of the disposal of our US K12 business.

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Capital expenditure on property, plant and equipment was £53m in 2020 compared to £55m in 2019. There were no material property sales in 2019 or 2020. Capital expenditure on software intangibles decreased from £138m in 2019 to £81m in 2020. The reduction in expenditure on intangible capital reflects the reduction in investment in enabling function technology as the digital transformation program comes to an end.

Cash outflow from acquisitions in 2020 was £12m compared to £97m in 2019. There were no significant acquisitions in 2020, the net cash outflow on acquisition of subsidiaries in 2020 relates to deferred payments for prior year acquisitions and investment purchases. There were two small acquisitions in 2019, Lumerit and Smart Sparrow which together accounted for £40m of cash consideration, £40m of additional capital was invested in PRH, with the balance of the cash outflow on acquisitions in 2019 being in relation to investments and prior year items. The net cash inflow in respect of businesses and investments disposed was £631m in 2020 compared to a net outflow of £96m in 2019. In 2020 the cash received largely related to the disposal of PRH and the partial repayment of the receivable held in relation to the disposal of the US K12 business. In 2019 the cash outflow mainly relates to the US K12 Courseware business and reflects the deferral of proceeds and the level of working capital in the business at the disposal date.

Dividends from joint ventures and associates decreased from £64m in 2019 to £4m in 2020. The reduction is primarily due to the fact that the PRH disposal completed in April 2020. Dividends paid to company shareholders in 2020 of £146m compares to £147m in 2019. Cash returned to shareholders via the share buyback program in H1 2020 amounted to £176m in 2020. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

Overall the Group’s net borrowings decreased from £1,016m at the end of 2019 to £463m at the end of 2020. In addition to the cash flows referred to above, the adoption of IFRS 16 added £666m of net debt on transition after taking account of both lease liabilities and the investment in finance lease receivable brought on balance sheet at January 1, 2019.

Outlook

On March 8, 2021 the Group announced its expectations for revenue and adjusted operating profit growth in 2021. Adjusted operating profit is the key financial measure used by management to evaluate the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below under ‘Sales and operating profit by segment’ and in note 2 within Item 18 — Financial Statements. Due to the difficulty in making accurate forecasts of some of the information excluded from adjusted operating profit, the Group is unable to quantify expected 2021 statutory operating profit without unreasonable efforts, and consequently, no statement thereof, and no reconciliation of the Group’s expected 2021 adjusted operating profit thereto, is included.

The 2021 outlook is based on the following:

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The Group sets out in note 11 within Item 18 — Financial Statements, as part of its assessment of goodwill for impairment, the sensitivity to impairment resulting from reasonably possible changes in key assumptions. It is highlighted that a relatively small reduction in contribution, that could arise from longer-term disruption caused by the COVID-19, may result in impairment charges.

In assessing the Group’s liquidity, the impact of the COVID-19 pandemic has been modeled under several scenarios to ensure that the likelihood of a prolonged period of disruption has been appropriately considered in assessing the availability of funding to the Group and the ability of the Group to comply with its banking covenants. The modeling includes a severe reduction in revenue, profit and operating cash flow that extends through the full three-year period to ensure that the Group has adequate resources to manage for a prolonged period of disruption.

In assessing the Group’s ability to continue as a going concern for the period to June 30, 2022, the board analyzed a variety of downside scenarios including a severe but plausible scenario where the Group is impacted by all principal risks from 2021 (weighted for probability of occurrence) as well as reverse stress testing to identify what would be required to either breach covenants or run out of liquidity. The severe but plausible scenario modeled an impact from COVID-19 and other risks which in aggregate were significantly greater than seen in 2020 continuing throughout 2021 to 2022.

At December 31, 2020, the Group had available liquidity of c£1.9bn, comprising central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF) maturing February 2024. Even under a severe downside case where further declines in profitability compared to 2020 are modeled in 2021 and 2022, the Group would maintain liquidity headroom in excess of £800m and sufficient headroom against covenant requirements during the period under assessment even before modeling the mitigating effect of actions that management would take in the event that these downside risks were to crystallize.

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Sales information by segment

The following table shows sales information for each of the past three years by segment:

Sales information by geographic market supplied

The following table shows sales information for each of the past three years by geographic region:

In the table above sales are allocated based on the country in which the customer is located.

Exchange rate fluctuations

The Group earns a significant proportion of its sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was £1:$1.28 in 2020, £1:$1.28 in 2019 and £1:$1.34 in 2018. Fluctuations in exchange rates can have a significant impact on the Group’s reported sales and profits. In 2020, the Group generated 69% of its continuing sales in the US (2019: 62%; 2018: 64%). In 2020 the Group estimates that a five-cent change in the average exchange rate between the US dollar and sterling would have had an impact on its reported earnings per share of approximately 5.3p. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for more information on how foreign exchange risk is managed. The year-end US dollar rate for 2020 was £1:$1.37 compared to £1:$1.32 for 2019 and £1:$1.27 for 2018. The total impact on shareholders’ funds of foreign exchange translation was a loss of £179m in 2020 compared to a loss of £111m in 2019. These net movements are principally driven by movements in the US dollar as a significant portion of the Group’s operations are in the US.

Critical accounting policies

The Group’s consolidated financial statements included in “Item 18. Financial statements” are prepared based on the accounting policies described in note 1 to the consolidated financial statements.

Certain of these accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are described in note 1a (3) in “Item 18. Financial Statements”.

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Results of operations

Year ended December 31, 2020 compared to year ended December 31, 2019

Consolidated results of operations

Sales

The Group’s total sales decreased from £3,869m in 2019 to £3,397m in 2020, a decrease of £472m or 12%. This year on year decrease was impacted by currency movements, primarily the comparative weakness of the US dollar relative to sterling during the year. In 2020 currency movements decreased sales by £31m when compared to the equivalent figures at constant 2019 rates. When measured at 2019 constant exchange rates, the Group’s sales declined by 11%. Part of the decrease is due to the absence of sales from businesses sold during 2019 and 2020. The Group estimates that after excluding the impact of disposals sales in 2020 declined by 10% compared to 2019 at constant exchange rates. Sales decline was seen across all business segments except for Global Online Learning which saw strong growth year on year.

Global Online Learning sales increased by £111m or 19% from £586m in 2019 to £697m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Online Learning sales increased by 18% in 2020 compared to 2019. The sales growth reflects strong enrolment growth in Virtual Schools and good growth in OPM.

Global Assessment sales decreased by £139m or 13% from £1,031m in 2019 to £892m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Assessment sales decreased by 14% in 2020 compared to 2019. Sales declined 10% at Pearson VUE reflecting the impact of the test center closures in the first half of the year offset by pent up demand in the second half partially moderated by further lockdowns in Q4. Online Proctoring saw strong growth in the year with volumes up from 0.2m at the end of 2019 to 2.1m at the end of 2020 predominantly driven by demand from the IT sector. Overall testing volumes were down 22% to 12.9m due to test center closures. In School and Clinical Assessment, cancelation of Spring testing and school closures impacted both businesses respectively in H1 with a further modest impact due to COVID-19 in H2.

North America Courseware sales decreased by £197m or 18% from £1,091m in 2019 to £894m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, North America Courseware sales decreased by 13% in 2020 compared to 2019. In US Higher Education Courseware sales declined 12% with total unit sales increasing slightly and digital registrations including eBooks growing 9%. In Canada, courseware sales were down significantly due to school and bookstore closures. The sales decline also reflects the disposal of the US K12 business in 2019.

International sales decreased by £247m or 21% from £1,161m in 2019 to £914m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, International sales decreased by 19% in 2020 compared to 2019. The sales decline reflects the interruption of Australian immigration and test center closures impacting PTE, as well as budgetary pressures caused by the impact of COVID-19 on courseware purchasing.

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Cost of goods sold and operating expenses

The following table summarizes the Group’s cost of sales, net operating expense and other net gains and losses:

Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges, the cost of service provision in the assessment and testing business and the cost of teaching and facilities in direct delivery businesses. The Group’s cost of sales decreased by £91m, or 5%, from £1,858m in 2019, to £1,767m in 2020. The decrease largely reflects the decrease in sales but also includes some continuing benefit from restructuring. In addition, cost of sales as a percentage of sales increased largely as a result of the mix effect caused by a sales decline in businesses with generally higher gross margins than Pearson as a whole. Cost of sales was 52.0% of sales in 2020 compared to 48.0% in 2019.

Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs decreased by £14m reflecting the flow through of restructuring savings, the absence of costs from businesses disposed and the decrease in physical print sales.

Selling, marketing and product development costs. The Group’s selling, marketing and product development costs decreased by £59m or 9% from £631m in 2019 to £572m in 2020. The decrease is explained by the absence of costs from businesses disposed, the flow through of restructuring savings and a drive to reduce costs due to the impact of COVID-19. As a percentage of sales, these costs increased slightly in 2020 from 16.3% in 2019 to 16.8% in 2020.

Administrative and other expenses. The Group’s administrative and other expenses decreased by £183m or 18% from £999m in 2019 to £816m in 2020. The decrease is explained by the absence of costs from businesses disposed, the flow through of restructuring savings, a drive to reduce costs due to the impact of COVID-19and the impact of lower intangible charges. In 2019 intangible charges included an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market.

Restructuring costs. Restructuring costs of £157m in 2019 relate to the 2017-2019 restructuring program announced in May 2017. This program began in the second half of 2017 and costs incurred related to delivery of cost efficiencies in enabling functions and the US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies. The restructuring program was largely completed at the end of 2019.

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Other income. Other operating income mainly consists of freight recharges, sub-rights and licensing income, distribution commissions, investment income and gains on minor asset disposals together with service fee income from Penguin Random House. Other operating income decreased to £45m in 2020 compared to £54m in 2019 mainly due to reductions in freight charges.

Other net gains and losses. In 2020 other net gains and losses largely relate to the sale of the remaining interest in PRH (£180m gain) and impairments of assets and other costs relating to the disposal of Pearson Institute of Higher Education (£8m loss). In 2019, other net gains largely relate to the sale of the US K12 business.

Share of results of joint ventures and associates

The contribution from the Group’s joint ventures and associates decreased by £49m to £5m in 2020 from £54m in 2019. The decrease is mainly due to the disposal of the 25% interest in Penguin Random House in April 2020.

Operating profit

In 2020, the Group reported an operating profit of £411m compared to an operating profit of £275m in 2019. The increase in profit of £136m is mainly due to the gain on sale of PRH, the reduction in restructuring costs and the reduction in intangible charges, which were more than enough to offset the impact of COVID-19 on trading profits. After stripping out the effect of the sale of businesses, intangible charges, restructuring costs and the impact of currency movements, profits from trading decreased by around £210m. This underlying trading decrease was primarily due to the impact of COVID-19 on trading in the Global Assessment and International segments, continued pressure in the US Higher Education Courseware market, partly offset by growth in the Global Online Learning segment and cost savings in the Enabling Functions.

Net finance costs

Net finance costs increased by £14m from £43m in 2019 to £57m in 2020. The Group’s net interest payable increased from £41m in 2019 to £61m in 2020. The increase is mainly due to interest on tax with credits recorded in 2019 not being repeated in 2020, and interest charges on the bond raised in June 2020. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2020 the total of these items was a gain of £4m compared to a loss of £2m 2019. Net finance income relating to retirement benefits decreased from £13m in 2019 to £6m in 2020 reflecting the comparative funding position of the plans at the beginning of each year and lower prevailing discount rates. In 2020, finance income of £26m relating to the revaluation of the US K12 disposal proceeds was recorded and there were increases in losses on long-term interest rate hedges and increases in foreign exchange losses on unhedged inter-company loans and cash and cash equivalents in 2020 compared to 2019.

For a more detailed discussion of the Group’s borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Taxation

The reported tax charge in 2020 was £44m (12.5%) compared to a credit of £34m (14.7%) in 2019. The decrease in the effective tax rate is mainly due to a benefit from the release of tax provisions due to the expiry of the relevant statute of limitation. The statutory tax credit in 2019 was primarily due to US tax losses generated on the disposal of the US K12 business. In February 2021, the Group received charging notices requiring payment of materially all of the alleged State Aid. A payment of £100m was made on 8 March 2021. The Group expects to recover the funds in due course.

Discontinued operations

There were no discontinued operations in either 2019 or 2020.

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Profit for the year

The profit for the financial year in 2020 was £310m compared to a profit in 2019 of £266m. The increased profit reflects increased operating profit offset by higher net finance costs and a higher tax charge.

Earnings per ordinary share

The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 41.0p in 2020 compared to 34.0p in 2019 based on a weighted average number of shares in issue of 755.4m in 2020 and 777.0m in 2019. The increase in earnings per share was due to the increase in profit for 2020 as described above and was impacted by the decrease in the number of weighted average number of shares in 2020 compared to 2019 which mainly arise as a result of the share buy back in 2020.

The diluted earnings per ordinary share was 41.0p in 2020 and 34.0p in 2019 , with the dilutive effect of options being minimal.

Exchange rate fluctuations

Currency movements decreased sales by £31m and increased operating profit by £1m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding the Group’s management of exchange rate risks.

Sales and operating profit by segment

The following tables summarize the Group’s sales and adjusted operating profit for each of the Group’s business segments. Adjusted operating profit is included as it is the key financial measure used by management to evaluate the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below and in note 2 within Item 18 — Financial Statements.

In the Group’s adjusted operating profit, it has excluded other net gains and losses, acquisition related costs, amortization and impairment of acquired intangibles and the cost of major restructuring programs. The intangible charges relate only to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. The Group does not believe these charges are relevant to an understanding of the underlying performance. Charges relating to acquired intangible assets are non-cash charges that reflect the historical expenditure of the acquired business. These acquired intangible assets continue to be supported by ongoing expenditure that is reported within adjusted operating profit. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as it is important to highlight their impact on operating profit, as reported, in the period in which the disposal transaction takes place in order to understand the underlying trend in the performance of the Group.

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A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:

Global Online Learning

Global Online Learning sales increased by £111m or 19% from £586m in 2019 to £697m in 2020 and adjusted operating profit increased by £15m or 18% from £84m in 2019 to £99m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Online Learning sales increased by 18% in 2020 compared to 2019 and adjusted operating profit also increased by 23%. The sales growth reflects strong enrolment growth in Virtual Schools and good growth in OPM. Adjusted operating profit growth was due to margin on sales growth more than offsetting the investment in our virtual schools platform and customer care support and margin impact in OPM due to discontinued programs. Headline profit grew 18% with good growth in adjusted operating profit partially offset by FX and portfolio changes.

Virtual Schools performed strongly driven by 43% enrolment growth in new and existing schools for the 2020/2021 academic year. We opened three new full-time, state-wide partner schools, and combined with two contract exits this takes the total partner schools to 43 in 29 states. We are launching two new partner schools in Florida and Oregon for the 2021/2022 academic year.

In OPM, we saw good sales growth with a strong performance in undergraduate and international, partially offset by discontinued programs. We also saw the benefits of the operational changes made earlier this year, with increased efficiencies in our student recruitment process and student acquisition costs. Underlying course

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enrolments (excluding discontinued programs) grew 20% and total course enrolments declined 7%. We are delivering 470 programs across 34 partners globally. We launched Pearson Pathways, a digital marketplace that provides learners with tailored recommendations for courses and credentials to help them achieve the skills they require.

The Global Online Learning results also include intangible charges of £29m in 2020 compared to £35m in 2019 reflecting lower acquisition activity in recent years.

Global Assessment

Global Assessment sales decreased by £139m or 13% from £1,031m in 2019 to £892m in 2020 and adjusted operating profit decreased by £106m or 30% from £351m in 2019 to £245m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Assessment sales decreased by 14% in 2020 compared to 2019 and adjusted operating profit also decreased by 30%. Sales declined 10% at Pearson VUE reflecting the impact of the test center closures in the first half of the year offset by pent up demand in the second half partially moderated by further lockdowns in Q4. Online Proctoring saw strong growth in the year with volumes up from 0.2m at the end of 2019 to 2.1m at the end of 2020 predominantly driven by demand from the IT sector. Overall testing volumes were down 22% to 12.9m due to test center closures. In School and Clinical Assessment, cancelation of Spring testing and school closures impacted both businesses respectively in H1 with a further modest impact due to COVID-19 in H2.

Adjusted operating profit declined 30% due to the COVID-19 impact on trading, partially offset by mitigating actions.

The Global Assessment results also include intangible charges of £36m in 2020 compared to £27m in 2019 reflecting impairments of £12m made in 2020. Major restructuring costs were £7m in 2019 and £nil in 2020.

North American Courseware

North America Courseware sales decreased by £197m or 18% from £1,091m in 2019 to £894m in 2020 and adjusted operating profit decreased by £41m or 18% from £231m in 2019 to £190m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, North America Courseware sales decreased by 13% in 2020 compared to 2019 and adjusted operating profit also decreased by 20%. In US Higher Education Courseware sales declined 12% with total unit sales increasing slightly and digital registrations including eBooks growing 9%. In Canada, courseware sales were down significantly due to school and bookstore closures. The sales decline also reflects the disposal of the US K12 business in 2019. Adjusted operating profit declined 18% due to the impact of trading partially offset by restructuring and discretionary savings and the disposal of our US K12 courseware business in 2019.

The Group continued to see unbundling of premium priced print and digital products for digital only formats. In 2020 2.2m textbooks were sold into US Higher Education colleges, compared with 3.7m in 2019. Sales of standalone eBook units into colleges grew 33% to 3.7m units, showing signs of secondary market recapture. There has also been continued momentum in Inclusive Access with sales to not-for-profit institutions up 29% on last year representing 13% of US Higher Education Courseware revenue.

The North American Courseware results also include other net gains and losses of £3m gain in 2020 compared to a £13m gain in 2019. In 2019 these primarily relate to the gain on sale of the US K12 business and in 2020 they relate to favorable adjustments to prior year disposal costs. Major restructuring costs in 2019 were £51m and are £nil in 2020.

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International

International sales decreased by £247m or 21% from £1,161m in 2019 to £914m in 2020 and adjusted operating profit decreased by £117m or 39% from £299m in 2019 to £182m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, International sales decreased by 19% in 2020 compared to 2019 and adjusted operating profit also decreased by 39%. The sales decline reflects the interruption of Australian immigration and test center closures impacting PTE, as well as budgetary pressures caused by the impact of COVID-19 on courseware purchasing. Adjusted operating profit declined 39% due to the impact of trading partially offset by mitigating actions.

For School & HE Courseware, budget constraints and school closures have led to fewer purchases. In the UK, qualifications revenue was impacted, as expected, by the cancelation of exams in 2020, as well as the end of the NCT contract. In our franchise business in Brazil and across courseware, we have seen market contraction as a result of the pandemic.

PTE volumes were down 36% with declines in all key markets except China where we saw 17% growth due to an improved competitive performance.

The International results also include intangible charges of £15m in 2020 compared to £89m in 2019 reflecting impairments made in relation to Brazil in 2019 of £65m which have not been repeated in 2020. Major restructuring costs were £24m in 2019 and £nil in 2020. Other net gains and losses in 2020 primarily relate to charges in relation to the disposal of PIHE. In 2019 other net gains and losses relate to small acquisitions and disposals.

On 5 March 2021, the Group agreed the disposal of its K-12 Sistemas – COC and Dom Bosco – in Brazil, subject to securing regulatory approval and closing.

Enabling Functions

Enabling functions adjusted operating loss decreased by £45m or 10% from £449m in 2019 to £404m in 2020. The Group estimates that after excluding the impact of exchange rates and the contribution from businesses disposed in 2019 and 2020, the Enabling Functions adjusted operating loss decreased by 9%. Cost reductions were due to restructuring and discretionary savings.

Penguin Random House

The Group’s share of Penguin Random House adjusted operating profits was £nil in 2020 compared to £65m in 2019. Dividend income of £1m was recognised in 2020. In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. At the end of December 2019 the Group’s share of the assets of Penguin Random House was classified as held for sale on the balance sheet. In April 2020, the Group completed the sale of the remaining 25% interest in Penguin Random House to Bertelsmann, generating net proceeds of £531m and resulting in a pre-tax profit of £180m.

Results of operations

Year ended December 31, 2019 compared to year ended December 31, 2018

Consolidated results of operations

Sales

The Group’s total sales decreased from £4,129m in 2018 to £3,869m in 2019, a decrease of £260m or 6%. The year on year movement was impacted by exchange rates, primarily the comparative strength of the US dollar relative to sterling during the year. In 2019, currency movements increased sales by £97m when compared to the equivalent figures at constant 2018 rates. When measured at 2018 constant exchange rates, the Group’s sales declined by 9%. Part of the decrease is due to the absence of sales from businesses sold during 2018 and 2019. The Group estimates that after excluding the impact of disposals sales were flat in 2019 compared to 2018 at

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constant exchange rates. Although sales at constant rates after taking account of disposals were flat there were further significant decreases in North America in higher education courseware, offset by aggregate growth in the rest of the business.

Global Online Learning sales increased by £65m or 12% from £521m in 2018 to £586m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Global Online Learning sales increased by 8% in 2019 compared to 2018. Revenue at Virtual Schools and OPM grew at 6% and 4% respectively due to increased enrolment and course registrations.

Global Assessment sales increased by £76m or 8% from £955m in 2018 to £1,031m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Global Assessment sales increased by 4% in 2019 compared to 2018. In US School Assessment, revenue declined slightly with continued contraction in revenue associated with the PARCC and ACT-Aspire multi state contracts and contract losses were partially offset by new contract wins. In Professional Certification (Pearson VUE) revenue grew driven by increases in global test volumes.

North American Courseware sales decreased by £370m or 25% from £1,461m in 2018 to £1,091m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, North American Courseware sales decreased by 11% in 2019 compared to 2018. The sales decline was primarily due to North American Higher Education Courseware which declined 12% with print declining by close to 30%, partially offset by modest growth in digital.

International sales decreased by £31m or 3% from £1,192m in 2018 to £1,161m in 2019. The Group estimates that after excluding the impact of exchange rates and the contribution from businesses disposed in 2018 and 2019, International sales increased by 3% in 2019 compared to 2018. Courseware revenue declined moderately. Declines in School Courseware in the UK and Australia offset growth in Italy. In Higher Education Courseware, revenue declines in the UK and Europe more than offset growth in Australia. There was with growth in English Language Courseware in China and School Courseware in the Middle East and Hispano America, offset by declines in school courseware in India and Higher Education courseware in South Africa following a change in government funding.

Cost of goods sold and operating expenses

The following table summarizes the Group’s cost of sales, net operating expense and other net gains and losses:

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Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges, the cost of service provision in the assessment and testing business and the cost of teaching and facilities in direct delivery businesses. The Group’s cost of sales decreased by £85m, or 4%, from £1,943m in 2018, to £1,858m in 2019. The decrease largely reflects the decrease in sales but also includes some continuing benefit from restructuring. In addition, cost of sales as a percentage of sales increased largely as a result of the mix effect caused by a sales decline in businesses with generally higher gross margins than Pearson as a whole. Cost of sales was 48.0% of sales in 2019 compared to 47.1% in 2018.

Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs decreased by £15m reflecting the flow through of restructuring savings, the absence of costs from businesses disposed, the decrease in physical print sales and some one-off costs in the Core business in 2018 relating to a change in distribution arrangements that year.

Selling, marketing and product development costs. The Group’s selling, marketing and product development costs decreased by £128m or 17% from £759m in 2018 to £631m in 2019. The decrease is explained by the absence of costs from businesses disposed and restructuring savings realized in the year. As a percentage of sales, these costs decreased in 2019 from 18.4% in 2018 to 16.3% in 2019.

Administrative and other expenses. The Group’s administrative and other expenses decreased by £40m or 4% from £1,039m in 2018 to £999m in 2019. This decrease is explained by the absence of costs from businesses disposed, the impact of restructuring savings particularly in enabling functions and the benefit from adoption of IFRS 16 partly offset by continuing investment in technology and the impact of higher intangible charges. In 2019 intangible charges increased due to an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market.

Restructuring costs. Restructuring costs of £157m in 2019 and £90m in 2018 (excluding the share of associate restructuring charges) relate to the 2017-2019 restructuring program announced in May 2017. This program began in the second half of 2017 and costs incurred related to delivery of cost efficiencies in enabling functions and the US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2018 and 2019 relate predominantly to staff redundancies and, in 2018, to the net cost of property rationalization. Included in the property rationalization in 2018 is the impact of the consolidation of the Group’s property footprint in London which resulted in a charge for onerous leases of £91m partially offset by profit from the sale of property of £81m.

Other income. Other operating income mainly consists of freight recharges, sub-rights and licensing income, distribution commissions, investment income and gains on minor asset disposals together with service fee income from Penguin Random House. Other operating income decreased to £54m in 2019 compared to £69m in 2018 mainly due to decreased rights income, the absence of recoveries following legal settlements in 2018 and fewer asset gains in 2019.

Other net gains and losses. In 2019 gains of £16m largely relate to the sale of the K12 school courseware business in the US. In 2018 a £230m gain from the sale of businesses related to the sale of the Wall Street English language teaching business (WSE), realizing a gain of £207m, the disposal of the Group’s equity interest in UTEL, the online University partnership in Mexico, realizing a gain of £19m, and various other smaller disposal items realizing a net gain of £4m.

Share of results of joint ventures and associates

The contribution from the Group’s joint ventures and associates increased by £10m to £54m in 2019 from £44m in 2018. The increase is mainly due to reduced intangible and restructuring charges in PRH in 2019 and in addition, there were restructuring costs incurred in respect of the Group’s ACT Aspire joint venture in 2018 that were absent in 2019.

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Operating profit

In 2019, the Group reported an operating profit of £275m compared to an operating profit of £553m in 2018. The decrease in profit of £278m mainly reflects the absence of significant gains on disposal in 2019 compared to 2018, an increase in intangible charges and restructuring costs and the lost contribution from businesses disposed which more than offset a favorable impact from currency movements and the adoption of IFRS 16 ‘Leases’. Excluding out the effect of the sale of businesses, intangible charges, restructuring costs, one-off pension related charges and the impact of currency movements and IFRS 16, profits from trading increased by around £30m. This trading increase was primarily due to savings from restructuring and lower staff incentives which offset the impact on profits of lower sales in North America higher education courseware and inflationary pressures.

Net finance costs

Net finance costs decreased from £55m in 2018 to £43m in 2019. Net interest payable increased from £24m in 2018 to £41m in 2019. The increase is due to the adoption of IFRS 16 which resulted in an additional £34m of net interest payable in 2019. After excluding the impact of IFRS 16 there was a reduction in net interest payable due to lower levels of average net debt together with favorable movements in interest on tax and the absence of one-off costs relating to the redemption of bonds. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2019 the total of these items was a loss of £2m compared to a loss of £31m 2018. Income relating to employee benefit plans was £2m higher in 2019 than in 2018 reflecting the higher net surplus on pension balances at the beginning of 2019 compared to the beginning of 2018. Other losses in both 2019 and 2018 primarily relate to foreign exchange differences on un-hedged cash and cash equivalents, and other financial instruments although these losses were much lower in 2019.

For a more detailed discussion of the Group’s borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Taxation

The reported tax credit in 2019 was £34m (14.7%) compared to a credit of £92m (18.5%) in 2018. The movement in the tax rate reflects several one-off benefits in 2018 including provision releases due to the expiry of relevant statutes of limitation and due to the reassessment of historical positions, as well as a one-off benefit from a reassessment of the tax treatment of certain items of income and expenditure. In 2019, the credit is primarily due to US tax losses generated on the disposal of the K12 business.

Discontinued operations

There were no discontinued operations in either 2018 or 2019.

Profit for the year

The profit for the financial year in 2019 was £266m compared to a profit in 2018 of £590m. The decreased profit reflects decreased operating profit and reduced tax credits partially offset by lower net finance costs as set out above.

Earnings per ordinary share

The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 34.0p in 2019 compared to 75.6p in 2018 based on a weighted

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average number of shares in issue of 777.0m in 2019 and 778.1m in 2018. The decrease in earnings per share was due to the decrease in profit for 2019 as described above and was not significantly impacted by the small decrease in the number of weighted average number of shares in 2019 compared to 2018.

The diluted earnings per ordinary share was 34.0p in 2019 and 75.5p in 2018, with the dilutive effect of options being minimal.

Exchange rate fluctuations

Currency movements increased sales by £97m and increased operating profit by £15m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding the Group’s management of exchange rate risks.

Sales and operating profit by segment

The following tables summarize the Group’s sales and adjusted operating profit for each of the Group’s business segments. Adjusted operating profit is included as it is the key financial measure used by management to evaluate the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below and in note 2 within Item 18 — Financial Statements.

In the Group’s adjusted operating profit, it has excluded other net gains and losses, acquisition related costs, amortization and impairment of acquired intangibles and the cost of major restructuring programs. In 2018, the Group also excluded the impact of adjustments arising from clarification of guaranteed minimum pension (GMP) equalization legislation in the UK. The intangible charges relate only to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. The Group does not believe these charges are relevant to an understanding of the underlying performance. Charges relating to acquired intangible assets are non-cash charges that reflect the historical expenditure of the acquired business. These acquired intangible assets continue to be supported by ongoing expenditure that is reported within adjusted operating profit. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as it is important to highlight their impact on operating profit, as reported, in the period in which the disposal transaction takes place in order to understand the underlying trend in the performance of the Group. The GMP equalization charge arises from the ruling in the Lloyds Bank High Court case in the UK in October 2018 that provided clarity on how pension plans should equalize GMP between males and females. The case ruling results in an income statement charge, an additional liability and the potential requirement to make back-payments to pensioners who may have been retired for some years. The Group excluded this charge from adjusted earnings as it related to historical circumstances.

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A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:

Global Online Learning

Global Online Learning sales increased by £65m or 12% from £521m in 2018 to £586m in 2019 and adjusted operating profit decreased by £15m or 15% from £99m in 2018 to £84m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019 and the impact of adopting IFRS 16 on profits, Global Online Learning sales increased by 8% in 2019 compared to 2018 and adjusted operating profit decreased by 17%. Revenue at Virtual Schools and OPM grew at 6% and 4% respectively due to increased enrolment and course registrations.

Virtual Schools grew revenue 6% and served 76,000 full time equivalent students through 42 continuing full-time virtual partner schools in 28 states, up 5% on last year. Six new full-time online, state- wide partner schools opened in the 2019-20 school year in the states of Oregon, Washington, Tennessee, Minnesota and California, while a contract was exited in North Carolina.

Higher Education Services (including OPM and Learning Studio) grew revenue 4%, due to growth in OPM, partially offset by a small drag from Learning Studio revenue, a learning management system, which was fully

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retire in 2019. In OPM, revenue grew 9%, with growth in course registrations of 5% and new programs launched more than offsetting programs terminated. The overall active program count grew to 347 from 325 in 2018.

During 2019, the OPM business continued to optimize its portfolio and reduced the number of partners to 25 from 35. This will allow the business to shift towards enterprise models where it has a number of programs with a single partner and can benefit from economies of scale in marketing and recruitment and integrate more content and assessment services into these partnerships.

The decrease in adjusted operating profit reflected inflation and investment in strategic growth priorities which offset the impact of sales increases, restructuring savings and lower staff incentives.

The Global Online Learning results also include costs of £nil in 2019 and £7m in 2018 in respect of the 2017- 2019 restructuring program. Amortization relating to acquired intangibles was £35m in 2019 compared to £43m in 2018 reflecting lower acquisition activity in recent years.

Global Assessment

Global Assessment sales increased by £76m or 8% from £955m in 2018 to £1,031m in 2019 and adjusted operating profit increased by £47m or 15% from £304m in 2018 to £351m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019 and the impact of adopting IFRS 16 on profits, Global Assessment sales increased by 4% in 2019 compared to 2018 and adjusted operating profit increased by 11%.

In Student Assessment, revenue declined slightly in 2019 with continued contraction in revenue associated with PARCC and ACT-Aspire multi-state contracts and contract losses which were partially offset by new contract wins. During 2019, Pearson won new contracts or signed renewals in several key incumbent states including Kentucky, Maryland, Colorado and New Jersey, as well as the federal NCES contract for delivering the National Assessment of Educational Progress (NAEP). Pearson also won back the testing contract in the state of Tennessee. Automated scoring continues to be a competitive strength for Pearson. In 2019, we scored 39 million responses with AI, up 8% from 2018.

In Professional Certification (VUE), global test volume rose 8% to c.16.5 million tests. Revenue in North America was up a high single-digit percentage, mostly driven by the IT sector with increased demand for cloud technology certifications through Microsoft and Amazon, and volume growth in an education contract launched at the end of 2018 which is now operating at its full run-rate. VUE signed over 40 new contracts in 2019, including the Project Management Institute (PMI) and our renewal rate on existing contracts continues to be over 95%.

Clinical Assessment declined as demand for new product only partially offset normal declines in products in the later stages of their lifecycle.

The increase in adjusted operating profit reflected the sales increase, the impact of restructuring savings and lower staff incentives.

The Global Assessment results also include costs of £7m in 2019 and £33m in 2018 in respect of the 2017-2019 restructuring program. Amortization relating to acquired intangibles was £27m in 2019 compared to £29m in 2018.

North American Courseware

North American Courseware sales decreased by £370m or 25% from £1,461m in 2018 to £1,091m in 2019 and adjusted operating profit decreased by £66m or 22% from £297m in 2018 to £231m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018

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and 2019 and the impact of adopting IFRS 16 on profits, North American Courseware sales decreased by 11% in 2019 compared to 2018 and adjusted operating profit decreased by 21%. The sales decline was primarily due to North American Higher Education Courseware which declined 12% with print declining by close to 30%, partially offset by modest growth in digital.

In 2019 the weaker performance was driven by several factors: Premium-priced print and digital products were substituted for digital only formats and sales of bundle units declined 45% during 2019; Campus bookstores bought less physical inventory due to changing student behavior, with over 50% of learners now preferring an eBook to a physical text with offsetting eBook growth of 18% during 2019 and; There were modest adoption share losses caused by delivery issues due to the implementation of the new ERP system in the second half of 2018 as well as the re-organization of the sales force.

The business is focused on regaining share over time as it builds traction from the rollout of our next wave of digital products on the Pearson Learning Platform (PLP), which launched in September 2019. 60% of all Revel titles will migrate onto the PLP in 2020 enhancing the faculty and student experience. The business is also launching a direct-to-learner version of the Pearson eBook in 2020, with enhanced features and AI-driven text-to-speech.

US Higher Education Courseware digital registrations, including eBooks, declined 2%. Good registration growth in Revel, up 9%, was offset by continued market pressure in Developmental Mathematics and the planned retirement and reprioritization of niche products with lower demand. There was continued good progress with Inclusive Access signing 162 new institutions in 2019, taking the total not-for-profit and public institutions served to 779. The business now has direct relationships with over 850 institutions, including 80 longer-standing contracts with for-profit colleges. In 2019, 1.8m Inclusive Access enrolments were served up from 1.4m in 2018, making up 9% of 2019 US Higher Education Courseware revenue, up 19% on 2018 on a like-for-like basis, excluding the 80 for-profit colleges.

The decrease in adjusted operating profit reflected the sales shortfall, inflation and the disposal of the K12 business which offset the impact of restructuring savings and lower staff incentives.

The North American Courseware results also include costs of £51m in 2019 and £7m in 2018 in respect of the 2017- 2019 restructuring program. Amortization relating to acquired intangibles was £nil in 2019 compared to £1m in 2018 reflecting lower acquisition activity in recent years. Net gains on business disposals of £13m in 2019 relate to the K12 sale with £4m of profits on several small disposals in 2018.

On March 29, 2019 the Group completed the sale of the US K12 school courseware business to Nexus Capital Management LP for headline consideration of $250m comprising an initial cash payment of $25m and an unconditional vendor note for $225m expected to be repaid in three to seven years.

International

International sales decreased by £31m or 3% from £1,192m in 2018 to £1,161m in 2019 and adjusted operating profit decreased by £6m or 2% from £305m in 2018 to £299m in 2019. The Group estimates that after excluding the impact of exchange rates and the impact of adopting IFRS 16 on profits, the contribution from businesses disposed in 2018 and 2019, International sales increased by 3% in 2019 compared to 2018 and adjusted operating profit increased by 2%.

Courseware revenue declined moderately. Declines in School Courseware in the UK and Australia offset growth in Italy. In Higher Education Courseware, revenue declines in the UK and Europe more than offset growth in Australia. There was with growth in English Language Courseware in China and School Courseware in the Middle East and Hispano America, offset by declines in school courseware in India and Higher Education courseware in South Africa following a change in government funding.

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In Student Assessment and Qualifications, revenue grew strongly, due to price and volume increases for A levels and GCSE qualifications in the UK and the delivery of a new digital assessment contract in Egypt. This was partially offset by continued market declines in Apprenticeships. In 2019, the business successfully delivered the UK’s National Curriculum Test (NCT), marking 3.8m scripts, up slightly from 2018. The NCT will be delivered by another provider in 2020.

PTE Academic saw continued strong growth in test volumes in Australia and New Zealand up 14% from 2018. This was driven by its use to support visa applications to the Australian Department of Home Affairs as well as good growth in New Zealand. The business recently announced the win of the UK Secure English Language Test (SELT) contract with the UK Home Office which is expected to drive future growth.

In English Services, underlying revenue grew slightly in our English Language School franchise in Brazil due to new product launches. In School Services, underlying revenue grew slightly due to price increases and new product launches in our private sistemas in Brazil. In Higher Education Services, enrolments grew 3% at the Pearson Institute of Higher Education (formerly CTI), however revenue declined modestly due to changes in mix.

Adjusted operating profit benefitted from higher revenue together with the benefits of restructuring.

The Group’s statutory operating profit for International included restructuring costs of £24m in 2019 and £9m in 2018. Also included in the statutory operating profit is amortization and impairment of acquired intangibles and gains and losses on disposal of businesses. In 2019 intangible charges of £89m compare to a charge of £26m in 2018 and this increase was due to an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market. In 2018 gains on the disposal of businesses amounted to £226m and result from the sale of the Wall Street English language teaching business (WSE), realizing a gain of £207m and the disposal of the equity interest in UTEL, the online University partnership in Mexico, realizing a gain of £19m. Gains on disposals in 2019 of £3m relate to adjustments to prior year disposals. The statutory operating profit in 2018 also includes the one-off £8m charge in respect of guaranteed minimum pension (GMP) equalization in the UK.

Enabling Functions

Enabling functions adjusted operating loss decreased by £78m or 15% from £527m in 2018 to £449m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Enabling Functions adjusted operating loss also decreased by 14%. The decrease in the loss reflects restructuring savings. The Group’s statutory operating profit for Enabling Functions included restructuring costs of £75m in 2019 and £38m in 2018.

Penguin Random House

The Group owned 25% of Penguin Random House, the first truly global consumer book publishing company. The Group’s share of Penguin Random House adjusted operating profits were £65m in 2019 compared to £68m in 2018. Penguin Random House performed solidly in 2019 with underlying revenue growth from a rise in audio sales, stable print sales, and the industry’s top bestsellers, including “Where the Crawdads Sing” by Delia Owen, “Becoming” by Michelle Obama, and bestselling books by Margaret Atwood, Tara Westover, Lee Child, Jamie Oliver, Jeff Kinney, and Dr. Seuss.

In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. The sale is expected to complete in the first half of 2020. At the end of December our share of the assets of Penguin Random House was classified as held for sale on the balance sheet.

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Liquidity and capital resources

Cash flows and financing

Net cash generated from operations decreased to £450m in 2020 from £480m in 2019. The decrease in cash generated from operations is largely explained by the drop-through of reduced profit due to COVID-19, offset by improved working capital.

Net interest paid at £50m in 2020 compares to £64m in 2019 and reflects a reduction in interest on lease liabilities and a reduction in payments related to FX contracts. Tax received in 2020 was £2m compared to tax paid of £30m in 2019 with the decrease mainly explained by refunds received in the US and UK relating to historical periods, the settlement of a historical tax audit and the impact of the disposal of our US K12 business.

Capital expenditure on property, plant and equipment was £53m in 2020 compared to £55m in 2019. There were no material property sales in 2019 or 2020. Capital expenditure on software intangibles decreased from £138m in 2019 to £81m in 2020. The reduction in expenditure on intangible capital reflects the reduction in investment in enabling function technology as the digital transformation program comes to an end.

Cash outflow from acquisitions in 2020 was £12m compared to £97m in 2019. There were no significant acquisitions in 2020, the net cash outflow on acquisition of subsidiaries in 2020 relates to deferred payments for prior year acquisitions and investment purchases. There were two small acquisitions in 2019, Lumerit and Smart Sparrow which together accounted for £40m of cash consideration, £40m of additional capital was invested in PRH, with the balance of the cash outflow on acquisitions in 2019 being in relation to investments and prior year items. The net cash inflow in respect of businesses and investments disposed was £631m in 2020 compared to a net outflow of £96m in 2019. In 2020 the cash received largely related to the disposal of PRH and the partial repayment of the receivable held in relation to the disposal of the US K12 business. In 2019 the cash outflow mainly relates to the US K12 Courseware business and reflects the deferral of proceeds and the level of working capital in the business at the disposal date.

Dividends from joint ventures and associates decreased from £64m in 2019 to £4m in 2020. The reduction is primarily due to the fact that the PRH disposal completed in April 2020. Dividends paid to company shareholders in 2020 of £146m compares to £147m in 2019. Cash returned to shareholders via the share buyback program in H1 2020 amounted to £176m in 2020. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

The cash outflow from financing of £299m in 2020 compares to £102m in 2019 and includes the repayment of borrowings of £230m in 2020 and £48m in 2019. These repayments include the repayment of the draw down of the revolving credit facility in 2020 and in 2019 the early redemption of various bonds (and their associated swaps). In 2019, the Group announced the refinancing of its bank facility, reducing its size to $1.19bn and extending its maturity date to February 2024. Drawings of £230m representing a financing cash inflow in 2019 were outstanding on this facility at the end of December 2019 and were repaid in 2020. In March 2019, the Group executed market tenders to repurchase €55m of its €500m 1.875% notes due 2021 of which €250m were outstanding at December 31, 2018. Also included in financing cash flows are repayments of lease liabilities which increased from £91m in 2019 to £92m in 2020. Dividends paid to company shareholders in 2020 of £147m compares to £148m in 2019. Cash returned to shareholders via the 2020 share buyback program amounted to £176m. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

This was offset by proceeds from the issuance of £350m guaranteed notes maturing June 4, 2030. The notes bear a coupon of 3.75% and have been issued in accordance with the ICMA Social Bond Principles 2018. The proceeds will be primarily used to finance and re-finance delivery of education in our Connections Academy, BTEC and GED businesses to help achieve the United Nations’ 4th Sustainable Development Goal (SDG) for a Quality Education. The social bond framework is a natural progression of Pearson’s long-standing commitment to integrating social and environmental sustainability into the business.

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Overall the Group’s net borrowings decreased from £1,016m at the end of 2019 to £463m at the end of 2020. In addition to the cash flows referred to above, the adoption of IFRS 16 added £666m of net debt on transition after taking account of both lease liabilities and the investment in finance lease receivable brought on balance sheet at January 1, 2019.

Capital resources

The Group’s borrowings fluctuate by season because of the school year’s effect on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, the Group’s maximum level of net debt normally occurs in July, and its minimum level of net debt normally occurs in December.

In assessing the Group’s liquidity, the impact of the COVID-19 pandemic has been modeled under several scenarios to ensure that the likelihood of a prolonged period of disruption has been appropriately considered in assessing the availability of funding to the Group and the ability of the Group to comply with its banking covenants. The modeling includes a severe reduction in revenue, profit and operating cash flow that extends through the full three-year period to ensure that the Group has adequate resources to manage for a prolonged period of disruption.

In assessing the Group’s ability to continue as a going concern for the period to June 30, 2022, the board analyzed a variety of downside scenarios including a severe but plausible scenario where the Group is impacted by all principal risks from 2021 (weighted for probability of occurrence) as well as reverse stress testing to identify what would be required to either breach covenants or run out of liquidity. The severe but plausible scenario modeled an impact from COVID-19 and other risks which in aggregate were significantly greater than seen in 2020 continuing throughout 2021 to 2022.

At December 31, 2020, the Group had available liquidity of c£1.9bn, comprising central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF) maturing February 2024. Even under a severe downside case where further declines in profitability compared to 2020 are modeled in 2021 and 2022, the Group would maintain liquidity headroom in excess of £800m and sufficient headroom against covenant requirements during the period under assessment even before modeling the mitigating effect of actions that management would take in the event that these downside risks were to crystallize.

At December 31, 2020, the Group’s net debt was £463m compared to £1,016m at December 31, 2019. The decrease is largely due to the receipt of proceeds of £531m from the PRH sale, the receipt of deferred proceeds of £105m from the US K12 sale, the £48m repayment of the loan to PRH and positive operating cash flow offset by interest and dividend payments and the cash outflow of £176m from the Group’s share buyback program.

Net debt is defined as all short-term, medium-term and long-term borrowing (including leases and related derivatives), less all cash, cash equivalents, other liquid resources and the net investment in finance lease receivables. Cash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-term deposits with maturities of more than 90 days and other marketable instruments which are readily realizable and held on a short-term basis. Total short-term, medium- term and long-term borrowing excluding derivatives amounted to £1,720m at December 31, 2020, compared to £1,664m at December 31, 2019 reflecting the issuance of a bond in 2020. At December 31, 2020, total cash and liquid resources were £1,116m, compared to £437m at December 31, 2019. The increase in 2020 was primarily driven by the receipt of proceeds of £531m from the PRH sale, the receipt of deferred proceeds of £105m from the US K12 sale, the £48m repayment of the loan to PRH, the £57m reduction in spending on software assets and the receipt of proceeds of £346m from the bond issue. These were offset by the cash outflow of £176m from the Group’s share buyback program and the £230m repayment of the Revolving Credit Facility which was drawn at December 31, 2019.

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In February 2021, the Group renegotiated its revolving credit facility, extending the maturity of $1bn of the facility by one year to 2025.

Contractual obligations

The following table summarizes the maturity of the Group’s borrowings, its obligations under non-cancellable leases, deferred consideration and pension funding obligations, exclusive of anticipated interest payments. Due to the variability of future interest payments, these have been excluded from the table below:

The UK pension plan’s most recent triennial actuarial valuation for funding purposes was completed as at January 1, 2018 and this valuation revealed a technical provision funding surplus of £163m. The plan expects to be able to provide benefits (in accordance with the plan rules) with a very low level of reliance on future funding from the Group.

At December 31, 2020 the Group had no capital commitments for fixed assets. There are contingent liabilities in respect of indemnities, warranties, legal and royalty claims and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition, there are contingent liabilities in respect of tax assessments as outlined in note 34 in “Item 18. Financial statements”. None of these claims, guarantees or assessments is currently expected to result in a material gain or loss.

Off-balance sheet arrangements

The Group does not have any off-balance sheet arrangements, as defined by the SEC for the purposes of Form 20-F, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations.

Borrowings

The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer-term loans from banks and capital markets.

At December 31, 2020, the Group had a $1.19bn committed revolving credit facility with a maturity date in February 2024. At December 31, 2019, none of the $1.19bn credit facility had been drawn. The facility set in place in March 2019, contains two key covenants measured for each 12-month period ending June 30 and December 31:

The Group must maintain the ratio of its profit before interest, tax and amortization to its net interest payable at no less than 3:1; and must maintain the ratio of its net debt to its EBITDA at no more than 4:1. “EBITDA” refers to earnings before interest, taxes, depreciation and amortization. The Group is currently in compliance with these covenants.

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See note 18 of “Item 18. Financial Statements” for information on the Group’s longer-term loans from banks and capital markets.

Treasury policy

The Group’s treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of the Group’s borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Related parties

There were no significant or unusual related party transactions in 2020, 2019 or 2018. Refer to note 36 in “Item 18. Financial Statements”.

Accounting policies

For a description of the Group’s principal accounting policies used refer to note 1 in “Item 18. Financial Statements.

Andy Bird

Appointed to the Board May 1, 2020. Appointed as Chief Executive Officer October 19, 2020. Member of the Reputation & Responsibility Committee.

Andy has a long and distinguished career spanning 35 years in the media industry, and is an accomplished, strategic leader of global consumer content businesses. Most recently he spent 14 years working for The Walt Disney Company, joining the business as President of Walt Disney International in 2004, before being appointed Chairman in 2008. He held this role for a decade, during which time he transformed the organization into a digital first, direct-to-consumer business, focused on serving the diverse needs of customers around the world. In addition, Andy worked to establish the iconic brand in China, through the creation of Disney English, teaching English language to Chinese families through immersive learning experiences. Prior to Disney, Andy worked in a number of senior positions at AOL Time Warner, and spent the earlier part of his career at Piccadilly Radio, Virgin Broadcasting Company, BSB Music Channel, Big & Good Productions and Unique Broadcasting

Sally Johnson

Appointed April 24, 2020, Sally joined Pearson in 2000 and has held various finance and operations roles across The Penguin Group, the education business and at a corporate level. She brings to the Board extensive commercial and strategic finance experience as well as transformation, treasury, tax, risk management, business and financial operations, investor relations and M&A expertise. She has held various senior level roles across the business, most recently as Deputy CFO of Pearson. Sally is a member of the Institute of Chartered Accountants in England and Wales and trained at PricewaterhouseCoopers. She was also a Trustee for the Pearson Pension Plan from 2012 to 2018.

Dame Elizabeth Corley, DBE

Appointed May 1, 2014. Chair of the Remuneration Committee and member of the Audit and Nomination & Governance Committees.

Elizabeth has extensive experience in the financial services industry, having been CEO of Allianz Global Investors, initially for Europe then globally, from 2005 to 2016. She continued to act as an advisor to the company until the end of 2019. Previously she was at Merrill Lynch Investment Managers and Coopers & Lybrand. Elizabeth is a Non-Executive Director of BAE Systems plc and Morgan Stanley Inc. Elizabeth is active in representing the investment industry and developing standards within it. She is chair of the Impact Investing Institute; a director of the Green Finance Institute and serves on the investment committee of the Leverhulme Trust. She was appointed Dame Commander of the Order of the British Empire in the Queen’s Birthday honors in 2019 for her services to the economy and financial services. Current notable commitments: BAE Systems plc (Non-Executive Director), Morgan Stanley Inc. (Non-Executive Director).

Sherry Coutu, CBE

Sherry has extensive experience in the technology industry. She has also served on the boards of a range of companies and charities, with a focus on working with entrepreneurs and specializing in consumer digital, information services, and education. Sherry is the Chair of Founders4Schools and founder of the Scale-Up Institute. Previously, she was CEO of Interactive Investor International plc, and has served on the boards of Cambridge Assessment, Bloomberg New Energy Finance and the London Stock Exchange plc as well as being SID and Remuneration Committee Chair of RM plc. Sherry has started and/or invested in over 60 technology businesses and served on the boards of Zoopla plc, Raspberry Pi, NESTA, and the Advisory boards of the National Gallery, Royal Society and LinkedIn. She was appointed Commander of the British Empire in the 2013 New Year honors for her services to entrepreneurship. Current notable commitments: Reinvent Technology Partners.

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Vivienne Cox, CBE

Appointed on January 1, 2012. Chair of the Nomination & Governance Committee and member of the Audit and Reputation & Responsibility Committees.

Vivienne has wide experience in energy, natural resources and business innovation. She worked for BP plc for 28 years in global roles including Executive Vice President and Chief Executive of BP’s gas, power and renewables business and its alternative energy unit. She is Chair of the supervisory board of Vallourec S.A., a leader in the seamless steel pipe markets, and a Non-Executive Director at pharmaceutical company GlaxoSmithKline plc, where she also acts as Workforce Engagement Director. She also has a deep understanding of regulatory and government relationships. She serves as Chair of the Rosalind Franklin Institute and Vice Chair of the Saïd Business School (part of Oxford University). She was appointed Commander of the British Empire in the 2016 New Year honors for her services to the economy and sustainability. Current notable commitments: GlaxoSmithKline plc (Non-Executive Director), Vallourec S.A. (Chair of the supervisory board).

Linda Lorimer

Appointed July 1, 2013. Chair of the Reputation & Responsibility Committee and member of the Audit Committee.

Linda has spent almost 40 years serving higher education. She retired from Yale in 2016 after 34 years at the university where she served in an array of senior positions including Vice President for Global & Strategic Initiatives. She oversaw the development of Yale’s online education division and the expansion of Yale’s international programs and centers. During her tenure, she was responsible for many administrative services, ranging from Yale’s public communications and alumni relations to sustainability, human resources and the university press. She also served on the boards of several public companies, including as Presiding Director of the McGraw-Hill companies. Linda is a member of the board of Yale New Haven Hospital, where she chairs the nominating and governance committee and is a trustee of Hollins University. She also remains on several consequential advisory committees at Yale University.

Michael Lynton

Appointed on February 1, 2018. Member of the Audit and Reputation & Responsibility Committees.

Michael has more than thirty years of senior-level management experience, including extensive experience in consumer marketing, traditional and digital media, and the adoption of new technologies. He also has broad public company governance experience. Michael served as CEO of Sony Entertainment from 2012 until 2017, overseeing Sony’s global entertainment businesses. He was also Chairman and CEO of Sony Pictures Entertainment from 2004. Prior to that, he held senior roles within Time Warner and AOL, and earlier served as Chairman and CEO of Penguin Group where he extended the Penguin brand to music and the internet. Michael is Chairman of Snap, Inc., Schrödinger, Inc. and Warner Music Group, and currently serves on the boards of IEX and Ares Management Corporation LLC. Current notable commitments: Ares Management Corporation LLC (Non-Executive Director), Snap, Inc. (Chairman), Schrödinger, Inc. (Chairman), Warner Music Group (Chairman), The Boston Beer Company, Inc. (Non-Executive Director).

Graeme Pitkethly

Appointed on May 1, 2019. Member of the Audit and Reputation & Responsibility Committees.

Graeme joined Unilever in 2002 and, prior to being appointed CFO and Board member, was responsible for Unilever’s UK and Ireland business. Previously, he had held a number of senior financial and commercial roles within Unilever, including Senior Vice President of Finance for Global Markets, Group Treasurer, Global Head of M&A and Chief Financial Officer of Unilever Indonesia. Graeme spent the earlier part of his career in senior

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corporate finance roles in the telecommunications industry with FLAG Telecom, and started his career at PricewaterhouseCoopers. Graeme is currently Vice Chair of the Task Force on Climate Related Financial Disclosures, Vice Chair of the 100 Group Main Committee and is a Chartered Accountant. Current notable commitments: Unilever plc (Chief Financial Officer).

Tim Score

Appointed January 1, 2015. Chair of the Audit Committee and member of the Nomination & Governance and Remuneration Committees.

Tim has extensive experience of the technology sector in both developed and emerging markets, having served as Chief Financial Officer of ARM Holdings plc, the world’s leading semiconductor IP company, for 13 years. He is an experienced non-executive director and serves as Chairman of The British Land Company plc, a role to which he was appointed in July 2019, a non-executive director of HM Treasury, and a Trustee of the National theater. Tim has garnered extensive financial and listed company experience during previous and current positions. He served on the board of National Express Group plc from 2005 to 2014, including time as interim Chairman and six years as the Senior Independent Director. Earlier in his career Tim held senior finance roles with Rebus Group, William Baird, LucasVarity plc and BTR plc. Current notable commitments: The British Land Company plc (Chairman).

Lincoln Wallen

Appointed January 1, 2016. Member of the Audit and Reputation & Responsibility Committees.

Lincoln has extensive experience in the technology and media industries, and is currently CTO of Improbable, a technology start-up supplying next-generation cloud hosting and networking services to the video game industry. Lincoln was CEO of DWA Nova, a software-as-aservice company spun out of DreamWorks Animation Studios in Los Angeles, a position he held until 2017. He worked at DreamWorks Animation for nine years in a variety of leadership roles including Chief Technology Officer and Head of Animation Technology. He was formerly CTO at Electronic Arts Mobile, leading their entry into the mobile gaming business internationally. Lincoln is a Non-Executive Director of the Smith Institute for Industrial Mathematics and Systems Engineering. His early career involved 20 years of professional IT and mathematics research, including as a reader in Computer Science at Oxford. Current notable commitments: Improbable (Chief Technology Officer).

The following table sets forth information concerning the Executive Committee, as at February 28, 2021.

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Tim Bozik

Tim has more than 30 years of extensive leadership experience in higher education products and the business of delivering them at Pearson. Tim earned a Bachelor’s Degree from the University of Notre Dame and currently serves on the Board of Directors for the Association of American Publishers.

Rod Bristow

Rod has worked in education for more than 30 years in the UK and internationally. Rod is a trustee for the Education and Employers Taskforce, a fellow of the Royal Society for Arts, governor for Harlow College and the BMAT multiacademy trust. Rod is a graduate of University College London.

Lynne Frank

Lynne has over 25 years of experience in the media industry. Previously, she has worked in companies such as WarnerMedia, ESPN/Disney and Turner Broadcasting. Lynne holds a degree in economics and business, and a certificate in corporate board governance from the University of California, Los Angeles (UCLA).

Gio Giovannelli

Gio has over 25 years of international business experience, including four CEO roles in Brazil, one of which was Grupo Multi. Previous board roles include BOVESPA-listed Natura and CVC Viagens. Gio graduated from Bocconi University, holds an Economics Ph.D. and is OPM graduate of Harvard Business School.

Albert Hitchcock

Albert has over 30 years of experience in the technology industry. Previously, Albert was Group CIO at Vodafone and prior to this was Global CIO at Nortel Networks. Albert is a Chartered Engineer and a Fellow of the Institute of Engineering & Technology.

Mike Howells

Mike has more than 20 years of international business experience. Previously, he has worked in the British diplomatic network and the UK Foreign, Commonwealth and Development Office. Mike holds a masters degree in International Law from the University of Nottingham and an Anthropology degree from University College London.

Ishantha Lokuge

Ishantha has more than 20 years of Silicon Valley experience. Previously, he was at Shutterfly, eBay and Healtheon/WebMD. He holds degrees in computer science from Brandeis and Tufts, as well as a graduate degree in Media Arts and Sciences from the Massachusetts Institute of Technology (MIT) Media Lab.

Cinthia Nespoli

Cinthia has 17 years of international legal experience. Previously, she has worked in the manufacturing sector at multinational companies. Cinthia was admitted to the Brazilian bar in 2004 and earned her law degree from Pontifícia Universidade Católica de Campinas and a postgraduate degree in tax law from Pontifícia Universidade Católica de São Paulo.

Anna Vikström Persson

Anna Vikström Persson has over 20 years of international HR experience. Previously, Anna held executive positions at Sandvik, SSAB and Ericsson. Anna has a certificate in German and a masters in law, as well as professional HR qualifications from both London Business School and Michigan Business School.

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Bob Whelan

Bob has over 40 years years of significant expertise in testing and assessment. Previously, Bob worked at Personnel Decisions International, as well as National Computer Systems (NCS) which Pearson acquired in 2000. Bob earned his BA from the University of Alabama in finance and economics.

On 8 March 2021 the Group announced a new strategy, including a new divisional structure. As such, the following table sets forth the composition of the Executive Committee following the implementation of the new organizational structure that will come into effect during 2021.

Compensation of senior management

It is the role of the Remuneration Committee (the Committee) to approve the remuneration and benefits packages of the Executive Directors and other members of the Pearson Executive.

The principal duties of the Committee are to:

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Remuneration policy

The 2020 Directors’ Remuneration Policy (2020 policy) described was approved by our shareholders at the Annual General Meeting held on 24 April 2020. The 2020 policy is underpinned by Pearson’s remuneration principals and aligns the remuneration arrangements for Executive Directors with our strategy and the interests of our long-term shareholders.

The Committee’s starting point continues to be that total remuneration should reward both short and long- term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional performance.

Total remuneration is composed of fixed and performance-linked elements, with each element supporting different objectives. Base salary: helps to recruit, reward and retain employees. Base salary reflects the employment market, level, role, skills, experience and individual contribution. Allowances and benefits: help the company to recruit and retain employees. Retirement benefits: help to recruit and retain staff and recognize their long-term commitment to the company. Annual incentives: Recognize and motivate the achievement of annual business goals and strategic objectives. Annual incentives typically have a focus on key financial and non-financial metrics and reward employees for the company’s performance and their individual contribution to the success of the company. Long-term incentives: help to recruit, reward and retain people, drive long-term earnings, share price growth and value creation to align the interests of Executives and shareholders. Long-term incentives encourage long-term shareholding and commitment to the company and link management’s long-term reward and wealth to corporate performance in a flexible way.

For Executive Director benchmarking purposes, the Committee reviews remuneration by reference to different comparator groups including survey data from companies of similar size and scope, excluding financial services companies.

Consistent with its policy, the Committee places considerable emphasis on the performance-linked elements i.e. Annual and Long-term incentives. The Committee continues to review the mix of fixed and performance- linked remuneration on an annual basis, consistent with its overall philosophy.

Appointment of Chief Executive Officer

In October 2020, Andy Bird was appointed as Chief Executive after a very thorough recruitment process. In order to secure Andy Bird’s appointment, the Committee developed a remuneration package mindful of practice in Andy Bird’s home market – the US – where pay rates are substantially higher than in the UK and the way pay is structured is often very different. The Committee believe that such a package was an essential bridge between practices in order to secure an exceptional candidate who will lead Pearson through the next phase of its strategic development.

Going forward remuneration arrangements

With the exception of the co-investment award, a one-off arrangement to support his recruitment, Andy Bird’s remuneration arrangements were set in line with our approved Directors’ Remuneration Policy, which is aligned to UK market practice and key governance principles. Whilst within policy, the Committee recognizes that this package represents an uplift over his predecessor. When setting the package, the Committee considered, as is typical practice, Andy Bird’s proven skills and experience, the remuneration he received in his prior role and compensation levels for Chief Executive roles at comparable companies (including both FTSE-listed

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companies and global sector comparators). After careful evaluation, the Committee determined that such a package was appropriate, balancing these various reference points. While the Committee was mindful of internal relativities, it believed that securing such an exceptional candidate as Andy Bird was fundamental to Pearson’s future success.

Appointment of Chief Financial Officer

Sally Johnson was appointed as Chief Financial Officer on 24 April 2020. On appointment, Sally’s base salary was set at £515,000 per annum, in line with the starting salary of Coram Williams in 2015. Her maximum AIP opportunity is 170% of salary and she will be granted an annual LTIP award with a maximum face value of 245% of salary.

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Base salary

Base salaries are set to provide the appropriate rate of remuneration for the job, taking into account relevant employment markets, business sectors and geographic regions.

Base salaries are typically reviewed annually taking into account: general economic and market conditions; the level of increases made across the company as a whole; particular circumstances such as changes in role, responsibilities or organization; the remuneration and level of increases for executives in similar positions in comparable companies in accordance with their regional employment market; and individual performance.

While there is no maximum salary level or maximum increase that may be offered, salary increases will normally be in line with typical increases awarded to other employees in the Group.

However, increases may be above this level in certain circumstances such as:

Allowances and benefits

Allowances and benefits comprise cash allowances and non-cash benefits and which may include:

Executive Directors are also eligible to participate in savings-related share acquisition programs, which are not subject to any performance conditions, on the same terms and to the same value as other employees.

Where an Executive Director is required to relocate to perform their role, appropriate one-off or on-going expatriate/relocation benefits may be provided (e.g. housing, schooling etc.).

The Committee may introduce other benefits, where it is considered appropriate to do so, taking into account the individual circumstances, the country of residence of a Director, the benefits available to all employees and the wider external market.

The cost of the provision of allowances and benefits varies from year to year depending on the cost to the company and there is no prescribed maximum limit. However, the Committee monitors annually the overall cost of the benefits provided along with market data, to ensure that it remains appropriate.

Retirement benefits

Employees in the UK are eligible to join the Money Purchase 2003 section of the Pearson Group Pension Plan. Executive Directors are eligible to join this plan or receive a cash allowance of equivalent value.

If any Executive Director is from, or works, outside the UK, the Committee retains a discretion to put in place retirement benefit arrangements for that Director in line with local market practice including defined benefit pension arrangements operated by Pearson locally. The maximum value of such arrangement will reflect local market practice at the relevant time.

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The Committee will also honor all pre-existing retirement benefit obligations, commitments or other entitlements that were entered into by a member of the Pearson Group before that person became a Director, such as participation in the Final Pay section of the Pearson Group Pension Plan, which is closed to new members.

New appointments

From 2020, in line with our approved 2020 policy, new executive appointments to the Board are eligible to receive pension contributions of up to 16% of pensionable salary or a cash allowance of up to 16% of salary in line with the maximum company contribution as a percentage of salary that UK employees who are over 45 are eligible to receive.

UK Executive Directors who are, or become, affected by the lifetime allowance may be provided with appropriate benefits, as an alternative to further accrual of pension benefits such as a cash supplement, in line with the treatment for the employee population.

The pension entitlements of each Director are as follows:

Andy Bird

Andy Bird receives a payment in lieu of pension at 16% of his base salary. This is the new hire Executive Director rate in accordance with our Directors’ Remuneration Policy as approved at the 2020 AGM which was set in line with the pension provision for UK employees of a similar age.

Sally Johnson

Sally is an existing member of the Final Pay Section of the Pearson Pension Plan. Her accrual rate is 1/60th of pensionable salary per annum, restricted to the Plan earnings cap (£170,400 per annum in 2020/21). There are no enhanced early retirement benefits.

John Fallon

John Fallon was a member of the Final Pay Section of the Pearson Pension Plan. Mr Fallon left Pearson on 31 December 2020 at which point his benefit accrual in the Plan ceased. Mr Fallon attained the maximum service accrual for this benefit when he reached 20 years’ service in October 2017. With effect from this date, he had accrued a benefit of two-thirds of his final pensionable salary and no further service-related benefits were accrued under the Plan. Based on the 2020/21 earnings cap of £170,400, he will have accrued a pension of £108,680 per annum at this time.

In addition, during 2020 he received a taxable and non-pensionable cash supplement in lieu of the previous Funded Unapproved Retirement Benefits Scheme (FURBS) arrangement. This supplement was reduced from 26% to 23% of base salary during 2020 as the first annual step in reducing John Fallon’s pension entitlements to align with the UK workforce rate of 16% of base salary under our revised Directors’ Remuneration Policy. There are no enhanced early retirement benefits.

Coram Williams

Coram Williams was a member of the Final Pay Section of the Pearson Pension Plan. Coram left Pearson on 24 April 2020, at which point his benefit accrual in the Plan ceased. He had an accrual rate of 1/60th of pensionable salary per annum, restricted to the Plan earnings cap (£166,200 per annum in 2019/2020), with continuous service with a service gap. There are no enhanced early retirement benefits.

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Annual incentives

Measures and performance targets are set by the Committee at the start of the year, with payment made after year end following the Committee’s assessment of performance relative to targets.

Annual Incentive Plans are discretionary. The Committee reserves the right to adjust payments up or down if it believes that the outcome does not reflect underlying financial or non-financial performance or if such other exceptional factors warrant doing so.

The Committee may apply malus and / or clawback for a period of five years in circumstances, such as financial misstatement, individual misconduct or reputational damage to the company.

Annual incentives will not exceed 200% of base salary. For the Chief Executive, the individual maximum incentive opportunity is 200% of base salary and 170% for the Chief Financial Officer. There is normally no pay-out for performance at threshold. 50% of the maximum is payable for on-target levels of performance.

The Committee has the discretion to select the performance measures and relative weightings from year to year to ensure continuing alignment with strategy and to ensure targets are sufficiently stretching. The Committee sets performance targets for each measure annually. Annual incentives will normally be based on financial and strategic performance targets. Financial metrics will normally account for at least 75% of the total annual opportunity with the remaining portion normally being based on strategic and / or performance against personal objectives.

The plan is designed to incentivize and reward underlying performance. Actual results may be adjusted to remove the effect of foreign exchange and portfolio changes (acquisitions and disposals) and other relevant factors that the Committee considers do not reflect the underlying performance of the business in the performance year.

The funding of annual incentives will normally be related to the performance against financial and strategic imperatives performance targets. For the 2021 financial year the annual bonus will be based 30% on adjusted operating profit, 30% on sales performance, 20% on operating cash flow and 20% on strategic measures. Each performance measure will operate independently. There will be no changes to the maximum annual incentive opportunities for 2021.

Strategic measures will be measured, using third party data or externally audited internal data (where third- party data is not available or applicable). Performance metrics linked to strategic objectives can be selected annually to support the Group’s strategy. A pay-out will only be made if a minimum level of performance has been achieved under the financial metrics, as determined by the Committee each year.

Details of performance measures, weightings and targets will be disclosed in the annual Remuneration Report for the relevant financial year if and to the extent that the Committee deems them to be no longer commercially sensitive. The performance period is one year.

Long-term incentives

Awards of shares are made on an annual basis, which vest on a sliding scale based on performance, assessed against corporate performance targets measured at the end of the three-year performance period.

Awards are normally subject to a post vesting holding period for two years following the end of the performance period. For awards granted prior to 2020 the holding period applied will be in-line with the approach set out in the Directors’ Remuneration Policy in place at the time of award.

Participants may receive additional shares representing the gross value of dividends that would have been paid on shares that vest during the performance period.

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The Committee reserves the right to adjust pay-outs up or down before they are released if it believes that the vesting outcome does not reflect underlying financial or non-financial performance or if such other exceptional factors warrant doing so. In making such adjustments, the Committee is guided by the principle of aligning shareholder and management interests.

The Committee may apply malus and / or clawback for a period of five years in circumstances, such as financial misstatement, individual misconduct, or reputational damage to the company.

The maximum award is 350% of base salary in respect of a financial year.

The Committee will determine the performance measures, weightings and targets governing an award of shares prior to grant to ensure continuing alignment with strategy and to ensure that targets are sufficiently stretching.

The Committee establishes a threshold below which no pay-out is achieved and a maximum at or above which the award pays out in full. The proportion of the award that vests at threshold may be up to 25%.

Awards will normally be subject to the achievement of targets for earnings per share, return on invested capital and relative total shareholder return (weighted equally). The Committee may determine that different measures or weightings may apply for future awards, however, the committee would intend to consult with shareholders in advance if a different performance measure was to be used or if there was to be a significant change in the weighting of measures.

Sally Johnson was the only Executive Director eligible for a Long-Term Incentive Plan (LTIP) award in 2020. The maximum face value of the award granted was 245% of base salary. The Committee exercised its discretion in determining the appropriate share price to use for this purpose which is normally the closing share price on the trading day prior to the date of grant (which would have been 459.80p). However, mindful of recent share price volatility, the Committee exercised its discretion to use the five-day average share price to 1 March 2020, which was the share price used to determine share awards for the wider employee population and resulted in a lower number of shares being granted.

The 2020 LTIP award will vest on 1 May 2023 subject to the following performance targets: