Pearson : Risk Governance Report

Risk

Risk management

Effective risk management is essential to executing our strategy, achieving sustainable shareholder value, protecting our brand, and ensuring good governance.

The table below sets out the Group's governance structure for risk management.

The internal audit function (Assurance)

The internal audit function is responsible for providing independent assurance to management and the Audit Committee on the design and effectiveness of internal controls, to mitigate strategic, financial, operational and compliance risks.

• - Responsible for the Group's strategy

• - Ultimately responsible for reviewing management's assessment of the

  Group's principal risks

• - Approves the annual budget and long-range financial plans

• - Determines risk appetite in line with the Group's strategy

• - Provides oversight and assurance to the Board concerning the integrity of the company's procedures for identifying, assessing, managing, and reporting on risk

• - Monitors and evaluates the Group's compliance and risk management processes and control programmes

• - Conducts targeted reviews of key risks

• - Approves the Group risk management framework

• - Approves internal audit plans

- Considers the Group's impact on the communities in which Pearson operates, including ensuring that risk management processes are in place to manage relevant risks

Pearson Executive Management (PEM) (identification, assessment, and mitigation)

• - Comprises the CEO, CFO, and other senior leaders as shown on page 68

• - Accountable for ensuring that risks are mitigated in line with risk appetite

• - Responsible for the execution of the Group's strategy

• - Responsible for reviewing and approving the principal risks, mitigation plans and controls

• - Reports to the Audit Committee on risks where required

Plc Board (oversight)

Audit Committee (oversight)

Reputation & Responsibility Committee (oversight)Enterprise Risk Management function (identification, assessment, and mitigation)

• - Prepares the Group risk management framework

• - Maintains the Group risk register and the list of principal risks

• - Reviews risks with divisions to assess and monitor risk exposures

• - Prepares a consolidated risk view for the Executive Management

• - Provides oversight over Group risk management activity

• - Reports to the Audit Committee on risks

- Senior leadership is responsible for monitoring, mitigating, and reporting on risk

- Risk committees within each division assess the principal risks and implement further sub-committees as appropriate for division-specific exposures

- Functional heads work in conjunction with group technical experts to monitor and manage significant Group risks. These experts provide operational support, guidance, policy, and advice

- Dedicated teams providing guidance, review, and assurance over key operational and financial risks including finance, legal, and compliance

- Personnel across the company are trained in relevant risk management to identify, assess, mitigate and escalate risks

Senior leadership (identification, assessment, and mitigation)

Technical specialists (identification, assessment, and mitigation)

Risk management experts (identification, mitigation, and assurance)

Pearson Personnel (identification, assessment, and mitigation)

Risk oversight

Risks are managed by members of the Pearson Executive Management team (PEM), either on a divisional basis or by function (as set out in the accountability for principal risks section on page 63).

Risk owners conduct regular risk reviews with their leadership teams, consulting others where appropriate, including technical specialists, either within their division or operating in one of the centres of expertise. Risk reports are shared with key stakeholders, including the Enterprise Risk Management team, and are discussed at PEM team meetings.

The Audit Committee has the delegated responsibility for reviewing the effectiveness of the Group's procedures for the identification, assessment, management, and reporting of risk.

Each division is expected to present an overview of its risk register to the Audit Committee at least annually and to provide an annual deep dive on key risks, supported by central risk team experts as required.

Deep dive sessions are also held with enterprise-wide functions such as tax, treasury and cyber security.

The Audit Committee uses these deep dive sessions to understand the rigour of management's risk scanning and to challenge any judgements being made in response to risks.

The internal audit team provides independent assurance to the

Audit Committee on the design and effectiveness of internal processes, to mitigate strategic, financial, operational and compliance risks. Internal audit plans are aligned to the principal risks but also consider other key risk areas and other assurances available. Plans are agreed in advance with the PEM team and the Audit Committee.

Risk environment

The Group operates in markets in learning, content, assessment and qualifications where it has held leading positions over several years and where the businesses and markets have progressively become more digital.

Factors affecting the markets in which the Group operates include the Group's position as an accredited provider of high-stakes tests, organisational capability, competitive dynamics, learner preferences, delivery methods including the growing adoption of AI tools and the reputation of companies operating in the market. The Group seeks to maximise the opportunities from changing market conditions while balancing its expansion with appropriate monitoring and understanding of associated risks.

Further information on the Group's divisions and key markets can be found in the strategy section on pages 12-21.

Risk identification and monitoring

Our risk identification processes follow a dual approach. Firstly, we take a top-down view which considers strategic risks relevant across the whole of Pearson. Secondly, we take a bottom-up approach at a divisional or functional level, to identify and assess a complete list of each business unit's risks, with key risks highlighted in management reporting and in each division's long-range plan.

Detailed interviews are conducted throughout the year with each division to assist with risk assessment and management. Risks are then ranked according to their likely impact as principal risks, significant near-term risks, emerging risks, or other risks.

Classification as principal risks, significant near-term risks, and emerging risks

We define our principal risks as those which could have a significant and ongoing effect on the Group's valuation by reducing the demand for, or profitability of, its products and services. This assessment considers multiple dynamics including the duration, velocity, and size of the potential impact. Effective management of these risks is essential to executing our strategy, achieving sustainable shareholder value, maintaining our reputation, and ensuring good governance. However, they do not comprise all the risks associated with our business, and are not set out in priority order. Additional risks not known to management, or currently deemed to be less material, may also have an adverse effect on our business.

Significant near-term risks are risks which could have a significant near-term cash impact or affect the Group's short-term results, but would not be expected to have a significant ongoing effect on company valuation.

Emerging risks are risks which we believe are well mitigated in the short term but may represent a significant future opportunity or threat. These include company-specific risks and risks affecting the macro economy.

Principal risks

The Board of Directors has undertaken a robust assessment of the current risks facing Pearson, in accordance with Provision 28 of the 2018 UK Corporate Governance Code. This assessment identified the following principal risks, as well as a number of emerging risks and risks which while more modest could have a significant near-term impact. For each of our principal risks, the tables below identifies:

• - the change in the risk over the last 12 months

• - the movement and outlook for that risk

• - management actions

• - the link between the risk and Group strategy

• - our risk tolerance

• - examples of the risk

• - risk 'contagion', i.e. the extent to which issues in one area could increase the risk in other areas

• - the assessed risk 'velocity', i.e. an indication of the speed at which a risk could materially impact the Group.

Accreditation risk

Termination or modification of accreditation due to policy changes or failure to maintain the accreditation of our courses and assessments by states, countries, and professional associations, reducing their eligibility for funding or attractiveness to learners. Awarding bodies may also require modification of tests to continue to receive accreditation which may reduce the convenience to learners or increase the cost of delivery.

Movement and outlook

The risk has increased to a high level, from moderate-high, due to an uncertain political environment with upcoming elections in the UK and US and upcoming contract renewals in a number of assessments businesses during 2024. During the year the Group achieved accreditation to deliver the Pearson Test of English in Canada for study and migration. BTEC results season was successfully executed. The risk is expected to remain at an elevated level for the foreseeable future.

Management 1. actions

Focus on creating a culture where learners and awarding bodies can depend on Pearson and know that we will meet their standards. We recognise our obligations, particularly in the testing space, to ensure prompt and accurate exam grading, and take actions accordingly.

• 2. Continuing the evolution and enhancement of security, data and governance standards to ensure the Group continues to meet and exceed the required standards to be an accredited provider.

• 3. Broadening the range of services offered and the range of stakeholders. During the year, Pearson Test of English won recognition for Canadian

  Student Direct Stream and economic migration visa applications and the Group acquired PDRI which provides recruitment assessment for

  Federal employees.

• 4. Continue to grow full-service offering, including online proctoring. This helps to ensure the Group has offerings that can cater for customers' many needs, especially in the global assessment market.

• 5. Focus on flawless or near flawless execution of marking and delivering assessment results.

Link to strategy

Ensuring we can participate in satisfying the growing need for accreditation and certification.

Risk toleranceExamples of risks

Political and regulatory.

Low - Pearson seeks to operate in stable, well-regulated markets with known requirements to be accredited, and then has a low tolerance for taking risks which may jeopardise that accreditation.

Risk contagion

Risk velocity

Changes in regulation or loss of contracts could occur within a 12 month period.

Artificial Intelligence, Content and Channel risks

Description

The risk that Pearson's intellectual property is harder to protect as a result of increased content generation through artificial intelligence and that Pearson's content and method of delivery (channel) is, or is perceived to be, insufficiently differentiated in terms of outcomes or learner experience. This could lead to lost sales and a significant decline in the market value of Pearson.

Movement and outlook

The risk has increased from a moderate to a moderate-high level. The Group is demonstrating capability in leveraging improvements in AI but the accelerating pace of change increases the risk.

The risk is expected to remain at a similar level for the next 12 months, as more companies bring new products and services to market. The Group is also anticipating revenue growth from a number of new products, including

Channels, which have not yet been proven on a large scale.

Management 1.

Use of AI in both developing content and delivering outcomes, such as the

actions

successful beta launch of AI study tools in Higher Education and use of large language models in English Language Learning.

• 2. Increasing use of interactivity and multi-channel content, particularly on Pearson+, including by offering podcast content and videos (Pearson+ Channels).

• 3. Launch of content offerings in Pearson VUE to aid test takers in their test preparation.

• 4. Deployment of new curriculum materials in Virtual Schools and launch of the Connections Academy Career Pathways programme.

• 5. Actions to reduce piracy and to manage and enforce intellectual property rights including legal enforcement where appropriate.

• 6. Investment in acquisitions offering new methods for testing or delivering content.

Link to strategy

Managing AI, content and channel risk helps achieve our offering of high-quality, affordable products which lead to better access and outcomes, protecting revenue.

Risk toleranceExamples of risks

• - Intellectual property protection

• - Method of delivery

• - Balance of content creation and content purchased

Medium - This is a strategic risk and Pearson should be rewarded for successfully developing and delivering products and services that consumers value. Some risk is accepted to ensure the consumer remains at the centre of what we do.

Risk contagion

Accreditation risks are likely to have a financial impact but have limited risk of contagion.

Risk velocity

Significant short-term impacts are possible but due to longer-term contracts or the time required for instructors, or consumers themselves, to learn how to use the new products and services, it is more likely that the impact will be felt over years.

Failure to deliver high-quality and engaging products and services may have an impact on reputation and responsibility risks and on meeting customer expectations.

Capability risk

Description

Movement and outlook

The risk continues to be rated at moderate. The Group has successfully executed its cost efficiency programme resulting in a lower cost base, albeit ongoing maintenance of cost levels needs constant and rigorous monitoring and control. The Group's financial plan assumes that costs will be successfully managed in all divisions, despite the lower cost base.

Further improvements have been made in data and cyber governance and resilience during the year. The Group is undergoing a migration process that will enhance its system resilience and reduce the risk of outages. The migration involves moving key servers to the cloud or to a new consolidated US site, with the major remaining work streams expected to be completed during 2024. Agility has been demonstrated in the use of new technology such as the use of generative AI. Capability remains a foundational requirement to

continue to meet the Group's objectives, with greater risk where the Group is entering new markets, such as Workforce Skills, which has experienced some delivery challenges.

Inability to meet our contractual obligations or to transform as required by our strategy due to infrastructure, systems or organisational challenges.

Management 1. Risk ratings are applied to each system and plans put in place to maintain

actions

system up time. Recovery plans are in place in the event of downtime to allow customers to maintain as much functionality as possible or to get back online as soon as possible.

• 2. Regular patching, activity, employee training and security measures such as multi-factor authentication help to ensure the stability and security of key Group systems.

• 3. Migration of servers for platform products to the cloud to enhance resilience.

• 4. Enhanced agility, notably in how the Group has been able to develop and deploy beta tests of products using large language models.

Management 5. actions

continued

Dedicated resources to focus on testing and developing AI products and to understand evolving market capabilities.

• 6. Supply chain planning to ensure that the Group is able to respond should a key customer or supplier fail.

• 7. Enhanced focus on developing products to serve new markets and user groups and cross-selling between divisions.

• 8. Employee engagement monitoring and learning development programmes to help retain key talent. Senior management has undertaken leadership capability assessments and changes have been made to enhance capability, including new hires and development training.

• 9. Acquisitions such as Faethm and Mondly have been made to build the Group's capability in key strategic areas, such as AI and direct to consumer language learning.

• 10. The Group regularly reviews its cost base to ensure its competitiveness and identify operations for efficiencies.

Link to strategy

Capability relates to the three priorities to unlock growth:

• - Consumer-focused and technology-enhanced approach

• - Portfolio and organisational structure

• - Talent and culture

Risk toleranceExamples of risks

• - Business resilience

• - Business transformation and change

• - IT resilience

• - Safety and corporate security

• - Talent

Medium - the Group aims to ensure it has the capability to deliver strategic objectives, requiring strong coordination and planning, but without stifling innovation.

Risk contagion

Risk velocity

Failures of capability could impact within a six-month period.

Failures in capability could result in increased reputation and responsibility risk and failures to meet customer expectations.

Competitive marketplace

Significant changes in our target markets could make those markets less attractive. This could be due to significant changes in demand or in supply which impact the addressable market, market share and margins (e.g. changes in enrolments, in-sourcing of learning and assessment by customers, open educational resources, a shift from in-person to virtual learning or vice versa, or innovations in areas such as generative AI).

Movement and outlook

The risk has remained at a moderate-high level.

The largest risk to the Group relates to the large value of customer contracts scheduled for renewal during 2024, particularly in US Student Assessment.

Pearson's Virtual Schools business faces revenue headwinds following the termination of one of its major customers and with another due to terminate in the fall of 2024. Both have decided to operate services in-house.

In Higher Education, the courseware market includes channel partners who operate at low margins, as well as competition from various sources including, open education resources and new entrants. The Group faces a risk of financial loss should a channel partner fail with balances outstanding to the Group. Market share loss in Higher Education stabilised during 2023. Channels was launched as an additional paid product potentially offering a new revenue stream.

The risk is expected to remain elevated for the next 12 months, due to the level of competitor activity being observed, as well as continued investment in educational technology.

Management 1. actions

The Group's Assessment & Qualifications and Virtual Learning businesses, as service businesses, have a particular focus on working in partnershipwith customers, including IP owners, to ensure that their needs are being met, resulting in high retention rates on the long-term contracts in place.

2. A significant proportion of the Group's revenue comes from governments or bodies funded by governments (for example, schools and colleges) where higher retention rates are typically observed, provided accreditation and customer expectations risks are well managed (see Accreditation for further information).

3.

The strategy in Higher Education has been focused on reducing reliance on channel partners and the opportunity for secondary resale by providing digital solutions.

Management 4. actions

continued

The Group invests in emerging and evolving technologies to lead and respond to changes in market dynamics. Examples include the launch of AI products usinglarge language models in Higher Education in beta and use of AI in workforce.

5. The Group's strategy is to address learners wherever they choose to learn, reducing reliance on learners' choosing particular types of institution. Direct to consumer offerings such as Mondly and Pearson+ can be accessed via smartphone by anyone, and VUE's international test centre network (also used by Pearson Test of English) allows test takers to sit exams close to home. This complements our existing businesses such as Higher Education and US Student Assessment where the Group isintroduced to learners through their college or school.

6.

Competitive analysis is undertaken to monitor and respond to competitivethreats, with decentralised teams able to mobilise quickly to maximise opportunities and manage risk.

Link to strategy

We have identified three big global opportunities and associated marketplaces:

• - Technology disruption in education

• - The workforce skills gap

• - The growing need for accreditation and certification

Risk toleranceExamples of risks

• - Substitutes

• - Market pricing

• - Product differentiation

• - Consumer learning preferences

Medium - This is a strategic risk associated with successfully selecting attractive global opportunities and seizing them. Pearson seeks to lead the shift to digital ways of learning and consequently to maintain strong market positions.

Risk contagion

Changes in the competitive marketplace could increase portfolio change.

Risk velocity

Changes are to be expected in the global learning market over the Group's five-year planning horizon, but the timing and pace of such changes is uncertain. Pearson's Assessment & Qualifications and Virtual Schools businesses benefit from long-term contracts, which reduce the potential velocity in these divisions in particular.

Customer expectations

Rising end-user expectations increase the need to offer differentiated value propositions, risking margin pressure to meet these expectations and potential loss of sales if not successful.

Movement and outlook

The risk has remained at a moderate level. While the risk is well managed within many of our businesses, as demonstrated by strong NPS scores and retention rates, cost pressures and a changing technology landscape are leading to changes in customer expectations. Evidence of higher customer expectations has been observed in the direct to consumer market, particularly for Mondly, where the cost of acquiring and retaining new learners is high, leading to some re-balancing towards offering language tuition for enterprises. Concerns about identity verification and the risk of cheating have resulted in some increase in demand for in-person testing in our VUE and PTE businesses.

In Workforce Skills, feedback from customers led to a re-focus on modular solutions rather than a fully integrated platform as previously envisaged.

The outlook is expected to be similar for the next 12 months.

Management 1. Monitoring and targeting strong NPS scores, responding to

actions

customer feedback.

• 2. The Group's direct to consumer offerings of Mondly and Pearson+ provide valuable insights about usage.

• 3. Our service businesses conduct regular reviews with customers to ensure that their expectations are well understood and met and where gaps arise, steps are taken to address these concerns.

Link to strategy

Focus on delighting our customers and meeting their expectations.

Risk toleranceExamples of risks

• - Customer experience

• - Data architecture and usage

• - Accessibility

Medium - This is a strategic risk and Pearson should be rewarded for successfully developing and delivering products and services that consumers value. Some risk is accepted to ensure the consumer remains at the centre of what we do.

Risk contagion

Risk velocity

Typically, one to three years, as long-term contracts run off.

Portfolio change

Description

Failure to effectively execute desired or required portfolio changes to promote scale or capability and increase focus on key divisional and geographic markets, due to either execution failures or inability to secure transactions at appropriate valuations.

Movement and outlook

The risk has reduced to moderate-low as recent acquisitions are largely integrated and disposals have been successfully executed.

The risk level will remain at a similar level until further portfolio activity is undertaken.

Management 1. Investment plans included in strategic plans, aligning requirements with

actions

divisional structure.

• 2. Disposal of the Pearson Online Learning Services business, helping to focus the group on future growth opportunities.

• 3. Acquisition of PDRI, significantly expanding Pearson's services to the US federal government.

• 4. An experienced Corporate Finance team to execute transactions, supported by a dedicated post-deal Operations team.

• 5. Pearson Ventures allows Pearson to take stakes in companies in early funding rounds supporting growth through innovation.

Link to strategy

Portfolio and organisational structure to unlock growth.

Risk toleranceExamples of risks

• - Identification of requirements

• - Achieving value on acquisitions/disposals

• - Integration of acquisitions

Medium - The Group seeks to balance carefully the opportunity to achieve growth through increasing capability and/or scale with the execution risk of portfolio change.

Risk contagion

Risk velocity

The speed of achieving the full benefits of an acquisition will vary depending on the size and scope of the acquisition, but typically from six months for a simple small acquisition to two years for a larger complex transaction.

Failures in managing portfolio change could impact capability and the ability to meet customer expectations.

Failure to produce products and services meeting customer expectations could also impact reputation and responsibility risks.

Reputation & responsibility

The risk of serious reputational harm through failure to meet obligations to key stakeholders. These include legal and regulatory requirements, the possibility of serious unethical behaviour and serious breaches of customer trust.

Movement and outlook

The risk remains at a moderate to high level, due to high ongoing cyber security threats and reputational risks, including data privacy and biometric risks, and the complexity of navigating different regional regulatory environments.

The Group's aim is to operate in a highly reputable and responsible manner and so we intend to maintain strong mitigations to reputation and responsibility risks. However, numerous threats exist including from those who seek to do harm to the Group or to its customers, including nation-state actors, organised criminal rings, and ransomware attackers, so constant vigilance is required.

Management 1. actions

Dedicated risk management teams throughout the organisation monitor and respond to key risks. These teams provide regular updates to senior management and report to the Reputation & Responsibility Committee or

Audit Committee as relevant.

• 2. Mandatory training for all staff covers key reputational risks including cyber and data risks.

• 3. Insurance cover, where available, supports the Group financially in the event of major incidents.

• 4. The Group makes significant investments to ensure high levels of IT resilience, including migrating systems to the cloud. Tools are in place to repel cyber threats and safeguard customer information.

Management 5. Cyber security and data privacy are topics which are always reviewed as

actions continued

part of the divisional risk deep dive exercises undertaken and reported to the Audit Committee. This work highlights any issues which have arisen and the relative vulnerability of platforms and software.

• 6. Strong financial controls are in place which are monitored by the controls steering committee and compliance teams as well as local management.

• 7. Reviews are undertaken after incidents and significant near misses to allow lessons to be learned and any remedial actions put in place. Internal Audit are asked to provide assurance around remediation actions for key risks in a timely manner.

Link to strategy

Our reputation and commitment to behaving responsibly underpin our strategy to be a trusted partner for consumers, businesses and educators.

Risk tolerance

Low - the Group seeks to be a highly trusted consumer learning brand. Any significant failures could negatively affect our relationship with consumers today and in the future.

Examples of risks

• - Compliance with laws and regulations

• - Cyber security

• - Data privacy

• - Safeguarding

• - Test failure

• - Use of third parties

Risk contagion

Risk velocity

Reputational risks could have a significant impact in a short period in the event of a significant issue.

Significant failures in this area could increase Pearson's capability and accreditation risks and weaken our position in the competitive marketplace.

Accountability for principal risks

For each of our principal risks (shown in bold), the table below lists the accountable senior executive(s) for each sub-risk. Since 2022, the Group has created a new position of Chief Product Officer, which has led to the changes in accountability marked in the table below.

Risks Accreditation risk Political and regulatoryAccountability

Chief Legal Officer and

Divisional Presidents

Artificial Intelligence, Content and Channel risk

Effective method of delivery (podcast, video, test, in-person, online)

Intellectual property protection

Products and services - effective investment in own and third-party content

Balance of content creation vs content purchased

Capability risk

Business resilience

Business transformation and change

IT resilience

Safety and corporate security

Talent

Competitive marketplace risk

Consumer learning preferences

Market pricing

Product differentiation

Substitutes

Chief Product Officer and

Divisional PresidentsChief Legal Officer and

Divisional PresidentsChief Product Officer and

Divisional PresidentsChief Product Officer and

Divisional PresidentsChief Legal Officer and

Divisional PresidentsChief Executive Officer andDivisional Presidents

Change since 2022

NoYesNoYesYesNoNo

Chief Information Officer and No

Divisional Presidents

Chief Legal Officer and

Divisional PresidentsChief Human

Resources Officer and

Divisional PresidentsDivisional Presidents Divisional PresidentsDivisional Presidents Divisional PresidentsNoNoNo NoNo No

Risks

Customer expectations risk Customer experience

Accessibility

Data architecture and usage

Portfolio change risk

Accountability

Chief Product Officer and

Divisional PresidentsChief Human Resources

Officer, Chief Product Officer and Divisional PresidentsChief Information Officer, Chief Strategy Officer and

Divisional Presidents

Achieving value on acquisitions/disposals Chief Financial Officer and Chief Strategy OfficerIdentification of requirementsIntegration of acquisitionsChief Executive Officer, Chief No Financial Officer and Chief Strategy Officer

Chief Financial Officer

Reputation and responsibility risk

Compliance with laws and regulations

Cyber security

Safeguarding

Test failure

Data privacyUse of third partiesChief Legal Officer and

Divisional PresidentsChief Information Officer Chief Legal Officer and

Divisional Presidents

Change since 2022

YesYesYesNoNoNoNo NoAssessment & Qualifications, No

English Language Learning and Workforce Skills Divisional PresidentsChief Legal Officer and

Divisional PresidentsChief Financial Officer and

Divisional Presidents

NoNo

Significant near-term and emerging risks

The main near-term and emerging risks are shown in the table below, which also notes accountabilities and where the risk represents a change since the previous year.

Risks

Climate transition

Risks relating to sustainability and climate are outlined in pages 45-46. Expectations around climate change commitments and measurements change on a regular basis.

Inflation & interest ratesDescription

High global inflation risks increasing the cost of production for Pearson, which the Group may not be able to fully pass on. High interest rates also increase the risk of the failure of a key customer or supplier, although the Group has a well-diversified customer and supplier base. The Group has a significant proportion of its debt held at fixed interest rates, but faces the risk of increased costs when refinancing.

Chief Legal Officer and

Divisional Presidents

Chief Financial Officer and

Divisional Presidents

RecessionSupply chain

Disruption at ports globally and challenges for suppliers due to war or economic stress may lead to business interruption if not fully planned for and mitigated.

Recession in global markets could put pressure on school, enterprise and consumer budgets, reducing demand for our products and services. This has particular potential to negatively impact our English Language Learning and Workforce Skills divisions, unless disruption in the labour market encourages more people to retrain. Historically, demand for certain Pearson businesses, such as Higher Education, has been counter-cyclical, but there is no guarantee this will continue to be the case.

TaxSanctions and geopolitics

High levels of geopolitical volatility has led to the increased use of sanctions, which could inhibit Chief Executive Officer,the Group's ability to trade (as happened with our small business in Russia) or if inadvertently breached could lead to fines, penalties and actions against officers.

The company also has offices in Israel which could be affected by the ongoing conflict in the region.

Accountability

Chief Executive Officer

Classification and change since 2022

Emerging risk.

No change.

Significant near-term risk. Previously classified as emerging but reclassified due to ongoing elevated inflation and interest rates.

Emerging risk.

No change.

Chief Financial Officer and

Divisional Presidents

The outcome of tax decisions relating to prior year transactions in Brazil could lead to significant cash costs. The UK/EU State Aid case has been partially provided for and the potential liability paid, but there is potential for near-term change.

Chief Financial OfficerSignificant near-term risk. No change.

Chief Legal OfficerSignificant near-terms risk. Previously classified as an emerging risk but reclassified due to ongoing disruption.

Significant near-term risk. Previously classified as an emerging risk but reclassified due to ongoing disruption.

Risk assessment of prospects and viability

Corporate planning process

The board assessed the prospects of the company using the company's five-year plan, reviewing going concern over the period to 30 June 2025 and viability to 31 December 2028. The five-year period corresponds with Pearson's strategic planning process which is discussed by the board at least annually and represents the time over which the company can reasonably predict market dynamics and the impact of additions to the product portfolio.

The strategic plan takes account of a range of factors including market conditions, the likely impact of principal risks to the Group, product and capital investment levels, as well as available funding.

Pearson's strategy and business model is discussed in more detail on pages 12-23.

Viability assessment approach and outputs

Base case five-year plan

In considering the long term prospects of the company, the five-year plan was used as the base case model for assessment. Sales, profits and cash are forecast to grow in the base case. The company's subsidiary Pearson Funding plc has a debt maturity of €300m due within the going concern assessment period and it is assumed that this is refinanced ahead of time with a £250m bond or bank facility.

Severe but plausible downside model

In considering the viability of the Company, a severe but plausible model was prepared based on the base case adjusted for the probability weighted impact of all principal risks as well as other significant risks. The net impact of the risks modelled was to reduce adjusted operating profit by around 40% in each year.

At 31 December 2023, the group had available liquidity of £1bn comprising central cash balances and its undrawn $1bn Revolving Credit Facility (RCF) which matures in February 2027. The RCF can be extended by a further year in December 2024, extending the maturity to February 2028. It is assumed that the facility is then refinanced for the same value to beyond December 2028.

Under the severe but plausible downside case, the company would maintain comfortable liquidity headroom and sufficient headroom against covenant requirements during the period under assessment. That is, even before modelling the mitigating effect of actions that management would take if these downside risks were to crystalise. Such measures could include discretionary cost cutting measures, reducing dividends and reducing investment.

Reverse stress tests

Two reverse stress tests were modelled to determine the reduction in profit versus the plan that would be required to exhaust liquidity.

In the case of the going concern assessment, the profit reduction needed before 30 June 2025 was calculated. The model showed that operating losses were required in both 2024 and 2025 to exhaust liquidity.

For viability, the profit reduction and consequent reduction in cashflow needed to exhaust liquidity in 2028 was calculated, requiring cumulative losses of £300m more than identified in the severe but plausible downside case.

In each case, the downside required to exhaust liquidity significantly exceeded the downside in the severe but plausible scenario, even before allowing for any mitigation.

Conclusion

Based on the results of these procedures, and considering the company's strong balance sheet, the Directors have a reasonable expectation that Pearson will be able to continue in operation and to meet its liabilities as they fall due over the five-year period ending 31 December 2028. Further details of the Group's liquidity are shown in the "Financial Review" on pages 26-33.

Below are the inputs included in the severe but plausible scenario: Accreditation Risk

• - Loss of accreditation for Pearson Test of English in a major market

• - Risks associated with potential political and regulatory changes in US Student Assessment and UK & International Qualifications

• - Risks associated with potential political and regulatory changes in Virtual Schools

Capability Risk - Capability challenges in sales and technology reduce sales and result in increased costs - Additional costs to recruit teachers and students due to market conditions

Competitive Marketplace

• - Revenue declines in Higher Education due to enrolment and competition pressures

• - Loss of Virtual Schools due to insourcing

• - Impact of major distributor failing/bankruptcy

AI, Content and Channel Risk - Loss of sales due to AI-related risks and poor choice of content and/or channel

Customer Expectations

• - Additional costs to provide higher than planned functionality and levels of user experience

• - Challenges achieving customer expectations in Workforce Skills

• - Failure to achieve desired growth in Channels revenue

Portfolio Change - Failure to achieve anticipated acquisition synergies

Reputation and Responsibility - Potential cyber and data breaches negatively impacting reputation on an ongoing basis - Potential safeguarding incidents negatively impacting reputation on an ongoing basis

Recession and inflation - Potential for increased costs and lower sales because of a weak macro environment