AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON March 23, 2016APRIL 4, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form20-F

(Mark One)

or

for the fiscal year ended December 31, 20152018

or

for the transition period from            to            

or

Date of event requiring this shell company report

Commission file number1-16055

PEARSON PLC

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

80 Strand

London, England WC2R 0RL

(Address of principal executive offices)

Stephen Jones

Telephone: +44 20 7010 2000

Fax: +44 20 7010 6060

80 Strand

London, England WC2R 0RL

(Name, Telephone,E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x☒    No  ¨☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨☐    No  x☒

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x☒    No  ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨☐    No  ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a non-accelerated filer.an emerging growth company. See definition of “accelerated file” and, “large accelerated filer” and “emerging growth company”, in Rule12b-2 of the Exchange Act. (Check one):

x☒  Large accelerated filer                 ¨☐  Accelerated filer                ¨☐  Non-accelerated filer☐  Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:    Item 17  ¨☐    Item 18  ¨☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act):    Yes  ¨☐    No  x☒

TABLE OF CONTENTS

INTRODUCTION

In this Annual Report on Form20-F (the “Annual Report”) references to “Pearson”, the “Company” or the “Group” are references to Pearson plc, its predecessors and its consolidated subsidiaries, except as the context otherwise requires. “Ordinary Shares” refer to the ordinary share capital of Pearson of par value 25p each. “ADSs” refer to American Depositary Shares which are Ordinary Shares deposited pursuant to the Second Amended and Restated Deposit Agreement dated August 15, 2014, amended and restated as of August 8, 2000 among Pearson, The Bank of New York Mellon as depositary (the “Depositary”) and owners and holders of ADSs (the “Deposit Agreement”). ADSs are represented by American Depositary Receipts (“ADRs”) delivered by the Depositary under the terms of the Deposit Agreement.

We haveThe Group has prepared the financial information contained in this Annual Report in accordance with International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee (“IFRS IC”) interpretations as issued by the International Accounting Standards Board (“IASB”) whichand in respect of the accounting standards applicable to the Group do not differ from IFRSconformity with International Financial Reporting Standards as adopted by the European Union (“EU”). Unless we indicate otherwise indicated, any reference in this Annual Report to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report.

We publish ourThe Group publishes its consolidated financial statements in sterling. We haveThe Group has included, however, references to other currencies. In this Annual Report:

For convenience and except where we specifyspecified otherwise, we havethe Group has translated some sterling figures into US dollars at the rate of £1.00 = $1.47,$1.28, 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, 2015. We do2018. The Group does not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. On February 29, 201628, 2018 the noon buying rate for sterling was £1.00 = $1.39.$1.33.

The Group currently consists of its education business, plus a 47%25% interest in the consumer publishing business Penguin Random House. See “Item 4. Information on the Company — Overview of operating divisions”. The Pearson plc Consolidated Financial Statements are included in this report on pagesF-1 to F-86. The Penguin Random House Venture Combined Financial Statements are included in this report on pages F-87 toF-160.

FORWARD-LOOKING STATEMENTS

You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”, contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that relate to future events or ourthe Group’s future financial performance. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause ourthe Group’s or ourits industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In evaluating them, you should consider various factors, including the risks outlined under “Item 3. Key Information — Risk Factors”, which may cause actual events or our industry’sindustry results to differ materially from those expressed or implied by any forward-looking statement. Although we believethe Group believes that the expectations reflected in the forward-looking statements are reasonable, weit cannot guarantee future results, levels of activity, performance or achievements.

PART I

Not applicable.

Not applicable.

Selected consolidated financial data

The table below shows selected consolidated financial data under IFRS as issued by the IASB.IASB and in conformity with IFRS as adopted by the EU. The selected consolidated income statement data for the years ended December 31, 2015, 20142018, 2017 and 20132016 and the selected consolidated balance sheet data as at December 31, 20152018 and 20142017 have been derived from ourthe Group’s audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report.

On July 23,February 4, 2014, the Group completed the sale of the Mergermarket group. The Mergermarket business was classified as held for sale on the Group’s balance sheet at December 31, 2013. The results of the Mergermarket business have been included in discontinued operations for all the years through to 2014.

On November 30, 2015, Pearson announcedthe Group completed the sale of The Financial Times to Nikkei Inc. The transaction completed on November 30, 2015 and from that point Pearson no longer consolidated The Financial Times’ results or net assets. The results of The Financial Times have been included in discontinued operations for all years through to 2014 and for the 11 months to November 30, 2015.

On August 11,October 16, 2015, Pearson announcedthe Group completed the sale of its 50% stake in The Economist Group. The transaction substantially completed on October 16, 2015 and from that point Pearson no longer had significant influence over The Economist Group. The share of profit after tax from the associate interest in the Economist Group has been included in discontinued operations for all years through to 2014 and for the period until October 16, 2015.

On November 29, 2013, Pearson announcedOctober 5, 2017 the Group completed the sale of the Mergermarket group which completed on February 4, 2014.a 22% share in Penguin Random House to Bertelsmann, retaining a 25% share. The anticipated loss of control as at December 31, 2013 resultedGroup also received recapitalization dividends in the Mergermarket business being classified as held for sale on the Pearson balance sheet at December 31, 2013.2017, with an additional amount due in 2018. The results of the Mergermarket business have been included in discontinued operations for all the years through to 2014.

In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction completed on July 1, 2013 and from that point, Pearson no longer controlled the Penguin Group of companies. Pearson accounts for its 47%remaining 25% associate interest in Penguin Random House on an equity basis.

On May 5, 2017, the Group announced that it was undertaking a strategic review of its US K12 courseware business. The loss of control resulted in the PenguinUS K12 business beingwas classified as held for sale on the PearsonGroup’s balance sheet as at December 31, 2012.2017 and December 31, 2018. On March 29, 2019 The resultsGroup completed the sale of Penguin have been includedits US K12 courseware business to Nexus Capital Management LP.

On August 16, 2017 the Group completed the sale of its test preparation business in discontinued operationsChina, Global English (GEDU), to Puxin Education.

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 all years through to 2012 andsale on the first six months of 2013.Group’s balance sheet as at December 31, 2017. The share of profit after tax from our associate interest in Penguin Random House from July 1, 2013 is included in operating profit from continuing operations.disposal completed on March 15, 2018.

The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and ourthe Group’s consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations.

For convenience, we havethe Group has translated the 20152018 amounts into US dollars at the rate of £1.00 = $1.47,$1.28, 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, 2015.2018.

Notes:

Dividend information

We payThe Group pays dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. OurThe board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. OurThe 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 ourthe annual general meeting. At ourthe Group’s annual general meeting on April 29, 2016 our26, 2019 shareholders will be asked to approve a final dividend of 34.0p13.0p per ordinary share for the year ended December 31, 2015.2018.

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 each of the respective payment dates for interim and final dividends. The final dividend for the 20152018 fiscal year will be paid on May 1, 201610, 2019 (subject to shareholder approval),.

Future dividends will be dependent on ourthe 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.

Exchange rate information

The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period and on the last day of each month during an annual period. On December 31, 2015 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.47. On February 29, 2016 the noon buying rate for sterling was £1.00 = $1.39.

Risk factorsFactors

You should carefully consider the risk factors described below, as well as the other information included in the rest of this document. OurThe 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 weit presently cannot identify.

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

Business transformation and change initiatives in line with expectations.

We are currently engaged in restructuringsupport of the business.Group’s strategic goals to accelerate its digital transition and to simplify its business will continue throughout 2019. The pace and scope of change increases the risk that not all these changes will deliver within anticipated timeframes, orand that the costs of these changes may increase. In addition, as a result of the increased pressure of transformational change, our business as usual activities may not perform in line with our plans or ourthe level of customer service may not meet expectations. In parallel with the business transformation, as we respondthe Group responds to the digital revolution and shift from a product to a services business, weit will continue to look at opportunities to develop business models and further refine organisationorganization structures. Resistance to change could restrict the organization from making the necessary changes to the business model.

Risk relatedFailure to effectively use the Group’s data to enhance the quality and integrityscope 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 do so may leadbe subject to noncompliance with legal and other requirements which could damage our business.

Unavailabilityfactors beyond the Group’s control. In addition, the unavailability of timely, complete and accurate data limits informed decision-making and increases the risk ofnon-compliance with legal, regulatory and reporting requirements. Business change and transformation success is dependent on migration of a significant number of datasets.datasets and our inability to effectively accomplish this could adversely affect the Group’s results.

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

With the continued pressure and uncertainty in the worldwide economies, there remains a risk of a weakening in trading conditions, which could adversely impact our future financial performance. The effect of

continued deterioration or lack of recovery in the global economy will vary across our 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, mayalthough can have a positive impact for many of the Group’s businesses, could for others lead to a reduction in demand for ourthe Group’s products and service.services.

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

A common trend facing all ourthe 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. We faceThe 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. NewAlternative 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 our traditional publishing business models, potentially impacting both sales volumes and pricing.

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

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

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

OurThe Group’s educational services and assessment businesses may be adversely affected by changes in government funding resulting from either trends that are beyond ourthe 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 ourthe Group’s failure to successfully deliver previous contracts.

The results and growth of ourthe 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 our customers. The current challenging environment could impact ourthe Group’s ability to collect on education-related debt.

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 ourthe 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 ourthe market in any given year. For ourThere is also a risk of political instability in the UK examinationat the time of publication arising from the potential for Brexit ‘no deal’ plus wider uncertainty and assessment businesses, changesinstability in UK government policy have had, and could continue to have, a significant impact on our present business.the rest of the world.

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

Failure to comply with anti-trustantitrust and competition legislation could result in costly legal proceedingproceedings and/or adversely impact ourthe Group’s reputation.

We areThe Group is subject to global and local anti-trustantitrust and competition law and although we areit is committed to conducting business in compliance with local and international laws, there is a risk that our management, employees or representatives may act in a way that violates applicable anti-trustantitrust or competition laws. As a result, there is a risk of litigation and regulatory proceedings in the countries in which we operate.the Group operates. These legal proceedings could result in greater scrutiny of ourthe 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 ourthe Group’s reputation.

If we dothe Group does not adequately protect ourits intellectual property and proprietary rights, ourits competitive position and results may be adversely affected and limit ourits ability to grow.grow limited.

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

OurThe Group’s intellectual property rights (IPR) in countries such as the USbrands and the UK, jurisdictions covering the largest proportion of our operations,content — historically its core assets — are generally well established within key markets. As technology has become an increasingly critical component of the exceptionGroup’s business strategy, it has also been steadily increasing investment in its patent program to expand its protection of patents, for which we only have a nascent portfolio based largelyhigh value inventions in the US.

Online copying and security circumvention have become increasingly sophisticated and resistant to available countermeasures. Notably, 2018 introduced “digital counterfeit” web sites selling 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 also includes plans to increase its global patent footprint in key markets outside the US. However, wethe Group also conductconducts business in other countries where ourits 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 our future growth. Where we havethe Group has registered or otherwise established ourits IPR, weit cannot guarantee that our such rights will provide competitive advantages to 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 usit in many countries; the potential that ourits IPR may lapse, be invalidated, circumvented, challenged, or abandoned, or that weit may otherwise lose the ability to assert ourits intellectual property rights against others. Moreover, despite trademark, brand and copyright protection, third parties may copy, infringe or otherwise profit from our proprietary rights without our authorization. The loss or diminution in value of these proprietary rights or ourthe Group’s intellectual property could have a material adverse effect on ourthe Group’s business and financial performance.

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

OurThe 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. OurThe 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 ourthe Group’s assessment and qualification businesses, both in the US and the UK. A service failure caused by a breakdown in our testing and assessment processes could lead to amis-grading of student tests and/or late delivery of test results to students and their schools. In either event wethe Group may be subject to legal claims, penalty charges under our contracts,non-renewal of contracts and/or the suspension or withdrawal of ourits 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 ourthe Group’s ability to retain existing contracts and/or obtain new customers.

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

To take advantage of international growth opportunities and to reduce ourits reliance on ourthe US and UK markets, we havethe Group has invested in a number of emerging markets, some of which are inherently more risky than ourits 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 our returns on investments made in these markets.

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 ourthe Group’s reputation.

Although we arethe Group is committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to ourits business, there is a risk that ourthe 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 ourthe Group’s reputation, or lead to litigation and financial impacts.

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

We continually acquireThe Group periodically acquires and disposedisposes of businesses to achieve ourits strategic objectives and we will continue to consider both as means to pursue ourits strategic priorities, although we doit does not plan to make any significant acquisitions in the short term. We for instance hold a 47% equity interest in Penguin Random House,

All the world’s leading consumer publishing company. This investment and associated return are subject to the continuing success of this venture, in a competitive global market. In 2015, we divested the Financial Times and our equity interest in The Economist in order to increase our focus on the opportunities we see in global education.

We operate in markets that are dependentGroup’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 ourthe Group’s revenues and reputation.

All ourthe Group’s businesses, to a greater or lesser extent, are dependent on information technology. WeIt either provideprovides software and/or internet services to ourits customers or we useuses complex IT systems and products to support our businessesits business activities, including customer-facing systems, back-office processing and infrastructure. We faceThe Group faces several technological risks associated with software product development and service delivery, information technology security (including virusviruses 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 we havethe Group has experienced verifiable attacks on our systemits systems by unauthorized parties. To date, such attacks have not resulted in any material damage, to us, but ourthe Group’s businesses could be adversely affected if ourits systems and infrastructure experience a significant failure or interruption.

Failure to comply with data privacy regulations, or any unauthorized disclosure of personal information, could result in an incident or other issue potentially causing reputational damage to ourthe Group’s brands and financial loss.

Across ourits businesses, we holdthe Group holds large volumes of personally identifiable information including that of employees, customers, students and citizens. Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of ourthe Group’s network by an unauthorized party, employee theft, misuse or error or otherwise, could harm ourthe Group’s reputation, impair ourits ability to attract and retain ourits customers, or subject usthe Group to claims or litigation arising from damages suffered by individuals, and thereby harm ourits business and operationoperational results. Failure to adequately protect personally identifiable information could potentially lead to penalties, significant remediation costs, reputational damage, cancellation of some existing contracts and difficulty in competing for future business. In addition, wethe Group could incur significant costs in complying with the relevant laws and regulations regarding the unauthorized disclosure of personal information. Changes to data privacy legislation must also be monitored and acted upon to ensure we remainthe Group remains in compliance across different markets.

Failure to prevent or detect a malicious attack on ourthe Group’s systems could 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 ourits businesses, we holdthe Group holds large volumes of personally identifiable information including that of employees, customers, students and citizens.citizens, and other highly sensitive business critical data such as financial data, internal sensitive information, and intellectual property. Despite ourits implementation of security measures, individuals may try to gain unauthorized access to ourthe Group’s data in order to misappropriate such information for potentially fraudulent purposes. A significant breach can result in a devastating impact on Pearson’sthe Group’s reputation, financecustomer loyalty, and student experience. Inability to prove due diligence can result in severe penalties and loss of business (existing and future).

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

We operateThe 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 are invested in the capital markets, which are often volatile, the plans may require additional funding from us,the Group, which could have an adverse impact on its results.

It is ourthe Group’s policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. OurThe target for the UK defined benefit plan is a self-sufficient level of funding. The Group’s earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in ourits defined benefit plans. OurThe Group’s greatest exposure relates to ourthe 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. As of the end of 2015,

Although the UK defined benefit plan continues to show a surplus on an IAS19 basis and following the latest valuation is expected to besignificantly derisked (as it is in surplus on a technical provisions basis following funding payments made during 2015. Following discussions with effect from 1 January 2018 as per the plan trustee in 2015, we have committed to a funding program withrecent valuation), the target of the plan becoming largely independent of Pearson within five years. However the plan’s ability to achieve and maintain this standard remains subject to market conditions, meaning that additional funding could still be required from Pearsonthe Group in the future.

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

Across all ourits businesses, we managethe Group manages complex operational and logistical arrangements including distribution centers, data centers, and educational and office facilities, as well as relationships with third party print sites. We haveIt has also outsourced some support functions, including information technology, warehousing and logistics to third party providers. The failure of third parties to whom we haveit has outsourced business functions could adversely affect ourits 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 ourthe Group’s ability to service ourits customers and meet the terms of ourits 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 our future revenue growth. Similarly external threats, such as flu pandemic, terrorist attacks, strikes, weather etc., could all affect our business and employees, disrupting our daily business activities.

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

To the extent that worldwide economic conditions materially deteriorate, the Group’s revenues, profitability and cash flows could be significantly reduced as customers would be unable to purchase products and services in the expected quantities and/or pay for them within normal agreed terms. A liquidity shortfall

Disruption in capital markets or potential concerns about the Group’s credit, such as downgrades or negative outlooks by the credit rating agencies, may delay certain development initiatives or may expose the Group to a need to negotiate further funding. The proceeds from the divestments of the FT and the Economist have significantly improved liquidity. While we anticipatemean that our existing cash and cash equivalents, together with availability under our existing credit facility, commercial paper program, cash balances and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures,this capital may not be available on favorable terms or may not be available at all.all, although the reduced size of debt maturities mean that this risk is reduced.

Our access to capital is influenced by, among other factors, the credit ratings assigned to our debt by the credit rating agencies. At the year-end our long-term ratings were Baa1 from Moody’s and BBB+ from Standard & Poor’s. Both ratings were on negative outlook. The short-term ratings were P2 and A2 respectively. In February 2016, Moody’s changed Pearson’s long-term rating to Baa2 (Stable) and in March 2016 Standard & Poor’s changed Pearson’s long-term rating to BBB (Stable). The short term ratings are unchanged at P2 and A2.

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

As with any international business, ourthe Group’s earnings can be materially affected by exchange rate movements. OurThe main exposure is to movements in the US dollar to sterling exchange rate as approximately 60% of ourthe Group’s total revenue is generated in US dollars. WeThe Group also havehas exposure to a range of other international currencies including emerging market currencies. SalesOperating profit for 2015,2018, translated at 20142017 average rates, would have been £137m£17m or 3% lower.

The Group’s tax strategy reflects ourits business strategy and the locations and financing needs of ourits operations. In common with many companies, we seekthe Group seeks to manage ourits tax affairs to protect value for ourits shareholders, in line with ourits broader fiduciary duties. We areThe 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.

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

OurThe Group’s success depends on the skill, experience and dedicationengagement of ourits employees. If we areit is unable to attract, retain and develop sufficiently experienced and capable personnel,staff, especially in technology, product development, sales and management, ourleadership, its business and financial results may suffer. When talented employees leave, wethe Group may have difficulty replacing them,those skills, and ourits business may suffer. There can be no assurance that wethe Group will be able to successfully retain and attract the personnelskills that we need.it needs.

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

Incidents may occur that could cause harm to learners.where learners are abused or harassed. For example, where we havethe Group has direct learner contact via online learning, or in ourits direct delivery businesses where we areit is operating, either ourselvesdirectly or in partnership with schools, colleges, universities, testing and assessment centers.a third party partnership. These incidents can cause harm to learners, which is something we takethe Group takes extremely seriously, and could also have anegative financial, legal and reputational impact to the business.

Failure to adequately protect the health, safety and securitywell-being of peoplethe Group’s employees, learners and assetsother stakeholders could increase our costs and adversely impact our reputation.the Group’s reputation, profitability and future growth.

We have implemented policiesAlthough the Group has invested in global Health and Safety procedures and controls to safeguard the health, safety well-being and protectionwellbeing of ourits employees learners and stakeholders. However, there may beother stakeholders, accidents or incidents thatcould still occur due to unforeseen risks, for example due to changing local and global threats, causing injury or harm to individuals and impacting ourthe Group’s business operations. 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 global reputation.

Social, environmentalFailure to ensure security for the Group’s staff, learners, assets and ethicalreputation, 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.

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

We considerThe Group considers environmental, social environmental and ethical (SEE)governance (ESG) risks no differently to the way we manageit manages any other business risk. These include ethical business behavior,behaviour, compliance with UN Global Compact standards, environmental impact, people and data privacy.

If we dothe Group does not successfully maintain a strong brand, ourits business could be harmed. Beyond protection, strengthening the Pearson brand will enable usthe Group to more effectively engage governments, administrators, teachers, learners and influencers.influencers more effectively.

Pearson plc

Pearson plc, (Pearson)(Pearson or the Group) is an international education company with its principal operations in the education and consumer publishing markets. We createThe Group delivers content, assessment and manageservices, powered by technology, in order to drive personalized learning at scale. The Group creates and manages intellectual property, which we promoteit promotes and sellsells to ourits customers under well-known brand names. We deliver ourThe Group delivers its content in a variety of forms and through a variety of channels, including books and online services. We offerThe Group offers services as well as content, from test creation, administration and processing to teacher development and school software. Though we operateit operates in more than 70 countries around the world, today ourits largest markets are the US (63%North America (67% of sales) and Europe (15% of sales) on a continuing basis..

Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company andre-registered under the UK Companies Act as a public limited company in 1981. We conduct ourThe Group conducts its operations primarily through ourits subsidiaries and other affiliates. OurIts principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 20 7010 2000). and its website address is www.pearson.com

Overview

PearsonThe Group consists of its worldwide education business plus a 47%25% interest in Penguin Random House.

Pearson educationThe Group is a leading provider of educational materials and learning technologies. It provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. It publishes across the curriculum and provides a range of education services including teacher development, educational software and system-wide solutions, and also owns and operates schools.

From January 1, January 2014 the Group has been run as one global education company, organized around three geographical operating segments (North America, Core and Growth),. Within each segment, the Group provides content, assessment and three lines of business correspondingdigital services to the key stages of learning, (schools, higherschools, colleges and universities, as well as professional and vocational education and professional, which included the FTto learners.

The Group until the date of disposal in 2015). The lines of business are responsible for the global strategy, investment priorities, product strategy and product portfolio for respective learner age and stage. The geographies are responsible for customer relationships, sales and marketing, and delivery of education products in their markets. Supporting this structure are the global functions which partner with the geographies and lines of business and operate as integrated global functions to achieve scale economies.

Pearson owns a 47%25% interest in Penguin Random House, which was formed on July 1, 2013, upon the completion of an agreement between Pearson and Bertelsmann to merge their respective publishing companies, Penguin and Random House. Pearson originally owned a 47% stake in Penguin Random House, but sold 22% on October 5, 2017. The Group accounts for its remaining interest in Penguin Random House on thean equity basis.

Recent developments

During March 2019, the Group executed market tenders to repurchase €55m of its €500m Euro 1.875% notes due May 2021.

On March 29, 2019, the Group completed the sale of its US K12 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.

In January 2016, Pearson announced that it was embarking onFebruary 2019, the UK Group pension plan purchased a restructuring program to simplify the business, reduce costs and position the company for growth in its major markets. The majorityfurther pensionerbuy-in policy valued at approximately £500m with Legal & General. As a result of this latest transaction, 95% of the program is

expected toUK Group plan’s pensioner liabilities are now matched withbuy-in policies which significantly reduces longevity risk of the Group. Thebuy-in will be complete by mid-year 2016 and will involve implementation costsaccounted for in 2016 of approximately £320m,2019 and is expected to generate ongoing annualized benefits of £350m.reduce the retirement benefit asset on the balance sheet but is not expected to have a material impact on the income statement.

OurThe Group’s strategy

Pearson’s goalThe Group’s mission is to help people make measurable progress in their lives through all kindslearning and its vision is to have a direct relationship with millions of lifelong learners, to link education to the way people aspire to live and work every day and to collaborate with a wide group of partners to help shape the future of learning. OverTo deliver on this, the past decade,Group has three key strategic priorities:

The Group strives to leverage its core strengths in combining world-class content and assessment, powered by services and technology, to enable more effective teaching and personalized learning at scale. More detail on the world,three areas of focus is set out below.

Grow market share through digital transformation of the Group’s courseware and assessment businesses

Digitization enables us to drive improvements in learning outcomes. It allows the Group to build a more sustainable and profitable business with unique geographic reach, product breadtha more visible and professional depth.predictable revenue profile, based around access not ownership models. The businesses where digital transformation is the key focus are:

Pearson’s strategy centers

Become a simpler and more efficient company

This third strategic priority involves further simplification through shared service centres, leaner organizations through reduction in headcount and a reduction in the number of legacy applications, data centres and office locations. This does not just cut costs, it also provides an important platform for future growth because it enables the Group to reallocate investment to its growth areas more quickly, innovate at scale, and build a deep understandingmore direct, longer term relationship with the tens of learners’ and customers’ needs, and develop world-classmillions of learners who use Pearson products and services.

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 school and higher education.

In higher education, Pearson Online Services provides Online Program Management (OPM) services to institutions including Arizona State University, Rutgers University and Maryville University, partnering with them to provide fully online undergraduate and graduate degree courses.

The North America school business offers early learning solutions that help educators and families teach fundamental math and literacy skills; elementary and secondary imprints publish leading school programs in reading, literature, math, science, and social studies; and digital instructional solutions for preK-12, such as enVisionMATH and Miller-Levine Biology. Nearly 50%In order to focus on its digital strategy, on March 29, 2019 the Group completed the sale of its US schools use one of our tools to aid professional development and help teachers and administrators improve their effectiveness. Through ourK12 courseware business.

The Connections EducationAcademy business we provideprovides school management services and operateoperates virtual and blended schools.schools, serving around 73,000 full time equivalent students.

Testing plays an integral role in determining educator and student success and we arethe business is one of the largest providerproviders of educational assessment services in the US. We markIt marks large-scale school examinations for the US federal government and more than 2523 American states, scoring billions of machine-scorable test questions and evaluating more than 111approximately 110 million essays, portfolios and open-ended test questions every year. Working with educators and education advocates, ourthe business experts are helpinghelp to lead the development of Next-Generation Assessments that feature technology-enhanced items, performance-based assessments, and adaptive learning to foster problem-solvers and critical thinkers ready to compete in the global economy.

OurThe business’s solutions include learning assessments to help gauge how students learn, talent assessments to help growing companies develop their workforce, and clinical assessments to help psychologists and speech/language/hearing/occupational and physical therapists diagnose and monitor patients.

Our North America Higher Education business offers learning services for students, colleges and universities in the US. We provide learning tools and technologies, and about three million US college students are currently pursuing their studies online using Pearson Higher Education’s products. Our custom content and

curriculum solutions offer educators the opportunity to tailor their programs based on the needs of students. We also offer workforce education products and flexible workforce development solutions to fill the growing skills gap and increased demand for qualityThe professional certification prep training. College and career readiness is a K-20 issue, and it requires effective strategies employed in both K-12 and higher education. Our solutions are designed to help institutions retain students and prepare them for success in college and beyond.

Nearly 11 million North American college students registered with our higher education digital courseware to pursue their studies. The growing trend provides a wealth of data and analytics to improve the performance of individual students. Our advance capabilities in data, analytics and adaptive learning, and our leading efficacy research, enable us to design a smart learning path for every student.

The demand for online learning is steadily rising and we see this area as one of the fastest growing parts of the market where we can see demand increasing significantly over the next few years, where we’ve already got a good presence and where we think we could deploy our courseware, assessment, and technology capabilities at scale. Pearson On Line Services runs fully online undergraduate and graduate learning programs, such as the programs at Arizona State University Online. Likewise, at school level, Connections Education, our virtual school business serves tens of thousands of students through both virtual and blended school programs. This is one of our fastest growing businesses with demand continuing to increase year on year.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.

Growth Markets

Our aim is to take educational products and services and apply them at scale in countries such as Brazil, South Africa, China, India and other fast-growing economies. Around one third of our employees now work in these countries. We reach around two million students directly through our English language schools in China, Brazil and elsewhere, our partner schools in Brazil and India, and our higher education institutions in South Africa, as well as millions more with our textbooks and educational software.

In Brazil we are leading primary and secondary education with our ‘sistemas’ or learning systems which include COC, Dom Bosco, Pueri Domus and NAME. In South Africa we run thirteen of our CTI and MGI campuses throughout the country. We have over 11,000 students enrolled in courses ranging from undergraduate degrees in IT and sociology, to business diplomas and Masters courses in psychology. Our campuses prioritize digital learning with over 10,000 of our students accessing their courses through tablet devises, and focus on learning outcomes that prepare students for employment opportunities in their chosen careers.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.

Core Markets

Our biggest Core markets are the UK, Australia, Germany, France, the Benelux countries and Italy. These are countries where we work closely with educators and policy makers to improve learning through creating curriculum, designing assessments and developing digital learning systems. Additionally we have around 100 other markets, where we do not have scale ourselves, so we collaborate with others who share our values and commitment to efficacy to maximize reach and impact.

In the UK school market, we are the largest awarding organization offering academic and vocational qualifications that are globally recognized and benchmarked, with educational excellence rooted in names like

Edexcel, BTEC and LCCI. Learners take our qualifications in more than 80 countries worldwide. We use our online marking technology to mark over 97% of examination papers and our ResultsPlus service provides detailed analysis of every learner’s examination results. We are also driving innovation through digital products such as Bug Club and ActiveLearn, and supporting skills for employability for progression in study, work and life.

Through Pearson College we are the only FTSE 100 company delivering degrees in the UK. Our students get the chance to learn from leading employers as well as experienced academics and subject experts, in the heart of a 21^st Century business.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.

The details below describe our professional line of business, which is geographically spread over the three above segments. During 2015 Pearson sold its interests in The Financial Times and The Economist Group. The results of The Financial Times and The Economist Group are included in discontinued operations up to the sale completion dates being November 30, 2015 and October 16, 2015 respectively.

Our professional testing business, Pearson VUE (VUE), is a global leader inleading 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 7,20020,000 test centers across 194 countries,the globe, delivering 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 and CompTIA. In the UK Pearson VUE works with professional and government bodies including the Chartered Institute of Management Accountants (CIMA) and the Construction Industry Training Board (CITB).

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.

Pearson’sSee “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2018 compared to year ended December 31, 2017 — Sales and operating profit by division — North America” for a discussion of developments during 2018 with respect to this segment.

Core Segment

The biggest Core markets are the UK, Europe, APAC and North Africa. 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. Additionally the business participates in many other markets, where it does not have scale itself, but collaborates with others who share its values and commitment to efficacy to maximize reach and impact.

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, BTEC and

LCCI. Learners take the business’s qualifications in many countries worldwide. Online marking technology is used to mark the vast majority of 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 Bug Club and ActiveLearn, and through supporting skills for employability for progression in study, work and life.

The Higher Education business has seen good growth in OPM in both Australia and the UK, launching degree programs with Monash and Griffith Universities in Australia and Kings College London, University of Leeds and Manchester Metropolitan University in the UK.

In English, assets make the companyPearson Test of English is being used to support visa applications to the world’s largest Australian Department of Immigration and Border Protection resulting in significant growth in volumes.

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, 2018 compared to year ended December 31, 2017 — Sales and operating profit by division — Core” for a discussion of developments during 2018 with respect to this segment.

Growth Segment

The business aims to take educational products and services and apply them at scale in countries such as Brazil, India, South Africa, Hispano-America, Hong Kong & China and the Middle East.

English language teaching and learning business. More than 1.5 million teachersis one of the biggest opportunities in global education. The Group has refocused its activities in English, with disposals of its Chinese direct delivery businesses, GEDU and 35 million students use our English language learning resources and tools each year. The businesses in Pearson’s English division include: Wall Street English, (center-based learning for consumers);taking place in 2017 and 2018 respectively. The opportunity in English is now addressed in three main ways:

The Financial Times (FT)Brazilian business serves primary and secondary education with its ‘sistemas’ or learning systems which include COC, Dom Bosco and NAME.

In South Africa, the business is one of the world’s leading news organizations, recognized globallylargest players in the school textbook market and runs a private university with 8,500 students enrolled in courses ranging from undergraduate degrees in IT and sociology, to business diplomas and Masters courses in psychology.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2018 compared to year ended December 31, 2017 — Sales and operating profit by division — Growth” for its authority, integrity and accuracy. The FT provides a broad rangediscussion of essential services, including news, comment, data and analysis,developments during 2018 with respect to a growing audience of internationally minded professionals. The FT is comprised of the FT newspaper and FT.com, Financial Publishing, FT Chinese, FT Labs, and Medley Global Advisors. The FT Group included a 50% interest in The Economist Group, a publisher of one of the world’s leading weekly business and current affairs magazines, this interest was substantially disposed of in October 2015. Pearson sold The Financial Times in November 2015.

AHistorically 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 Core and Growth courseware markets operate in a similar way although often with less formal ‘adoption’ processes.

The operating cycles in respect of ourthe Group’s professional line of businesscontent are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training IT and travelIT 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. Elsewhere in the Group, operating cycles are typically less than one year.

Competition

Pearson’sThe Group’s businesses operate in highly competitive environments.

PearsonThe 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, andHarcourt.

In services, the Group competes with companies such asK-12 Inc in virtual schools and ETS,2U Inc. in online program management, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology.

In US 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 Core 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.

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

OurThe Group’s principal intellectual property assets consist of our 1) its:

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

Raw materials

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

Government regulation

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

Licenses, patents and contracts

We areThe Group is not dependent upon any particular licenses, patents or new manufacturing processes that are material to ourits business or profitability. Likewise, we areit is not materially dependent upon any particular contracts with suppliers or

customers, including contracts of an industrial, commercial or financial nature. Notwithstanding the foregoing, our Educationthe 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 usit by third parties (or assigned subject to royalty arrangements). In addition, some of our software products in various business lines, particularly those of ourits Clinical business, rely upon patents licensed from third parties.

Legal proceedings

WeThe Group and ourits subsidiaries are from time to time the subject of legal proceedings incidental to the nature of ourits and their operations. These may include private litigation or arbitrations, governmental proceedings and investigations by regulatory bodies. We doThe Group does not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on ourits financial position or profitability nor have any such proceedings had such effect in the recent past. To our knowledge, there are noThe Group is not aware of material proceedings in which any member of senior management or any of ourits affiliates is a party adverse to usit or any of ourits subsidiaries or in respect of which any of those persons has a material interest adverse to usit or any of ourits 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 ourits significant subsidiaries and associates as at December 31, 2015,2018, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

During 2014, the Group disposed of its interest in the Mergermarket group of companies and its North America business disposed of its joint venture interests in Safari Books Online and CourseSmart.

In February 2014, the Group acquired Grupo Multi, Brazil’s leading adult English language training company. There were no significant acquisitions in 2015 or 2013.

During 2015, the Group disposed of its interest in the FT Group including its 50% share of The Economist. The Financial Times sale was completed on 30in November 2015 and the sale of ourthe 50% share of The Economist Group was substantially completed on 16in October 2015.2015, with the remaining share sold in 2016. Also, in July 2015, the Group disposed of its interest in PowerSchool.

During 2014In May 2017, the Group announced that it was undertaking a strategic review of its US K12 courseware business. On March 29, 2019 the Group completed the sale of its US K12 courseware business to Nexus Capital Management LP.

In August 2017, the Group completed the sale of its test preparation in China (GEDU) to Puxin Education.

In October 2017, the Group disposed of its interest in the Mergermarket group22% of companies and our North America business disposed of its joint venture interests in Safari Books Online and CourseSmart.Penguin Random House to Bertelsmann, retaining a 25% interest.

During 2013In November 2017, the Group disposedannounced that it had agreed the sale of its interestWall Street English to a consortium consisting of funds affiliated with Baring Private Equity Asia and CITIC Capital. The disposal completed on March 15, 2018.

There were no material acquisitions in the Penguin group of companies in exchange for a 47% interest in Penguin Random House.2016, 2017 or 2018.

Property, plant and equipment

OurThe Group’s headquarters are located at leasehold premises in London, England. We ownAs at December 31, 2018 it owned or leaseleased approximately 1,000750 properties, including approximately 650530 testing/teaching centers in over 6055 countries worldwide, the majority of which are located in the United Kingdom and the United States and China.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 usthe 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.

The vast majority of our printing is carried out by third party suppliers. We operateThe Group operates a small digital print operation as part of ourits Pearson Assessment & Testing businesses which providesshort-run andprint-on-demand products, typically custom client applications.

We ownThe Group owns the following principal properties at December 31, 2015:2018:

WeThe Group leased the following principal properties at December 31, 2015:2018:

Capital Expenditures

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

The Company has not received, 180 days or more before the end of the 20152018 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the Exchange Act which remain unresolved.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS as issued by the IASB.IASB and in conformity with IFRS as adopted by the EU.

Where this discussion refers to constant currency comparisons, these are estimated byre-calculating the current year results using the exchange rates prevailing for the prior period. The increase or reduction in the value calculated is the estimate of the impact of exchange rates. We believeThe Group believes this presentation provides a more useful period to period comparison as changes due solely to changesmovements in exchange rates are eliminated.

General overview

Introduction

Pearson’sThe Group’s primary segments for management and reporting are geographical as follows: North America, comprising the School, Higher Educationcourseware, assessments and Professionalservices businesses in the US and Canada; Growth, comprising the School, Higher Education and Professional businesses in emerging markets which are investment priorities, including Brazil, China, India and South Africa; and Core, comprising the School, Higher Educationcourseware, assessments and Professionalservices businesses in more mature markets outside North America, including the UK, AustraliaEurope, Asia Pacific and Italy.North Africa, and Growth, comprising the courseware, assessments and services businesses in emerging markets, including Brazil, India, South Africa, Hispano-America Hong Kong and China and the Middle East. In addition Pearsonthe Group separately reports on an equity basis the results from its 25% interest in Penguin Random House (PRH) associate..

On August 16, October 2015, Pearson substantially2017, the Group completed the sale of its 50% interesttest preparation business in China (GEDU) to Puxin Education, realizing apre-tax profit on sale of £44m. On October 5, 2017, the EconomistGroup also completed the sale of a 22% share in Penguin Random House to EXORBertelsmann, realizing apre-tax profit on sale of £96m.

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 on 30 November 2015 PearsonCITIC Capital realising 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 Financial TimesUS K12 courseware business (K12) to Nikkei. The resultsNexus 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. Following the repayment of the Economist and the Financial Times are included in discontinued operations in 2013 and 2014 and to the date of sale in 2015. Also, in July 2015,vendor note the Group disposedis entitled to 20% of its interest in PowerSchoolall future cash flows to Vista Equity Partnersequity holders and 20% of net proceeds if the business is sold. The K12 business had been held for considerationsale on the balance sheet following a strategic review and discussion with potential buyers regarding a disposal since the end of £222m realizing a pre-tax gain2017 and continues to be classified as held for sale on the balance sheet as at December 31, 2018.

None of £30m net of a £70m write down of related software assets. The PowerSchool business was notthe disposals referred to above were significant enough to meet the definition of a discontinued business and itstheir results to the date of disposal are included in continuing operations.

On February 4, 2014, Pearson completed the sale of the Mergermarket GroupThe Group’s total sales decreased from £4,513m in 2017 to BC Partners. The Mergermarket business was classified as held for sale on the balance sheet at December 31, 2013. Mergermarket’s results for 2014 to the date of sale and for 2013 have been included£4,129m in discontinued operations.

In July 2013, Pearson and Bertelsmann completed a transaction to create a new consumer publishing business by combining Penguin and Random House, and from that point, Pearson no longer controlled the Penguin Group of companies. Pearson accounts for its 47% associate interest in the Penguin Random House on the equity basis. The results for Penguin in the first half of 2013 have been included in discontinued operations. The share of results from the associate interest in Penguin Random House arising in the second half of 2013, and in 2014 has been included in operating profits in continuing operations.

Sales from continuing operations declined from £4,540m in 2014 to £4,468m in 2015,2018, a decrease of £72m£384m or 2%9%. This year on year declinedecrease was reducedexacerbated by currency movements, primarily the strengthcomparative weakness of the US dollar relative to sterling during the year. In 20152018 currency movements increaseddecreased sales by £137m£134m when compared to the equivalent figures at constant 20142017 rates. When measured at 20142017 constant exchange rates, ourthe Group’s sales declined by 5%6%. Part of the decrease is due to the absence of sales from businesses sold during 2017 and 2018, partly offset by the year and also in lightimpact of the evolutionadoption of our Connections Education business in North America a greater proportionIFRS 15 ‘Revenue from contracts with customers.’ This new standard was adopted on January 1, 2018 but the comparative figures for 2017 have not been restated (see also note 1 within Item 18–Financial Statements). The impact of that revenue is now recognized on a net basis. We estimateadopting IFRS 15 was to increase sales by £9m. The Group estimates that after excluding the impact of acquisitions and disposals and after taking accountthe adoption of the evolution of sales at Connections Education,IFRS 15, sales declined by 2%1% at constant exchange rates. Although there wasThis decrease is primarily explained by further declines in North America in higher education and school courseware, largely offset by aggregate growth in the Pearson VUE, Connections Education and Wall Street English China businesses, this growth was more than offset by declines inrest of the US Higher Education, UK Qualifications and South Africa businesses.business.

In 2015, Pearson2018, the Group reported an operating loss (from continuing operations)profit of £404m£553m compared to a correspondingan operating profit of £348m£451m in 2014.2017. The decreaseincrease in profit of £752m£102m mainly reflects an increase in gains on disposal and reduced intangible charges. Following significant economiccharges which more than offset increased restructuring, the lost contribution from businesses disposed and market deterioration in the Group’s operations in emerging markets and ongoing cyclical and policy related pressures in the Group’s mature market operations, management’s expectations of future returns were revised down in the course of 2015 resulting in the impairment of intangible assets in North America of £282m, in Core markets of £37m and in Growth markets of £530m. In 2014 impairments of £77m related to India. Operating profit before these impairments increased by £20m in 2015 compared to 2014. Cost savings in 2015 offset the impact of currency movements. After stripping out the effect of gains on the sale of businesses, reduced intangible charges, increased restructuring costs andone-off pension related charges, profits from trading declined by around £30m. This trading decline was primarily due to currency movements and the lost contribution from businesses disposed which offset the increased year on year benefit from restructuring savings. The impact of adopting IFRS 15 on operating profit was similar to the impact on sales and reduced service fee income from PRH. Cost savings followed restructuring in 2014 and consequent benefits that flowed through in 2015 and were compoundeddescribed above

increasing operating profit by £9m. The Group also adopted IFRS 9 ‘Financial instruments’ on January 1, 2018 but this new standard did not have a reduction in employee incentives in 2015. Currency movements had only a smallmaterial impact on operating profit (see also note 1 within Item 18–Financial Statements).

In May 2017, the Group announced a new restructuring program, the 2017-2019 restructuring program. This program began in the second half of 2017 and costs incurred were £79m in 2017 and £102m in 2018 and relate to delivery of cost efficiencies in the enabling functions and US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2018 relate predominantly to staff redundancies and 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. The onerous lease provisions are the main driver for the overall increase in provisions on the balance sheet at December 31, 2018.

Operating profit in 2018 included a gain of £230m from the sale of businesses that relates to the sale of the Wall Street English language teaching business (WSE), realising a gain of £207m, the disposal of the Group’s equity interest in UTEL, the online University partnership in Mexico, realising a gain of £19m, and various other smaller disposal items realising a net gain of £4m. Operating profit in 2017 included a gain of £128m from the sale of businesses. The sale of the Group’s test preparation business in China resulted in apre-tax profit on sale of £44m, while the sale of a 22% share in PRH resulted in apre-tax profit on sale of £96m. These were offset in part by net losses on other smaller disposals.

Currency movements decreased 2018 operating profit by £17m when comparing 2015 profitcompared to the equivalent figures translated at constant 20142017 exchange rates.

The lossprofit before taxation in 20152018 of £433m£498m compares to a profit before taxation of £255m£421m in 2014.2017. The decreaseincrease in profit of £688m mainly£77m reflects the £752m decrease£102m increase in the reported operating profit identified above offset by a reductionan increase in net finance costs of £64m,£25m, from £93m£30m in 20142017 to £29m£55m in 2015. 2018.

The Group’s net interest payable decreased from £64m£79m in 20142017 to £46m£24m in 2015, mainly2018. The decrease was primarily due to a reduction in gross debt achieved through the lower levelearly redemption of average net debtbonds in the period following disposals, additional interest receivable on cash balances held overseas2017 and lowerin early 2018. Charges relating to early redemptions increased finance charges in 2017 but were not as significant in 2018. Additionally there was a reduction in interest on tax provisions following agreementreassessment of historical tax positions.those provisions in 2018. Also included in net finance costs are net finance costs of deferred consideration associated with acquisitions,relating to employee benefit plans, foreign exchange and other gains and losses. In 20152018 the total of these items was a gainloss of £17m£31m compared to a lossgain of £29m£49m 2017. Income relating to employee benefit plans was £8m higher in 2014. Both2018 than in 2017 reflecting the gainhigher net surplus on pension balances at the beginning of 2018 compared to the beginning of 2017. Other losses in 2015 and the loss in 2014 mainly2018 primarily relate to foreign exchange differences onun-hedged cash and cash equivalents, and other financial instruments.instruments that generated gains in 2017.

The reported tax credit in 2018 was £92m (18.5%) compared to a charge of £13m (3.1%) in 2017. The movement in the tax rate reflects severalone-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 aone-off benefit from a reassessment of the tax treatment of certain items of income and expenditure.

Net cash generated from operations decreasedincreased to £518m£547m in 20152018 from £704m£462m in 2014.2017. The decreasedmain reason for the improvement in cash flow reflected trading conditions across allgenerated from operations was the businesses includingabsence in 2018 of special pension contributions which in 2017 were £227m and related to the impact of an increaseFT Group disposal (£25m) and to agreements relating to the PRH merger in US higher education textbook returns and higher pension deficit payments. Our average working capital to sales ratio declined by 3.1 percentage points to 15.4% reflecting disposals of businesses with relatively lower levels of working capital but was also due to higher receivable balances and2013 (£202m). The benefit from the absence of these pension contributions in 2018 was partly offset by higher incentive accruals. Averagepayments in 2018 relating to 2017 performance and other unfavourable movements in working capital comprises the average of the monthly carrying values over the relevant 12 month period for inventory, pre-publication costs, debtors and creditors, including deferred revenue.capital.

Net interest paid at £51m£22m in 2015 was lower than the £73m paid2018 compares to £69m in 20142017 and reflects the lowerdecrease in interest charge for the year.year referred to above. Tax paid in 20152018 was £232m£43m compared to £163m£75m in 2014. Tax paid2017 with the decrease mainly explained by tax refunds in 2015 included the tax on disposals made during the year of approximately £103m. Net capitalUS.

Capital expenditure on property, plant and equipment afterwas £70m in 2018 compared to £82m in 2017. Proceeds from the sale of property in 2018 of £128m includes proceeds from the sale of the Group’s London property as part of the restructuring program. There were no material property sales increased to £84m in 2015 from £66m in 2014 and net capital2017. Capital expenditure on software intangibles rosereduced from £105m£150m in 20142017 to £160m£130m in 2015.2018. The increase inexpenditure on both tangible and intangible capital expenditure is largely attributed toincludes the continuing investment in enabling function technology designed to lower administrative costs. The

There were no significant acquisitions in either 2018 or 2017 and the net cash outflow in respect of businesses and investments acquired was £463m£15m in 2014, the majority of which related to the acquisition of Grupo Multi, there were no significant acquisitions2018 and £14m in 2015 and expenditure totaled £27m in the year.2017. The net cash inflow in respect of businesses and investments disposed was £1,422m£107m in 20152018 compared to £375m£430m in 2014.2017. In 20152017 the cash received largely related to the Financial Times, The EconomistPRH and PowerSchoolGEDU disposals and in 2014 related primarily to2018 includes proceeds from the Mergermarket sale. sale of WSE and UTEL.

Dividends from joint ventures and associates increaseddecreased from £120m£458m in 20142017 to £162m£117m in 20152018. The reduction is primarily due to an increasethe PRH sale transaction in 2017 which resulted in a reduced equity share from 47% to 25% and involved recapitalization dividends amounting to £312m in 2017 and £50m in 2018. Dividends paid to company shareholders in 2018 of £136m compares to £318m in 2017 reflecting the rebasing of the dividend from PRH. Dividends paid of £423m in 2015 compares2017 to £398mreflect portfolio changes, increased investment and to align with profit expectations. Cash returned to shareholders via the share buyback program, announced in 2014 (including £1m paidOctober 2017 and completed in February 2018, amounted to non-controlling interests). £149m in 2017 and £153m in 2018.

Overall the Group’s net borrowings reduceddecreased from £1,639m£432m at the end of 20142017 to £654m£143m at the end of 2015.2018. The reduction in net debt was principally due to cash generated from operations and the factors noted above, principally the receipt of proceeds from disposals,disposal of businesses and was slightlyproperty in the year which more than offset by an increase in reported net debt due to the strengthening of the US dollar relative to sterling.interest, tax, sharebuy-back and dividend payments.

Outlook

In 2019, the Group expects to report adjusted operating profit of between £610m and £660m (including businesses held for sale and after taking account of the adoption of IFRS 16 — see also note 1 within Item 18 — Financial Statements.) 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 2019 statutory operating profit without unreasonable efforts, and consequently, no statement thereof, and no reconciliation of the Group’s expected 2019 adjusted operating profit thereto, is included.

The outlook for 2019 is based on the following factors when comparing to 2018. Guidance is based on exchange rates at 31 December 2018 and these rates would generate approximately £26m more adjusted operating profit than would be the case at constant 2018 average exchange rates. In 2018, the Group generated approximately 64% of its sales in the US, 3% in Greater China, 5% in the Eurozone, 3% in Brazil, 3% in Canada, 3% in Australia, 2% in South Africa and 1% in India. Guidance for 2019 includes the K12 business even though it was sold in March 2019. This business contributed £364m to 2018 sales and around £20m to 2018 adjusted operating profit. In addition, the 2018 results include the WSE business to the point of sale in March 2018 and this business contributed £42m to 2018 sales and £4m to 2018 adjusted operating profit. In 2019, the Group expects cost inflation of around £50m together with increased investment in strategic growth areas of around £33m. Incrementalin-year benefits from the 2017-2019 restructuring program are expected to be £130m in 2019. Further restructuring costs of £150m (excluded from adjusted operating profit) are expected in 2019.

In North America, our largest market, we anticipatethe Group expects US college enrolments willHigher Education Courseware revenue to be flat givento down 5% on the forecastcontinuation of the pressures seen on end demand in 2018 with ongoing declines in enrolment and modest growth in open educational resources (OER) adoptions. For print revenue in this segment, there is scope for

further declines in gross sales and improvements in US employment; a smaller adoption marketreturns. Print continues to be impacted by the ongoing rise of secondary channels, such as rental, but channel inventory has now returned to more normalized levels following the 2016 inventory correction and its after effects. The channel is now optimising the stock it holds, both through reducing purchases and returns, and this is expected to continue in K-12 learning services2019. Growth in digital and lower

participation ratedirect sales will be partiallyprovide some offset byto the continuing pressures on print. In Assessment, good growth is expected in Open Territories driven by new products; reduced testing revenuesProfessional Certification and stable revenue in the Clinical Assessment business in the US. A modest decline in revenue is expected in North America reflecting StateStudent Assessment on continued contraction in revenue associated with the Group’s Partnership for Assessment of Readiness for College and National Assessment contract losses worth approximately £100m announcedCareers (“PARCC”) and ACT Aspire contracts. Good growth is expected in 2015;revenue and enrolment in Connections Academy and in North America Online Program Management (OPM).

In Core, the Group is expecting stable revenue across Core, including student qualifications and assessment, with further revenue growth in clinical assessmentsOPM and professional certification.Pearson Test of English Academic, offset by continued declines in its courseware businesses.

In our Core markets (which include the UK, Italy and Australia), we expect declinesGrowth, The Group expects revenue to continue to increase in vocational course registrations in UK schools, ongoing pressure in our various learning services businesses, partially offset by growth in managed services in Australia and the UK. At VUE, we will cease to deliver the contract to administer the UK Driving Theory test for the DVSA in September 2016.

In our Growth markets (which include Brazil, China, India and South Africa), we expect continued pressure in South Africa on government spending on textbooks and lower enrolments in CTI, macro-economic pressures in emerging markets, specifically China and Brazil, offset by growth2019 benefiting from new products such as the New Student Experience.and services across all divisions.

InThe Group anticipates a lower contribution from Penguin Random House we anticipate that additional benefits from the ongoing integrationa normalized publishing performance and expects an annualafter-tax contribution of the business will be broadly offset by reduced demand for eBooks, following industry-wide changes in terms in 2015.

We completed the sale of PowerSchool on 31 July 2015 for £222m; the sale of The Financial Times on 30 November 2015 for £858m; and substantially completed the sale of our 50% stake in The Economist Group on 16 October 2015 for £469m including the gain on revaluation of the remaining 11% investmentaround£60m-£65m to a fair value of £92m. In addition we disposed of Fronter and a number of print textbook lists in the US. Total disposals contributed approximately £90m to 2015 adjusted operating profit which will not recur in 2016.profit.

Group incentive compensation was zero in 2015 reflecting the weakness of performance versus budget. The incentive pool will be reinstated to £110m in 2016 to ensure our work force is incentivized to sustain its strong competitive performance and to implement a significant program of change within the company.

Building on the work we have done over the last three years, we are taking further action to simplify our business and reduce our costs and position us for growth in our major markets. We intend to: create a single courseware product organization; integrate our North American assessment operations; reduce our exposure to large scale direct delivery and focus on more scalable online, virtual, and blended services; implement major efficiency improvements across all our enabling functions — technology, finance, HR; and rationalize our property portfolio and renegotiate and consolidate major supplier agreements. To implement this program, we will incur costs of approximately £320m in 2016 and expect to generate annualized savings of approximately £350m, with approximately £250m of savings in 2016 and a further £100m of savings in 2017. We have already implemented a number of significant associated actions since announcing the program in January 2016.

Sales information by segment

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

The average rate used for the US dollar was £1:$1.531.34 in 2015,2018, £1:$1.651.30 in 20142017 and £1:$1.571.33 in 2013.2016. Fluctuations in exchange rates can have a significant impact on ourthe Group’s reported sales and profits. In 2015, Pearson2018, the Group generated 63%64% of its continuing sales in the US (2014: 61%(2017: 65%; 2013: 60%2016: 65%). In 2015 we estimate2018 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 ourits reported earnings per share of 2.0p and a five cent change in the closing exchange rate between the US dollar and sterling would have had an impact on shareholders’ funds of approximately £180m.2p. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for more information.information on how foreign exchange risk is managed. Theyear-end US dollar rate for 20152018 was £1:$1.471.27 compared to £1:$1.561.35 for 20142017 and £1:$1.661.23 for 2013.2016. The total impact on shareholders’ funds of foreign exchange translation was a lossgain of £69m£86m in 20152018 compared to a gainloss of £175m£313m in 2014.2017. 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, however, in 2015 the impact of a stronger US dollar compared to sterling was more than offset by sterling’s strength against other currencies.US.