Str ateg ic r epo r t 1Standard Life Aberdeen 2017 1
We have a wealth of skills and experience across all divisions and regions. By working together to understand how the future landscape will impact our business model, we can accelerate our progress towards achieving our strategic objectives and help ensure the future growth and success of our business.
As an increasingly global business, we recognise the importance of local insight and the need to adapt to market environments. Our strategic partnerships are invaluable in accelerating our market access and brand recognition in countries around the world, as well as increasing our exposure to retail assets and mature books in an efficient way.
Our response We are investing in technology that helps us to become more scalable and operate more efficiently, and the merger allows us to bring together the best of our platforms. Through the programme we’re running to integrate our asset management businesses, one of the main aims is to deliver modern, consistent experiences across all of our platforms to meet the expectations of clients, customers and advisers. Our work to improve the experience we offer our pensions and savings customers includes integrating our workplace solutions with our clients’ existing technology, and developing our capability in offering automated advice based on customer data, or ‘robo-advice’.
• We have active and productive relationships with regulators in the UK and around the world in countries in which we operate
Increasing assets We aim to grow assets by offering capabilities, products and solutions that meet the needs of new and existing clients.
Investment performance 1 year: 70% 3 years1: 63% 5 years: 64% Recognised for 20 years of excellence in defined contribution pensions2
Q Can you explain the key financial benefits of the merger and are you on track to deliver the expected cost synergies?
Reported and Pro forma results This report includes results on both a Reported basis and on a Pro forma basis.
The residual increase was driven by higher Pensions and Savings costs of £769m (2016: £655m). The acquisition of Elevate in October 2016 and the growth of 1825 increased adjusted operating expenses by £42m. 2017 also includes a £31m impairment of intangible assets, which arose due to the discontinuation of part of an IT transformation project and a £16m cost of specific customer remediation.
Adjusted profit before tax is down by 1% to £1,039m on a Pro forma basis and is up by 19% to £854m on a Reported basis. IFRS profit attributable to equity holders of Standard Life Aberdeen plc increased by 90% to £699m. Adjusted profit before tax Adjusted profit before tax is a key measure which we believe provides a fuller understanding of the performance of the business by identifying and analysing adjusting items.
Str ateg ic r epo r t 35Standard Life Aberdeen 2017
Tax expense The total IFRS tax expense attributable to equity holders’ profits on a Reported basis was £66m (2016: £68m) including a credit of £42m (2016: credit £58m) relating to adjusting items. The effective tax rate on total IFRS profit is 8% (2016: 14%). The main factors which have brought the effective rate below the UK corporation tax rate of 19.25% (2016: 20%) are: • The gain arising from the IPO of HDFC Life was exempt from tax under normal tax rules
These items were partially offset by merger corporate transaction expenses which are not deductible for tax purposes. We would expect the effective rate on total IFRS profit to be lower than the UK corporation tax rate in future years due to the impact of IFRS accounting for associates and joint ventures, as above, and the lower tax rate which applies to profits earned by our Asian subsidiaries.
Own funds £6.8bn (£0.2bn) £0.7bn £7.3bn £6.2bn (£0.2bn) £1.2bn £7.2bn Solvency capital requirement (SCR) (£3.0bn) – (£0.7bn) (£3.7bn) (£2.9bn) – (£1.2bn) (£4.1bn) Solvency II capital surplus £3.8bn (£0.2bn) – £3.6bn £3.3bn (£0.2bn) – £3.1bn
Our quantitative investment process focuses on academic research and investment theory, identifying excess risk adjusted returns and using them in our active quantitative portfolios in a systematic, costeffective, and risk-controlled manner.
IFRS profit after tax On a Reported basis, profit for the year attributable to equity holders was £243m (2016: £259m). As a result of the merger we have incurred deal related costs of £37m and integration and merger related restructuring costs of £47m, mainly in relation to staff costs, consultancy fees and onerous lease provisions. Amortisation of intangibles and customer assets was £77m. In addition an intangible asset impairment charge of £40m has been recognised relating to the Lloyds Banking Group customer relationship.
Fee based revenue 1,912 1,920 Adjusted operating expenses (1,278) (1,231) Adjusted operating profit 634 689 Capital management 2 (2) Share of associates’ profit before tax 41 35 Adjusted profit before tax (Pro forma basis) 677 722 Remove Aberdeen pre-merger (185) (336) Adjusted profit before tax (Reported basis) 492 386 Adjusting items (151) (53) Share of associates’ tax expense (29) (11) Profit attributable to non-controlling interests (preference shares and perpetual notes) (8) – Total tax expense (61) (63) Profit for the year attributable to equity holders of Standard Life Aberdeen plc 243 259
Europe consists of our domestic and international bond businesses in Ireland as well as our business in Germany.
Our valuable mature book includes UK mature Retail, which includes older fee based business that was predominantly written before demutualisation and spread/risk products, such as annuities and protection, which provide a sustained contribution to our profit.
Mature books UK mature Retail AUA increased 1% to £35.2bn (2016: £34.9bn), benefiting from positive market movements. Net outflows decreased to £3.3bn (2016: £3.4bn). Net outflows included £0.4bn of transfers to our Active Money Personal Pension product (within UK Retail).
Through a combination of associate and joint venture life businesses we have an extensive reach in two of the fastest growing savings markets – India and China.
The merger and the announcement of the proposed sale of our capital heavy insurance business presents a unique opportunity to enhance our overall risk framework. This is essential in an environment which continues to be uncertain and challenging.
Risk governance Enterprise risk management framework Standard Life Aberdeen’s enterprise risk management (ERM) framework enables a risk based approach to managing our business. It integrates concepts of strategic planning, operational management and internal control, and incorporates the following framework elements: • Risk culture: The way we think and act as individuals and as a business. It encompasses our attitudes, capabilities and behaviours towards risk. Our culture drives how we identify, understand, openly discuss and act on current and future risks.
Our internal risk and capital assessment process plays a key role in supporting decision making and strategy development at our boards and risk committees.
Political change has the potential to impact the business through the introduction of new laws or regulations, or indirectly by altering client and customer sentiment. Decisions taken by the UK and Scottish governments, along with those in other locations where we operate, can significantly alter circumstances and change the way we do business. Our business has increasingly large numbers of subsidiaries around the world which expose us to a wider range of geopolitical risks. Geopolitical unrest can also adversely affect global markets which can directly impact on our ability to grow assets under management and administration. The ongoing negotiations surrounding the UK’s exit from the EU have yet to provide clarity on what the outcome will be for the UK or Europe. These unavoidable uncertainties and our potential failure to adequately prepare for Brexit could have significant customer, reputational and capital impacts.
• We maintain succession plans for key individuals which are regularly reviewed
• We will establish detailed and specific oversight processes in relation to Phoenix’s provision of IT services
• We have a fully embedded three lines of defence risk management model where there is an emphasis on first line risk accountability
• Investment in our system capabilities and business processes helps mitigate the risk
Market Risk Our business may be materially adversely affected by volatility in global markets. We are exposed to market risk from the direct investment of shareholder assets, indirectly from funds managed by our asset management business and with profits funds in our Pensions and Savings business, and as a result of fluctuations in fees that we earn. The merger and proposed sale continue our significant shift towards a fee based model. This results in heightened exposure to the performance of financial markets which can impact on asset values as well as investor sentiment. One characterisation of the market environment is that while markets have performed well, there are concerns about rising market complacency, leaving markets vulnerable to sharp reversals. Future adverse market movements may arise from the outcome of negotiations for the UK leaving the EU; the continuing low yield, low interest rate environment; and increasing geopolitical concerns. The stable trend reflects the current resilience of markets and our robust capital and solvency position to manage any market volatility.
Liquidity Risk The risk that we face is that there is insufficient liquidity available to meet our liabilities as they fall due. Costs associated with the integration of our asset management business and Brexit may depress the availability of liquid resources for the Group in the short term. Our forward-looking projections, including the expected cost synergies from merger and sale activity, indicate that we expect to manage liquidity risk on an ongoing basis.
Our operational environmental impact is mostly comprised of the energy we use in our buildings and air travel. To reduce our impact in these areas we track our consumption, pursue ongoing improvements in building management, and encourage our people to reconsider the need for air travel by offering technology solutions.
You can read the Articles on our website www.standardlifeaberdeen.com/annualreport 66 Standard Life Aberdeen 2017
Power to purchase the Company’s own shares At the 2017 Annual General Meeting (AGM), shareholders granted the Directors limited powers to:  Allot ordinary shares in the Company up to a maximum aggregate amount of £80,628,369
 Make market purchases of the Company’s ordinary shares up to a maximum of 197,905,999 of its issued ordinary shares
This year, we published our inclusion strategy, which was created by our business leaders, and which defines our priorities over the next three to five years. It aims to embed inclusion in everything we do, and improve transparency in how we talk about and report on diversity in our business. We know this will take time, but we have made it a priority.
Our actions are making a difference. Our strong gender balanced pipeline continues to grow; 44% of those in our talent pool who are considered capable of operating at Executive Committee level in the next three to five years are female and our 2017 graduate intake is 54% female and from a broad range of universities.
Results:  Participation: 60% (5,486 colleagues) had their say  Merger sentiment: 87% feel the merger represents an opportunity and 13% do not or are yet to be convinced  Mood: 52% describe feeling positive about coming to work and the remaining 48% feel neutral or not positive  Current culture: 70% chose positive words to describe the current culture, 7% chose neutral words and 23% selected negative words
– Appointed Independent Board Evaluation (IBE) to support the post-Merger Board composition review
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The Company was due to have the 2017 review facilitated by an external provider, as per Provision B.6.2 of the Code which states that ‘evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years’. However, given that the Board was going to change significantly with effect from completion of the Merger and its role would adjust and develop further, it was agreed that the value of the externally facilitated review would be enhanced if it was a review of the post-Merger Board and took place some months after the members of the post-Merger Board had time to come together. It was therefore recommended that an internally-facilitated review be carried out, consistent with previous years but adjusted to reflect the Board’s circumstances at the time. IBE has been appointed as the external facilitator and is currently carrying out the 2018 review.
The review included all elements of the SoG as follows:  General requirements – governance structure, board decision making documentation, allocation of responsibilities, policy framework, contingency plans, internal review of system of governance, organisational and operational structure
Summaries of the evidence of the compliance review for the insurance entities plus the output from a review of the relevant sections of the Code and guidance for Standard Life Aberdeen were then presented to the business unit ERMC and, where appropriate, the relevant business unit board.
Non-executive Directors Julie Chakraverty 3/3 John Devine 9/9 Gerhard Fusenig 3/3 Melanie Gee 9/9 Richard Mully 3/3 Kevin Parry 9/9 Lynne Peacock 9/9 Martin Pike 9/9 Jutta af Rosenborg 3/3 Akira Suzuki 3/3 Simon Troughton 3/3
4. Corporate governance statement continued 4.2 Audit Committee report The Audit Committee assists the Board in discharging its responsibilities for financial reporting, internal control and the relationship with the External auditors.
The Committee schedules six meetings per annum, four of which are co-ordinated with external reporting timetables. In 2017, there was one additional meeting, which was focused solely on the Merger
Key responsibilities The Audit Committee’s responsibilities are to oversee and report to the Board on:  The appropriateness of the Group’s accounting and accounting policies, including the going concern presumption and viability
 Other reports required by a regulator or assurance services relating to regulatory developments
 The impact of outflows in the asset management business on both profits and capital resources
Three scenarios were explored as part of the tail risk analysis and were designed to focus on scenarios which could have a potentially significant adverse impact on liquid resources. In particular this recognised the potential for liquidity strains to arise as a result of the uncertain geo-political environment. The scenarios considered were: a sophisticated and collusive payment fraud committed in a derivative collateral transaction resulting in a significant loss for Standard Life Investments; a corporate bond shock including large corporations
4. Corporate governance statement continued defaulting on payments; and a large number of advisers requesting rebalances on and withdrawals from Standard Life Pensions and Savings platform business at the same time as a pricing error occurred.
on the findings of this report we anticipate continued margin pressure for the asset management business.
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The resulting package has significantly increased both (i) the focus on long-term performance and (ii) the time horizons of the delivery of remuneration from the previous remuneration structure for both our Co-CEOs. This has been achieved with a package that delivers a lower package at target and maximum levels for both Co-CEOs. The proposed package for our executive Directors is detailed in the table below.
 A variable pay award based on a pre-determined balanced scorecard of measures that will reward achievement of key financial milestones across our global business over the long term (up to six years). This includes flows based on growth channels.
How will performance be measured? The tables on the following pages set out the Executive Incentive Plan (EIP) scorecards for variable pay awards going forward, both in terms of determining annual awards under the plan, and the underpin performance conditions to be used for deferred awards together with the rationale for their inclusion. As illustrated below, a significant proportion of annual award (60%) will be based on long-term financial measures. Details of the targets that will be used to determine the 2018 awards are also provided.
 The threshold, target and stretch figures will be disclosed retrospectively following the end of each performance period
 Underpin for gross flows will be set at the midpoint between the three-year aggregated 2019 budget total and the related threshold measure calculated for the 2019 performance scorecard
The Committee recognises that alongside the alignment to strategy, our reward policy must promote sound ethics, appropriate conduct and risk management and operating with integrity. We have fully consulted with the Chief Risk Officer during the development of our remuneration policy to ensure that this supports our own aims and objectives for a responsible business.
Specific benefit provision may be subject to minor change from time to time. Additional benefits may be provided on recruitment or to support relocation.
Underpin performance conditions are determined by the Committee on an annual basis, however, at least three will be based on financial measures.
Strategic measures  Focuses management on the delivery of the business’s strategic priorities to drive improved performance in future years
Principles In determining remuneration arrangements for new appointments to the Board (including internal promotions), the Committee applies the following principles: – The Committee takes into consideration all relevant factors, including the calibre of the individual, local market practice and existing arrangements for other executive Directors, adhering to the underlying principle that any arrangements should reflect the best interests of the Group and its shareholders
The Committee reserves the right to make any other payments (including appropriate legal fees) in connection with an executive Director’s cessation of office or employment where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the cessation of an executive Director’s office or employment.
Board in the case of the other non-executive Directors, to reflect, for example, housing, office, transport and other business-related expenses incurred in carrying out their role
Matthews and £6,260 for Barry O’Dwyer. Also included for Keith Skeoch, Rod Paris, Colin Clark, Paul Matthews and Barry O’Dwyer is private health cover at a cost to the Group of £422 per annum per employee and medical insurance for Martin Gilbert and Bill Rattray at a cost of £2,000 per annum.
The merger of Standard Life plc and Aberdeen Asset Management PLC has accelerated our ambition of creating a world-class investment company – broadening and deepening investment capabilities, extending global distribution footprint and providing scale and platform efficiency to compete and grow globally. Post-merger integration programme work is progressing at pace and on track to deliver against the plan set out in merger announcement. The Group also delivered a next generation investment data platform for its asset management business. On Friday 17 November 2017, HDFC Life listed on the National Stock Exchange of India Limited and The Bombay Stock Exchange Limited following completion of the Initial Public Offering generating £359m from the sale of part of the Group’s holding. Good progress has been made in upgrading the technology infrastructure for our pensions and savings business but technical challenges have been encountered in certain aspects of this work.
As a result of the approved ratings, the Group annual bonus outcome as approved by the Remuneration Committee for 2017 is: Bonus opportunity based on Group performance as a % of total bonus
Aberdeen Variable Pay plan targets Variable pay awards for the period 14 August 2017 to 31 December 2017 were based on targets agreed by the Remuneration Committee and were based, insofar as it was possible, on existing performance measures for these plans.
Maximum variable pay in deferred shares as a % of fixed pay
Long-term quantitative Compound growth in underlying earnings per share 12.5% 6% 9% 12% (13.2%) 0% Average return on capital employed 12.5% 16% 20% 22% 17.3% 4.1%
The table below summarises the key details of the awards made in 2017 to Directors with the amended performance targets: Basis of award (% of salary) Face value at grant Number of shares1
Cumulative adjusted profit before tax (excluding spread/risk margin) (80%) and cumulative growth net flows (20%) for the three-year period ended 31 December 2020
Martin Gilbert – 980,432 1,414,039 – – Bill Rattray – 190,047 566,958 – –
Percentage change in remuneration of the Director in the position of Chief Executive Officer The table below shows the percentage year-on-year change in salary, benefits and annual bonus earned between the year ended 31 December 2016 and the year ended 31 December 2017 for Keith Skeoch as Co-Chief Executive Officer compared to the average UK-based Group employee. The Committee considers these appropriate comparators as the Co-Chief Executive Officers are UK-based and the largest number of Group employees are based in the UK. Martin Gilbert has not been included in the comparison as he was only appointed as Co-Chief Executive Officer in August 2017.
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Total 48.1% Annual non-financial strategic 10.0% Aberdeen remuneration committee assessment 7.5% Annual personal performance 10.0% Aberdeen remuneration committee assessment 8.5%-9.5%
7. Independent auditors’ report to the members of Standard Life Aberdeen plc 1. Our opinion is unmodified We have audited the financial statements of Standard Life Aberdeen plc (“the Company”) for the year ended 31 December 2017 which comprise the Consolidated income statement; Consolidated statement of comprehensive income; Consolidated statement of financial position; Consolidated statement of changes in equity; Consolidated statement of cash flows; Company statement of financial position; Company statement of changes in equity; Company statement of cash flows and the related notes, including the accounting policies and the reconciliation of consolidated adjusted profit before tax to IFRS profit for the year.
 Assessing transparency: We considered whether the Group’s disclosures in relation to the assumptions used in the calculation of insurance contract liabilities appropriately represent the sensitivities of the liabilities to the use of alternative assumptions.
Subjective valuation: The Group’s intangible assets primarily comprise of customer relationships and investment management contracts and internally generated software. There is a risk of impairment to the carrying value of these intangible assets.
The risk Our response Valuation of level 3 financial instruments and investment property
Refer to page 84 (Audit Committee Report), page 235 (accounting policy) and page 241 (financial disclosures).
The carrying amount of the parent company’s investments in subsidiaries represents 87% (2016: 80%) of the company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area of most focus in the overall parent company audit.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £11m to £34m, having regard to the mix of size and risk profile of the Group across the components. The work on 32 of the 33 components was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. The group team performed procedures on the items excluded from normalised group profit before tax.
 in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Expenses Insurance and participating investment contract claims and change in liabilities 31 3,628 7,126 Change in non-participating investment contract liabilities 32 8,963 8,768 Administrative expenses
(a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group’s annual accounting periods beginning after 1 January 2017. The Group has not early adopted the standards, amendments and interpretations described below: IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018) IFRS 15 will replace IAS 18 Revenue and related interpretations. IFRS 15 provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. New disclosure requirements including estimate and judgement thresholds will also be introduced.
Intangible assets Determination of useful lives Determination of the recoverable amount in relation to impairment assessment of customer relationships and investment management contract intangibles
Profit for the year 732 1 The India and China segment has been renamed as India and China life. 2 Other primarily includes the corporate centre and related activities. 3 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life
The Group’s aim is that, subject to meeting all contractual obligations and maintaining an adequate financial position, payouts on a participating policy (including any final bonus applying) should fairly reflect the experience of the HWPF applicable to such a policy, after any adjustments for smoothing, and any distribution of the residual estate deemed appropriate by the Group.
UK and Ireland unitised with profits pension contracts (fee business via RCF) This class of business comprises single or regular premium contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. Such contracts include hybrid contracts (see Note 31) resulting in the unitised with profits investment elements being classified as participating investment contracts, although there are some contracts that are classified as participating insurance contracts, 166 Standard Life Aberdeen 2017
Acquisition costs deferred during the year 15 (49) (51) Amortisation of deferred acquisition costs 15 79 96 Total other administrative expenses 1,982 1,494
Auditors’ remuneration disclosed above excludes audit and non-audit fees payable to the Group’s principal auditor by Group managed funds which are not controlled by the Group, and therefore not consolidated in the Group’s financial statements. These were previously included in auditors remuneration and the 2016 comparatives have therefore been restated.
Adjusted earnings per share is calculated on adjusted profit after tax attributable to ordinary equity holders of the Company i.e. adjusted profit net of dividends paid on preference shares.
The final recommended dividend will be paid on 30 May 2018 to shareholders on the Company’s register as at 20 April 2018, subject to approval at the 2018 Annual General Meeting. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2017 is 21.30p (2016: 19.82p).
In relation to the open ended funds we considered that it was most appropriate to recognise an intangible asset relating to customer relationships between Aberdeen and open ended fund customers, rather than an intangible asset relating to investment management agreements between Aberdeen and Aberdeen’s open ended funds. Our judgement is that the value associated with the open ended fund assets under management is predominantly derived from the underlying customer relationships, taking into account that a significant proportion of these assets under management are from institutional clients.
The above assumptions, and in particular the net attrition assumption, were also used to determine the useful economic life of each asset used for amortisation. The reducing balance method of amortisation is considered appropriate for these intangibles, consistent with the attrition pattern on customer relationships which means that the economic benefits delivered from the existing customer base will reduce disproportionately over time.
India and China life – insurance contracts The Group’s policy for acquisition costs incurred on insurance contracts issued by overseas subsidiaries is to apply the policy used in the issuing entity’s local statutory or regulatory reporting or, where local reporting did not explicitly or implicitly defer acquisition costs at the time the overseas subsidiary was first consolidated, to adjust those policies to apply a policy similar to that described above for non-participating insurance contracts.
Not later than one year 470 477 Later than one year and no later than five years 1,488 1,529 Later than five years 3,392 4,028 Total operating lease receivables 5,350 6,034
Transferred from investment property 17 28 – 28 Reclassified as held for sale (8) – (8) Disposals and adjustments1 (22) (10) (32)
(d) Maturity profile The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows: Within 1 year years years years
Cash outflows Derivative financial assets (22,175) (2) (4) (16) (11) – (22,208)
Cash and cash equivalents in respect of with profits funds (participating business) and unit linked funds (including third party interests in consolidated funds) are held in separate bank accounts and are not available for general use by the Group. A breakdown of cash and cash equivalents by risk segment is provided in Note 39.
Merger reserve: the merger reserve consists of two components. Firstly at demutualisation in July 2006 the Company issued shares to former members of the mutual company. The difference between the nominal value of these shares and their issue value was recognised in the merger reserve. The reserve includes components attaching to each subsidiary that was transferred to the Company at demutualisation based on their fair value at that date. On disposal or impairment of such a subsidiary the related component of the merger reserve is released to retained earnings. Secondly following the completion of the merger of Standard Life plc and Aberdeen Asset Management PLC on 14 August 2017, an additional amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of Aberdeen Asset Management PLC and their fair value at that date.
The reserves credit for employee share based payments includes £57m (2016: £nil) in relation to replacement awards granted to employees of Aberdeen which were unvested at the acquisition date.
Non–economic assumptions decrease net of reinsurance of £141m includes a decrease of £51m which is primarily in respect of changes in the best estimate non-economic assumptions used in calculating the value of future transfers to equity holders in respect of participating business in the HWPF. Non-economic assumptions also includes a decrease of £90m (net of reinsurance) in respect of non-participating business, which primarily relates to changes in mortality assumptions.
 For contingent spouses' benefits an assumption is also made with regard to the proportions married, based on SLAL’s historic experience
Issue date 18 October 2017 4 December 2012 12 July 2002 4 November 2004 Maturity date 30 June 2048 4 December 2042 Perpetual Perpetual Callable at par at option of the Company from 30 June 2028 and on every interest payment date (semiannually ) thereafter 4 December 2022 and on every interest payment date
Contributions to defined benefit plans in the year ended 31 December 2017 were £12m (2016: £4m). Expected contributions to defined benefit plans in 2018 are £15m and are not expected to materially change over the next 3-5 years. These include £7m in 2017 and £11m contributions expected in 2018 to Aberdeen UK plans in respect of deficit funding agreed with the trustees. The current deficit on these plans is £18m.
Other currencies include assets of £5m (2016: £9m) and liabilities of £36m (2016: £7m) in relation to the fair value of derivatives used to manage currency risk.
(c)(ii) Credit spreads As at 31 December 2017, it is expected that an adverse movement in credit spreads of 50 basis points, with no change to default allowance, would result in a reduction to profit for the year of £18m (2016: £22m). A further reduction of £79m (2016: £58m) would arise as a result of a change in assumed default rates of 12.5 basis points per annum (25% of the spread change).
Independent assurance as to the effectiveness of the Risk CSA process is provided by Group Internal Audit in its role of ‘third line of defence’. The results of Risk CSA are reported through the risk governance structure.
Debt securities For debt securities, the Group has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Group has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows:  Government, including provincial and municipal, and supranational institution bonds These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are categorised as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.
TPICF and NCI1 Investment property 2,548 2,486 33 – 2,581 2,486 – – – – 2,581 2,486 Owner occupied property – – – – – – – – – – – –
Fair value 2016 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 9,567 Income capitalisation Equivalent yield
2 Restated. 3 Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices.
Proceeds of issue of subordinated liabilities 565 – Interest paid (81) (81)
(b) Unrecognised financial instruments The Group has committed £447m (2016: £453m) in respect of unrecognised financial instruments to customers and third parties. Of this amount £360m (2016: £363m) is committed by consolidated private equity funds. These commitments will be funded through contractually agreed additional investments both by the Group, through its controlling interests, and the funds’ non-controlling interests. The level of funding provided by each will not necessarily be in line with the current ownership profile of the funds.
Replacement share-based payment awards granted in a business combination are included in determining the consideration transferred. The amount included is calculated by reference to the pre-combination service and the market-measure of the replaced awards.
(ii) Share incentive plan The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,800. The Group offers to match the number of shares bought up to a value of £50 each month. The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.
Included in the expense above is £12m (2016: £nil) of share-based payment expenses which are included in restructuring and corporate transaction expenses in the consolidated income statement.
Panker Invest S.a r.l.52 Ordinary Shares 59% Paragon Insurance Company Guernsey Limited74 Ordinary shares 25% Parmenion Capital Ltd53 Ordinary shares 100% Parmenion Capital Partners LLP53 Limited Liability Partnership 100% Parmenion Investment Management Limited53 Ordinary shares 100% Parmenion Nominees Limited53 Ordinary shares 100% Parnell Fisher Child & Co. Limited3 Ordinary Shares 100%
Self Directed Investments Ltd53 Ordinary shares 100% Serin Wealth Limited80 Ordinary shares 50% Sinfonia Asset Management Limited54 Ordinary shares 25% SL (NEWCO) Limited2 Ordinary Shares 100% SL Capital Infrastructure I LP Limited Partnership 26% SL Capital NASF I A LP Limited Partnership 22% SL Capital Partners (US) Limited Ordinary Shares 100% SL Capital Partners LLP Limited Liability Partnership 60% SLA Belgium No.1 SA81 Ordinary shares 100% SLA Germany No.1 S.a r.l.52 Ordinary shares 100% SLA Germany No.2 S.a r.l.52 Ordinary shares 100% SLA Germany No.3 S.a r.l.52 Ordinary shares 100% SLA Ireland No.1 S.a r.l.52 Ordinary Shares 100% SLA Netherlands No.1 B.V.52 Ordinary Shares 100% SLACOM (No.10) Limited2 Ordinary Shares 100% SLACOM (No.8) Limited2 Ordinary Shares 100% SLACOM (No.9) Limited2 Ordinary Shares 100% SLCP (Founder Partner Ignis Private Equity) Limited Ordinary shares 60% SLCP (Founder Partner Ignis Strategic Credit) Limited Ordinary shares 60% SLCP (General Partner 2016 Co-investment) Limited Ordinary shares 60% SLCP (General Partner CPP) Limited Ordinary Shares 100% SLCP (General Partner EC) Limited Ordinary Shares 100% SLCP (General Partner Edcastle) Limited Ordinary Shares 100%
Standard Life Investments UK Real Estate Fund OEIC 69% Standard Life Investments UK Real Estate Trust
Zone 13 21 Church Street, #01-01, Capital Square Two, 049480, Singapore 14 44 Chipman Hill, Suite 1000 POX Box 7283, Stn. "A" Saint John, N.B. E2L 4S6,
Assets Investments in subsidiaries A 9,425 4,769 Investments in associates and joint ventures B 134 134 Loans to subsidiaries C 324 323 Debt securities C 857 605 Receivables and other financial assets C 76 54 Other assets F 27 8 Cash and cash equivalents C 7 55 Total assets 10,850 5,948
Liabilities Subordinated liabilities L 1,876 1,319 Deferred tax liabilities N – 3 Derivative financial liabilities L 33 – Other financial liabilities L 19 8 Other liabilities P 1 – Total liabilities 1,929 1,330 Total equity and liabilities 10,850 5,948
On 22 November 2017 the Company reduced its investment in Standard Life (Mauritius Holdings) 2006 Limited through the disposal of 494,589.5 participating shares for a cash consideration of £37m, as a result of a share capital reduction by Standard Life (Mauritius Holdings) 2006 Limited.
Investments in subsidiaries at FVTPL are £333m (2016: £276m) which relate to holdings in money market and absolute return investment funds over which the Group has control.
On 18 October 2017, the Company issued subordinated notes with a principal amount of US$750m. In order to manage the foreign exchange risk relating to the principal and coupons payable on these notes the Company has entered into a cross-currency swap which is designated as a hedge of future cash flows. Further details are provided in Note 21 of the Group financial statements.
The reserves credit for employee share-based payments includes £57m (2016: £nil) in relation to replacement awards granted to employees of Aberdeen which were unvested at the acquisition date.
Equity sensitivity to market risk The Company classifies certain debt securities as available-for-sale. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in profit or loss for the year. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Company's equity to variations in interest rate risk exposures differs from the sensitivity of the Company's profit after tax to variations in interest rate risk exposures.
We provide a reconciliation to previously published financial information in the adjusted profit section below.
Pro forma basis Remove Aberdeen results pre-merger completion Reported basis 2017 2016 2015 2017 2016 2015 2017 2016 2015 £m £m £m £m £m £m £m £m £m
Share of associates’ and joint ventures’ profit before tax 56 – – – – 56 1 Figures are ‘underlying profit’ which was an Alternative Performance Measure presented by the Aberdeen Group as reported in the audited financial statements for the year ended 30 September. 2 Adjusted to bring into line with Standard Life Group accounting practice to prepare financial results for the period 1 January to 31 December. 3 Adjusted to align the presentation of the Aberdeen Group’s underlying profit Alternative Performance Measure to adjusted profit of the Standard Life Aberdeen Group. Coupon payments on perpetual notes classified as equity were excluded from the Aberdeen Group underlying profit metric. The Group will now include these coupons payable within adjusted profit. This has resulted in a reduction in the adjusted profit before tax of the Aberdeen Group within capital management, and the corresponding inclusion of an adjustment for ‘Coupons payable on perpetual notes classified as equity’ within adjusting items.
Adjusted profit before tax 718 – (269) – (13) 302 51 789 Profit before tax Tax on adjusted profit (126) – 58 – – (302) – (370) Total tax expense Share of associates’ and joint ventures’ tax (13) – – – 13 – – – N/A Adjusted profit after tax 579 – (211) – – – 51 419
Fee income as presented in the consolidated income statement 1,686 1,186 Differences in recourse cash flow for the year 135 131 Presentation differences
Adjusted cash generation Adjusted cash generation provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to shareholders. The IFRS consolidated statement of cash flows includes policyholder cash flows, and therefore does not present a shareholder view, and does not exclude adjusting items.
Further details of the segmental calculation of adjusted cash generation are included below.
DAC/DIR adjustment (ii) (6) – (8) – Fixed and intangible assets adjustment (iii) 10 21 (30) 26 Adjusted cash generation – Standard Life Pensions and Savings and Other 332 (52) 267 (25)
Amortisation and impairment of intangible assets 14 201 122 56 23 84 41 17 26 Amortisation and impairment of intangible assets acquired through business combinations (excluded from adjusted profit) (125) (117) (8) – (39) (36) – (3)
Less: eliminations between Aberdeen AUM and UK Pensions & Savings AUA (0.6) – – – – – (0.6) Less: changes due to new AUMA methodology1 (10.8) – – – (0.8) – (11.6) Presentational change for new AUMA layout2 – – – – (11.9) 11.9 – Total Standard Life Aberdeen AUMA 586.6 80.4 (117.2) (36.8) 87.8 10.0 647.6 1 Some assets which were formerly included in Standard Life plc’s AUA are now excluded under the definition of AUMA for Standard Life Aberdeen plc. These assets largely comprise Assets which do not generate revenue from products and Other corporate assets. 2 AUMA tables include separate disclosure of ‘Corporate actions and business rationalisation’ which was not presented separately in previous disclosures by Standard Life plc.
Adjusted cash generation Adjusted cash generation (previously named underlying cash generation) presents a shareholder view of cash generation. The calculation of this measure has been amended following the merger. For the Aberdeen Standard Investments segment, adjusted cash generation adjusts IFRS net cash flows from operating activities for restructuring and corporate transaction expenses paid. For the Standard Life Pensions and Savings segment and Other, adjusted cash generation removes certain non-cash items from adjusted profit before tax. Adjustments are made for deferred acquisition costs/deferred income reserve and fixed/intangible assets. Adjusted cash generation is stated net of current (cash) tax. IFRS net cash flows from operating activities is not used as the basis for these segments as it includes policyholder cash flows, and does not exclude adjusting items. For the India and China life segment, adjusted cash generation reflects dividends received in the period.
Growth channels We aim to drive the increase in our assets, revenue and profit via our growth channels. This comprises Aberdeen Standard Investments (excluding mature business), UK Workplace and Retail, Europe (excluding Germany with profits), Hong Kong and Standard Life Wealth.
Solvency II Solvency II is an EU-wide initiative that brings consistency to how EU insurers manage capital and risk. Solvency II was implemented on 1 January 2016.
Technical provisions The best estimate market consistent value of our policyholder liabilities is referred to as technical provisions. The calculation is discounted to recognise the time value of money and includes a risk margin, calculated in accordance with Solvency II regulations.