“The UK in particular continues to develop rapidly as a result of both regulatory changes and customer trends. These changes are increasing the opportunities available to us and we are seeing real benefits from our increased investment. This February alone, we have seen a significant step up in our delivery of propositions with a new online ISA, the re-launch of Adviserzone, and the launch of Lifelens, our innovative benefits solutions for Corporates. There is more to come in the year ahead. The investment in new products, customer propositions, services and marketing is helping us to increase our presence significantly in both the retail and corporate pensions and savings markets.
Standard Life Investments is well positioned to continue its strong and profitable growth. The pipeline for both institutional and mutual fund products remains good, with fixed income and GARS attracting significant interest both in the UK and continental Europe.
UK spread/risk business AUA has increased by 2% to £13.4bn. Positive market movements have offset £0.6bn of net outflows.
A change in the basis of future pension increases in the UK staff pension scheme has resulted in additional operating profit of £59m in 2010. This action, together with strong investment performance, contributions and assumption changes, has resulted in the net position of the UK staff pension scheme improving significantly from a net deficit of £56m in 2009 to a surplus of £281m.
IFRS notes 50 3 European Embedded Value (EEV) 71 EEV primary statements 72
Movements in FTSE All-Share Index 2009/10 1.1 Group overview There are exciting opportunities for Standard Life in our key markets. External market forces affect our results and can influence the Group’s performance. We assess our ability to achieve our strategic objectives by monitoring a range of key performance indicators.
The Omnibus 2 Directive, published in January 2011, will amend the Solvency 2 Directive and is included in our implementation plans.
In September 2010, we announced changes to our organisational structure to support our transformation. This included reducing the size and cost of our group corporate centre. We confirmed that we would remove up to 600 jobs across the business and create up to 100 new jobs to support delivery of our strategy.
UK retail and UK total PVNBP includes protection of £1m (2009: £2m) which is classed as spread/risk business.
In June 2010, we established a team to focus on the direct-to-customer market. As a result we have rebuilt our customer website, making more products available to buy online and launched the MyFolio fund range.
These initiatives maintained and strengthened our market presence in the countries where International operates and have contributed to higher new business levels and strong net flows.
Despite the financial crisis continuing to weigh heavily on the global economy in 2010, average market values in 2010 were substantially higher than in 2009. The average daily FTSE All-Share Index, for example, rose 21% between the two years. Combined with rises in other major world markets, this led to an increase in asset management revenues. We continue to maintain strong third party sales across institutional, wholesale and customer segments.
IFRS equity attributable to equity holders of Standard Life plc £3,903m £3,457m 13%
Gross operating capital and cash generation from continuing operations 596 617
1.5 Capital and cash generation continued In overall terms, our EEV operating capital and cash generation from continuing operations has decreased to £287m. This was mainly due to a fall in capital and cash generation from back book management activities which generated £10m capital and cash in 2010. In 2009, back book management activities generated £71m which included the benefit of a release of UK deferred annuity reserves.
Matters related to the management of our capital are reserved for the Board of Standard Life plc. The scope of the liquidity and capital management policy is wide-ranging and forms one pillar of our overall management framework. It operates alongside and complements our other policies and processes, in particular our risk policies and strategic planning process and provides a framework for effective and consistent management of capital. We continue to develop our Enterprise Risk Management framework to robustly link the processes of capital allocation, value creation and risk management.
Following the sale of Standard Life Bank plc on 1 January 2010 we are now classified as an ‘insurance group’ as defined by the IGD. In 2010, our capital surplus remained robust, increasing by £0.2bn to £3.8bn. Capital resources increased to £7.4bn, largely due to higher market levels. The quality of our capital remains strong, with only £0.5bn (2009: £0.8bn) and £0.7bn (2009: £0.7bn) of total Group capital resources classified as upper tier 2 and lower tier 2 respectively. Lower tier 2 capital contributes only 18% (2009: 19%) to the Group capital surplus and further illustrates the strength of our capital position.
Appetite The Group has no appetite to fail to meet its liabilities as they fall due.
As a result of the policies and processes established with the objective of managing exposure to liquidity risk, the Group considers the extent of liquidity risk arising from its activities to be de-minimis.
Our website now: • Engages customers with clear, interactive and open content designed to help them get to grips with their finances
We are very focused on supporting advisers through the changes that will occur once the requirements of the Retail Distribution Review are implemented. A key development will be an enhanced retail investment platform. This solution will allow advisers to access all of their customers’ assets and trade on all of their customers’ assets on a single platform. In February 2011 we launched the first phase of this solution via our award-winning Adviserzone, with additional enhancements being made throughout the year. We want to go beyond the traditional product provider relationship with advisers. A good example of this was our acquisition of threesixty and Focus Solutions – businesses who offer specialist support to advisers. We also took steps to help advisers manage 38 www.standardlife.com
• In India, HDFC Life's YoungStar Super plan was voted Product of the Year 2010 in the insurance category by a consumer survey on product innovation
All our executives are in the process of completing 360 degree feedback against our leadership framework and establishing individual development plans. In the autumn we ran a series of 'leadership conversations' across different parts of the Group for people leaders, to deepen their understanding of their role in leading our transformation and support their development as leaders. Through these sessions, and other activities across the Group, all people leaders are expected to establish a development plan to build and develop their leadership and support delivery of personal objectives.
Shares distributed by employee trusts - 10 - - (10) - - -
Operating profit/(loss) before tax from continuing operations 222 113 23 73 (32) - 399
Included in total restructuring costs of £73m (2009: £60m) are £1m (2009: £1m) of costs in relation to discontinued operations.
The comprehensive income included in the consolidated statement of comprehensive income in respect of discontinued operations is as follows: Profit for the year from discontinued operations 20 49
Short-term fluctuations in investment return and economic assumption changes 127 5.7 (214) (9.7)
The number of shares held by trusts at 31 December 2010 which were not offset by a corresponding obligation to deliver a fixed number of equity instruments was 12,209,946.
2.10 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued
Effect of changes in: Effect of: Total change in contract liabilities (755) 2,266 (593) 918 (942) (24)
The Group’s capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities comprise investment management, general insurance and group corporate centre. The Group’s capital position, based on draft regulatory returns, is set out below: UK regulated life business
Global investment management operating profit before tax is stated after excluding profits of £70m (2009: £33m) which have been generated by life and pensions business. Refer to Note 3.17 – EEV methodology. 3 Refer to IFRS financial information Note 2.3 – Administrative expenses.
3 Refer to IFRS financial information Note 2.5 – Discontinued operations.
The EEV consolidated income statement presents EEV operating profit for continuing operations only and therefore excludes the results for the discontinued operations. The presentation of the comparatives has been restated accordingly. Prior to the exclusion of EEV operating profit from discontinued operations, total Group EEV operating profit before tax would have been £919m for the 12 months ended 31 December 2009.
These changes have been included within our best estimate assumptions for UK corporation tax and VAT as at 31 December 2010.
UK non-covered primarily comprises UK non-covered mutual funds business and the non-covered UK pension scheme. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation for the year ended 31 December 2010. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010. The comparatives for the year ended 31 December 2009 include both the banking and healthcare businesses as discontinued operations.
Total comprehensive income for the period attributable to equity holders 1,085 291
For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements, unless otherwise stated.
• Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds to do so
In determining future expenses in relation to covered business, no allowance has been made in the EEV or the NBC for any allocation of group corporate centre costs.
The opening and closing EEV numbers for the covered business are determined on an after-tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. Attributable tax and profit before tax are derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after-tax profits, it provides a consistent grossing up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to new business.
4.4 Group assets under administration and net flows Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included in the statement of financial position. In addition, certain assets are excluded from the definition, for example deferred acquisition costs, intangibles and reinsurance assets.
Total third party assets under management 56,929 12,399 (6,199) 6,200 8,484 14,684 71,613
Standard Life Investments – total assets under management 138,724 156,874 1 Included within mutual funds are cash inflows which have also been reflected in UK and Canada mutual funds new business sales and net flows for UK mutual funds, an element of UK non-insured SIPP and Canada mutual funds.
AAA AA A BBB Below BBB or not rated Total 31 December 2009 £m £m £m £m £m £m
Less: Claims, commissions and changes in provisions and liabilities (15,694) (14,880)
Closing operating cost base in respect of continuing operations 369 171 96 229 58 923