UK and Europe Standard Life Investments Canada Asia and Emerging Markets
Much is talked about the importance of ethics and integrity in financial services, but there is often a disconnect between what chairmen and their boards say and the day-to-day experiences of their customers. For us, we always try to make sure that all our people know that doing the right thing by our customers is the only way in which we can build a sustainable business. This includes being transparent in our charges and making sure that people understand exactly what they are getting when they buy one of our products, so that they can make properly-informed decisions.
Council’s Edinburgh Guarantee • Carried out research to learn more about our customers’ wants and needs • Held our first group-wide Green Travel Week to raise awareness, encourage greener travel and reduce our carbon footprint • Continued to invest in our people, through development, leadership and technology • Signed the Armed Forces Corporate Covenant and recently announced an enhanced special leave policy for employees who are, or who are partners of, serving personnel • Continued programme of activity to influence and promote sustainability issues, both as an investor through Standard Life
1 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits.
Group EEV operating capital and cash generation 2013 2012 £m £m
Reconciliation of key capital measures The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2013: Capital management 2013 2012 Movement
Group capital surplus and solvency cover3 2013 2012 2011 £bn £bn £bn
• Wrap platform assets increased by 36% to £16.6bn (2012: £12.2bn). The number of firms using our Wrap platform increased by 99 firms to 1,236 firms and those with more than £20m assets on the platform are up 41% to 228 firms.
Strategic overview Standard Life Investments is a leading asset manager with an expanding global reach. Our ‘Focus on Change’ investment philosophy lies at the heart of our wide range of investment solutions and is backed by disciplined risk management and a shared commitment to a culture of investment excellence. This has proved itself to be robust and repeatable in both good and challenging market conditions. We have an unbroken record of positive annual net flows since inception and a strong track record of profitable organic growth. Earnings before interest and tax have a compound annual growth rate over the last six years of 17%.
Assets under management and net flows We remain focused on meeting the needs of existing clients and securing new business backed by consistently strong investment performance, product innovation, high levels of client service and an expanding global distribution capability. Third party net inflows increased 66% to £10.1bn (2012: £6.1bn) representing 12% of opening third party AUM. This continued our unbroken record of positive annual net inflows since inception. Our retention rates were amongst the best in the industry, with redemptions at just 15% of opening third party AUM.
New business performance PVNBP sales of £2,894m were 18% lower in constant currency (2012: £3,584m) due to a particularly strong performance in 2012 when several large corporate pension and corporate benefit schemes were won. This was partially offset by a strong performance in retail fee business where segregated funds sales increased by 27% in constant currency to £832m (2012: £668m).
Heng An Standard Life, our life joint venture in China, continues with its strategy to develop targeted distribution channels to provide sustainable growth through offering a range of traditional insurance products.
Assets under administration and net flows AUA in the wholly owned businesses grew by 38% in constant currency to £296m (2012: £215m), with net inflows increasing to £80m (2012: £55m). This was driven by robust net inflows in Hong Kong and also reflects improved consumer sentiment across the markets we operate in.
New business performance PVNBP sales in the wholly owned businesses increased by 84% in constant currency to £468m (2012: £252m), driven mostly by the increased sales in Hong Kong. In India, sales fell by 3% in constant currency to £388m. HDFC Life continues to balance quality of business with sales volumes. In China, sales fell by 14% in constant currency to £77m as a result of strategic actions taken to focus on sustainable growth by targeting higher margin regular premium business.
• Burnthrough from the HWPF and GWPF • Insufficient long-dated fixed income assets to match the longest dated liabilities in Canada. Currency risk • Exchange rate movements that reduce the Sterling value of overseas operations and the capital repatriated from them
Our performance culture We believe great performance should be rewarded, and we aim to make the process we follow to do that clear to everyone. Our approach continues to support our reward principles by linking pay to performance and ensuring our remuneration remains competitive to the market and we continue to be a UK Living Wage employer. In addition to this commitment to the Living Wage, we do not support the use of zero hours contracts in our organisation. In 2013, building on our regular performance management conversations and enabled by technology, we introduced a flexible pay matrix and a new goal management system. This brings together performance and development goals in one place and helps ensure greater transparency to support our performance culture. We also introduced a refreshed total reward statement in September 2013, designed to help emphasise the way employees can tailor their benefits package and, by including details of annual salary and bonus awards, highlights to employees the link between performance and reward.
As an investor, we publish regular reports, statistics and evidence of our governance and stewardship activities. These are available online at www.standardlifeinvestments.com/governance_and_stewardship/index.html
Directors’ report The Directors present their annual report on the affairs of the Standard Life group (the “Group”), together with the audited International Financial Reporting Standards (IFRS) consolidated financial statements, European Embedded Value (EEV) financial information and Standard Life plc (the “Company”) financial statements, for the year ended 31 December 2013.
The main trends and factors likely to affect the future development, performance and position of the Group are outlined in the Chief Executive’s overview section of the Strategic report. Reviews of the operating and financial performance of the Group for the year ended 31 December 2013 are given in the Strategic report.
Restrictions on the transfer of shares and securities Except where listed below, there are no specific restrictions on the size of a holding or on the transfer of shares. Both are governed by the general provisions of the Company’s Articles of Association (the “Articles”) and current legislation and regulation. The Articles can be found on our website at www.standardlife.com/about/governance You can also obtain a copy from Companies House, or by writing to the Group Company Secretary and General Counsel at our registered address (details of which can be found in the Contact details section on page 289). The Articles may only be amended by a special resolution passed by the shareholders.
• Under a joint venture agreement dated 12 October 2009 (as amended) between the Company and Tianjin TEDA International Holding (Group) Co. Limited (TEDA), pursuant to which the Group holds its interest in Heng An Standard Life Insurance Company Limited (Heng An Standard Life), upon a change of control of the Company, TEDA has the right to terminate the joint venture and to purchase, or nominate a third party to purchase, the Group's shares in Heng An Standard Life for a price determined in accordance with the agreement.
The Directors are responsible for preparing the Annual Report and Accounts 2013. It is also their responsibility to state that they consider that the Annual Report and Accounts 2013, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. Under the Companies Act 2006, the Directors are required to prepare and approve financial statements for each financial year. The Directors must only approve the financial statements when they are satisfied that they give a true and fair view of how the Group and the Company have performed at the end of the financial year, and that they give a true and fair view of the profit of the Group and the Company for that year. The financial statements of the Group and, where relevant, the Company have been prepared in accordance with: • International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) • the Companies Act 2006 • the Disclosure and Transparency Rules (DTR) issued by the Financial Conduct Authority (FCA) • Article 4 of the International Accounting Standards (IAS) Regulation.
EEV basis of preparation, methodology and areas of judgement The Committee reviewed the EEV basis of preparation and changes to the methodology, and agreed that the basis of preparation and methodology were appropriate to be used in the 2013 EEV financial information. The Committee considered the areas with the most significant levels of judgement affecting the EEV financial information to be the determination of mortality and persistency assumptions and the risk discount rates in UK and Canada. In addition, the Committee also reviewed the projected release of the future taxes included in the Canadian liabilities. The Committee challenged the assumptions and agreed with management’s proposals.
The external auditors identify GIA reviews where they intend to place reliance on the work of the GIA team. Equally, the FCA or the PRA may request GIA to undertake specific reviews as part of their Risk Mitigation Plan follow up. GIA has an internal audit cosourcing agreement with KPMG LLP and this is used to support specific technical reviews. During the year, GIA carried out its own quality assurance processes and reported the results back to the Committee. The Committee members also met with the senior managers of the GIA team during the year. GIA operates in accordance with a Global Charter which is reviewed by the Committee every year. During 2013 the Global Charter was updated to reflect the IIA new code for internal auditors of banks and financial services.
Committee effectiveness The Committee reviews its remit and effectiveness annually. Members complete an online self-assessment questionnaire and review the Committee’s terms of reference. After analysing the questionnaire responses in late 2013, the Committee concluded that it had: • performed effectively during the year • fulfilled its duties under its terms of reference, and kept its terms of reference up-to-date • received sufficient, reliable and timely information from management and the external auditors to enable it to fulfil its responsibilities.
The Committee’s work in 2013 Economic uncertainty has continued during 2013 impacted by a number of factors including the possibility that quantitative easing measures in the USA may be phased out and by on-going concerns in the Eurozone. The Committee closely monitored financial markets during the year in order to assess the impact on the Group’s risk profile and capital position. Interest rates in the UK, Germany and Canada remained low relative to historic levels however for most of the year yields were higher than their 2012 closing levels. Stock markets have experienced strong growth in 2013 with a number of markets reaching historic highs. Against this economic backdrop the Committee carefully monitored solvency levels and key risk metrics across the Group.
The Chief Executive and other board members and executives (where appropriate) of Standard Life Investments attend Committee meetings. The Committee’s discussions are relevant to and inform the deliberations at the Board and other Committee meetings.
Second line: risk oversight is provided by the Group CRO and established risk management committees, including the Group ERMC. These management committees are supported by the specialist Risk Management and Compliance functions across the Group.
Within our model, the capital of the Group is quantified according to a number of metrics as described above. Businesses plan their capital consumption using internally agreed targets, which are set to ensure that strategic objectives can be delivered under a wide range of market and trading conditions. The risk exposures of the business units are assessed on the basis of the expected variance in key metrics in response to specific risk events, covering the full range of risks to which the Group is exposed.
Designed to support the delivery of Standard Life Investments’ annual business plan.
Awards are subject to clawback for up to two years post vesting.
Under the malus and clawback provisions the Remuneration Committee can reduce awards that have not yet vested and can require the repayment of an award.
Measures chosen may include, but are not limited to: • Group operating profit before tax • European Embedded Value operating profit before tax (EVOP)
Measures chosen may include, but are not limited to: • Operating profit before tax • Earnings before interest and tax (EBIT) • Operating RoE.
Continues to enhance the external profile of Standard Life Investments with key external parties.
Non-executive Director remuneration policy is to pay: • Board membership fees • Further fees for additional Board duties such as Chairman of a Committee, the Senior Independent Director and the Chairman of Standard Life Investments to take into account the additional responsibilities and time commitments of the roles.
• The Remuneration 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 figure reported for long-term incentives in 2012 has been restated as the actual market values at the date of vest of the Group LTIP and SLI LTIP, unknown at the date of publication of the 2012 Annual Report and Accounts are now known. The estimates provided in last year’s report were: David Nish £2,759k, Keith Skeoch £2,273k and Jackie Hunt £1,129k.
• Building on our regular performance management conversations and enabled by technology, we introduced a flexible pay matrix and a new goal management system to support our performance culture
• The level of vesting, subject to the above hurdle being satisfied, will be based on consolidated cumulative three-year third party earnings before interest and tax (EBIT) performance as shown in the table below. The actual EBIT targets will not be disclosed as the Board deem that this is commercially sensitive information and, if disclosed, could seriously prejudice the Group’s business.
Jackie Hunt Non-executive Director of National Express Group PLC £14,4602 1 Keith Skeoch continues to waive his fees from the ABI. 2 Jackie Hunt’s fees from National Express Group for the period 1 January 2013 to the date of her resignation (26 April 2013).
The following table shows the single figure of total remuneration for the director in the role of Chief Executive for the same five financial years as shown in the graph above. Also shown are the annual bonus awards and Group LTIP awards which vested based on performance in those years.
Performance graph: The graph shows the difference between investing £100 in Standard Life plc and the FTSE 100 on 1 January 2009 to 31 December 2013. It is assumed dividends are reinvested. The FTSE 100 has been chosen as the comparator index because Standard Life plc is a member of this FTSE grouping.
Where appropriate, the Remuneration Committee receives input from the Chairman, CE, CFO, Group Operations Officer, Director of Group Reward and Employment Policy, Group Chief Risk Officer and Head of Corporate Governance at Standard Life Investments. This input never relates to their own remuneration.
We have not audited the Pro forma reconciliation of consolidated operating profit to profit for the year set out on page 106 which was prepared by Standard Life plc.
ISA (UK& Ireland) states there is a risk of management override of controls due to the pressure management may feel to achieve the planned results.
Total tax expense 305 269 Less: Tax attributable to policyholders’ returns (215) (218) Tax expense attributable to equity holders’ profits 11 90 51
Profit before tax expense attributable to equity holders’ profits 586 745
Assets Intangible assets 15 300 214 Deferred acquisition costs 16 905 904 Investments in associates and joint ventures 17 328 328 Investment property 18 8,545 8,565 Property, plant and equipment 19 219 156 Pension and other post-retirement benefit assets 37 432 339 Deferred tax assets 20 121 177 Reinsurance assets 33 6,173 6,912 Loans 21 2,924 3,299 Derivative financial assets 21 1,767 2,150 Equity securities and interests in pooled investment funds 21 90,316 65,812 Debt securities 21 62,039 73,301 Receivables and other financial assets 21 1,042 1,717 Other assets 25 269 284 Assets held for sale 26 121 - Cash and cash equivalents 21 9,104 9,942 Total assets 184,605 174,100 Equity Share capital 28 238 236 Shares held by trusts 29 (6) (7) Share premium reserve 1,110 1,110 Retained earnings 30 1,391 1,441 Other reserves 31 1,494 1,579 Equity attributable to equity holders of Standard Life plc 4,227 4,359 Non-controlling interests 32 333 341 Total equity 4,560 4,700 Liabilities Non-participating insurance contract liabilities 33 28,312 29,050 Non-participating investment contract liabilities 33 97,659 84,201 Participating contract liabilities 33 30,447 31,618 Reinsurance liabilities 33 316 381 Deposits received from reinsurers 34 5,589 6,136 Third party interest in consolidated funds 32 11,803 12,037 Borrowings 34 95 108 Subordinated liabilities 34 1,861 1,868 Pension and other post-retirement benefit provisions 37 104 130 Deferred income 38 316 352 Deferred tax liabilities 20 178 43 Current tax liabilities 20 55 150 Derivative financial liabilities 23 795 853 Other financial liabilities 34 2,367 2,323 Other liabilities 40 148 150 Total liabilities 180,045 169,400 Total equity and liabilities 184,605 174,100 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation.
Amendment to IAS 19 Employee Benefits The amendment to IAS 19 revises requirements for pensions and other post-retirement benefits, termination benefits and other employee benefits. The main impact on the Group’s consolidated financial statements is that expected returns on plan assets and the unwind of the discount rate on the defined benefit obligation are no longer separately recognised in profit or loss. Instead, interest on the net defined benefit asset or liability is recognised in profit or loss, calculated using the discount rate used to measure the net pension obligation or asset. Additionally, the amended standard no longer permits entities to defer past service costs. Past service costs must be recognised immediately in profit or loss. The amendment has been applied retrospectively and the impact is described in Note 37 – Pension and other post-retirement benefit provisions.
IFRS 11 Joint Arrangements IFRS 11 defines and establishes accounting principles for joint arrangements and replaces previous requirements in IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. The standard distinguishes between two types of joint arrangements – Joint Ventures and Joint Operations – based on how rights and obligations are shared by the parties to the arrangement. Joint operators should recognise their share of the assets, liabilities, revenue and expenses of the interest in accordance with applicable IFRSs. Joint venturers should apply the equity method of accounting prescribed in IAS 28 Investments in Associates and Joint Ventures 2011 to account for their interest. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 is a single disclosure standard which applies to all entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 requires entities to disclose information to enable users of the financial statements to evaluate the nature, risks and financial effects associated with interests in other entities. The required disclosures are grouped into the following main categories: • Significant judgements and assumptions • Interests in subsidiaries • Interests in joint arrangements and associates • Interests in unconsolidated structured entities.
Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 removes and replaces the current requirements for hedge effectiveness in IAS 39 and therefore the requirements for the application of hedge accounting. The new requirements change what qualifies as a hedged item and some of the restrictions on the use of some hedging instruments. The accounting and presentation requirements remain largely unchanged. However, entities will now be required to reclassify the gains and losses accumulated in equity on a cash flow hedge to the carrying amount of a non-financial hedged item when it is initially recognised. Additional disclosures on hedge accounting are also required.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated, from the acquisition date, to each of the Group’s cash generating units or groups of cash generating units that are expected to benefit from the business combination. The carrying amount of goodwill for each cash generating unit or group of cash generating unit is reviewed when changes in circumstances or events indicate that there may be uncertainty over its carrying value, and at least annually.
(j)(ii) Intangible assets Intangible assets are recognised on the consolidated statement of financial position if it is probable that the relevant future economic benefits attributable to the asset will flow to the Group and they can be measured reliably and are either identified as separable (i.e. capable of being separated from the entity and sold, transferred, rented, or exchanged) or they arise from contractual or other legal rights, regardless of whether those rights are transferable or separable.
(k) Deferred acquisition costs (k)(i) UK and Europe - insurance and participating investment contracts Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that is subject to the Prudential Regulation Authority (PRA) realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts, acquisition costs, which include both incremental acquisition costs and other indirect costs of acquiring and processing new business, are deferred.
(k)(iii) Non-participating investment contracts Incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit linked investment contracts are deferred. Where such costs are borne by a with profits fund that is subject to the PRA’s realistic capital regime, deferral is limited to the level of any related deferred income.
Debt securities designated as AFS are measured at fair value. For these instruments interest calculated using the effective interest method is recognised in the consolidated income statement. Other changes in fair value and any related tax are recognised in other comprehensive income and recorded in a separate reserve within equity until disposal or impairment, when the cumulative gain or loss is recognised in the consolidated income statement with a corresponding movement through other comprehensive income. An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows.
(s) Cash and cash equivalents Cash and cash equivalents include cash in hand, money held at call and short notice with banks and any highly liquid investments with less than three months to maturity from the date of acquisition. Cash and cash equivalents are categorised for measurement purposes as loans and receivables and are therefore measured at amortised cost. For the purposes of the consolidated statement of cash flows, cash and cash equivalents also include bank overdrafts, which are included in borrowings on the consolidated statement of financial position.
For equity-settled share-based payment transactions, the fair value of services received is measured by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date, which is the date that the Group and the employees have a shared understanding of the terms and conditions of the award. If that award is subject to an approval process then the grant date is the date when that approval is obtained. Market vesting conditions and non-vesting conditions, such as the requirement of employees to save in a Save-as-you-earn scheme, are included in the calculation of the fair value of the instruments at the date of grant. Vesting conditions which are not market conditions are included in assumptions about the number of instruments that are expected to vest.
Profit for the year 694 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation. 2 Share of joint ventures’ and associates’ profit before tax comprises the Group’s share of results of HDFC Standard Life Insurance Company Limited, Heng An
UK and Irish unit linked pension contracts (fee business) This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts.
In 2012, £1m of unrecognised tax losses from previous years were used to reduce income tax expense. Unrecognised losses and timing differences of £4m were used to reduce the deferred tax expense (2012: £14m).
(c)(ii) Diluted alternative earnings per share restated1 £m p per share £m p per share
14. Dividends The Company paid a final dividend of 9.80 pence per share and a special dividend of 12.80 pence per share totalling £230m and £302m respectively (final 2011: 9.20 pence; £216m) in respect of the year ended 31 December 2012 on 21 May 2013. An interim dividend of 5.22 pence per share (interim 2012: 4.90 pence) totalling £124m (interim 2012: £115m) in respect of the year ended 31 December 2013 was paid on 29 October 2013. The dividends were recorded as an appropriation of retained earnings and special reserve for the year ended 31 December 2013.
First Real Properties Limited Canada 49.0 2 88 2 11 8 7 526304 Alberta Limited Canada 50.0 5 25 - 4 4 - HDFC Standard Life Insurance Company Limited India 26.0 27 1,180 30 1,132 406 394 Heng An Standard Life Insurance Company Limited China 50.0 20 379 2 346 66 73
The amount of debt securities expected to be recovered or settled after more than 12 months is £48,905m (2012: £61,940m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
3. Financial information – Notes to the Group financial statements continued 23. Derivative financial instruments continued (c) Held for trading Derivative financial instruments classified as held for trading include those that the Group holds as economic hedges of financial instruments that are measured at fair value. Held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.
Greater than 20 years Total 2013 £m £m £m £m £m £m £m
Shares issued in respect of share incentive plans 283,126 - 445,155 -
Economic assumptions reflect changes in fixed income yields, leading to higher valuation rates on non-participating business, and other market movements.
37. Pension and other post-retirement benefit provisions The Group operates post-retirement defined benefit and defined contribution plans for staff employed by the Group.
Charge recognised in the consolidated income statement 8 (56) (54) 1 Interest income has been calculated based on the fair value plan assets at 1st January 2013 which includes the effects of IFRS 13 valuation methodology changes.
Contributions made to defined contribution plans are included within current service cost, with the balance attributed to the Group’s defined benefit plans.
Present value of funded obligation (2,327) (209) (76) (2,612) (2,121) (233) (69) (2,423)
Effect of limit on plan surplus (233) - - (233) (182) - - (182) Net asset/(liability) in the consolidated statement of financial position 432 (81) (23) 328 339 (115) (15) 209
Change in effect of limit on plan surplus - - - 27 27 Remeasurement gains/(losses) recognised in other comprehensive income (83) 19 (64) 27 (37)
(CPM-RPP2014Publ) with generational projection without any size adjustment factors due to pension income level
Inflation Rises in inflation expectations would in isolation be expected to increase the cost of future benefit accrual and plan liabilities.
3. Financial information – Notes to the Group financial statements continued 41. Risk management (a) Overview (a)(i) Application of the risk management framework
Quantitative market risk disclosures are not provided in respect of the assets of the unit linked and segregated funds since the shareholder is not exposed to market risks from these assets. The shareholder’s exposure to market risk on these assets is limited to variations in the value of future profits earned on the contracts as fees are based on a percentage of the fund value. The sensitivity to market risk analysis includes the impact on those statement of financial position items which are affected by changes in future profits due to the market stresses changing the value of assets held by the unit linked and segregated funds. The shareholder is also not exposed to the market risk from the assets held by third parties in consolidated funds and non-controlling interests and therefore they have been excluded from the following quantitative disclosures.
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (b) Market risk continued (b)(ii) Sensitivity to market risk analysis continued Equity sensitivity to market risk The shareholder business in Canada classifies certain debt securities which back non-participating investment contract liabilities and subordinated debt liabilities as AFS. The shareholder business in the Other reportable segment also classifies certain debt securities which back subordinated debt liabilities issued by the Company as AFS. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the consolidated income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Group's equity to variations in interest rate risk exposures differs from the sensitivity of the Group's profit after tax to variations in interest rate risk exposures.
(c)(ii) Credit spreads As at 31 December 2013, 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 £28m (2012: £22m). A further reduction of £56m (2012: £61m) would arise as a result of a change in assumed default rates of 12.5 basis points per annum (25% of the spread change).
Non-participating insurance contract liabilities (45) 41 (13) 13 12 (11) (17) 18
Non-participating insurance contract liabilities (55) 51 (13) 13 15 (14) (2) 2
Greater than 20 years No defined maturity Total 2013 £m £m £m £m £m £m £m £m
Greater than 20 years Total 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m £m £m £m £m £m £m £m £m Shareholder business Non-participating investment contract liabilities 1,666 1,654 482 710 291 341 87 84 62 52 117 74 2,705 2,915
Total participating business 635 845 7 13 7 13 7 7 7 6 121 102 784 986 Unit linked and segregated funds Non-participating investment contract liabilities 95,267 81,601 - - - - - - - - - - 95,267 81,601
Contingent consideration – 2013: £15m (2012: £nil) Contingent consideration has been recognised as a result of business combinations in the year as discussed in Note 1 – Business combinations, and has been valued using a valuation model. The inputs into the model include unobservable inputs due to assumptions made regarding expected movements in assets under management and therefore the liability is classified as level 3 in the fair value hierarchy.
There were no transfers between levels 1 and 2 during the year (2012: none). Refer to 42(d)(iii) for details of movements in level 3. The table that follows presents an analysis of the Group’s assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41 – Risk management. Fair value hierarchy Level 1 Level 2 Level 3 Total 2013 2012 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m £m £m Shareholder business Investment property - - 14 47 417 474 431 521 Owner occupied property - - 1 1 45 32 46 33 Derivative financial assets 1 - 110 63 - - 111 63 Equity securities and interests in pooled investment vehicles 175 182 2 3 18 12 195 197 Debt securities 904 834 9,980 10,606 932 983 11,816 12,423 Assets held for sale 29 - - - - - 29 - Total shareholder business 1,109 1,016 10,107 10,720 1,412 1,501 12,628 13,237 Participating business Investment property - - - - 1,995 2,048 1,995 2,048 Owner occupied property - - - - 126 79 126 79 Derivative financial assets 206 415 446 691 - - 652 1,106 Equity securities and interests in pooled investment vehicles 14,021 8,380 - - 671 699 14,692 9,079 Debt securities 13,735 17,701 9,668 12,085 175 219 23,578 30,005 Assets held for sale - - - - - - - - Total participating business 27,962 26,496 10,114 12,776 2,967 3,045 41,043 42,317 Unit linked and segregated funds Investment property - - - - 4,829 4,701 4,829 4,701 Owner occupied property - - - - - - - - Derivative financial assets 246 135 493 546 - - 739 681 Equity securities and interests in pooled investment vehicles 69,904 52,942 - - 51 77 69,955 53,019 Debt securities 4,498 6,062 18,288 18,567 158 194 22,944 24,823 Assets held for sale - - - - 59 - 59 - Total unit linked and segregated funds 74,648 59,139 18,781 19,113 5,097 4,972 98,526 83,224 Third party interest in consolidated funds and non-controlling interests Investment property - - - - 1,290 1,295 1,290 1,295 Owner occupied property - - - - - - - - Derivative financial assets 88 63 177 237 - - 265 300 Equity securities and interests in pooled investment vehicles 5,141 3,149 - - 333 368 5,474 3,517 Debt securities 168 680 3,518 5,363 15 7 3,701 6,050 Assets held for sale - - - - 33 - 33 - Third party interest in consolidated funds and non-controlling interests 5,397 3,892 3,695 5,600 1,671 1,670 10,763 11,162 Total 109,116 90,543 42,697 48,209 11,147 11,188 162,960 149,940 202 Standard Life
3. Financial information – Notes to the Group financial statements continued 45. Commitments continued (c) Operating lease commitments The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights.
The year end balances arising from transactions carried out by the Group with related parties are as follows: 2013 2012 £m £m
The capital requirements of each business unit are forecast on a periodic basis, and the requirements are assessed against both forecast available capital and local regulatory capital requirements. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment. The capital planning process is the responsibility of the Chief Executive, until such time as a Chief Financial Officer is appointed. Capital plans are ultimately subject to approval by the Board.
Group total 2012 (restated)1 £m £m £m £m £m £m £m £m Available capital resources
Our responsibility is to audit and express an opinion on the EEV financial information in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Consolidation adjustment for different accounting bases4 - - - - (75) (75)
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss (8) 102
EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc (the Company) plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders.
For the year to 31 December 2012, Canada lapse assumption losses of £53m arise from the impact of assuming higher surrenders within Group pension business, reflecting recent experience. The £50m gain from mortality assumption changes in Canada mainly arises from annuities. The adverse £139m other assumption changes in Canada include losses of £45m from the decision to impose a minimum inflation rate on expenses; £17m from a reduction in expected fee income from our existing group savings and retirement contracts; and £72m from assuming that we will earn lower fee income on the funds invested from future deposits.
3. Financial information – Notes to the EEV financial information continued 7. Movements in total EEV (a) Analysis of profit and loss movements Covered
Development expenses (27) - (27) 8 (19) (26) - (26) 4 (22) Expected return on free surplus (7) - (7) - (7) - - - - - EEV operating profit/(loss) after tax 373 28 401 (28) 373 355 32 387 229 616
Contribution from in-force business: Expected return 125 - 125 (13) 112 151 (30) 121 (3) 118 Experience variances and operating assumption changes 170 (57) 113 41 154 318 (65) 253 (157) 96
Asia and Emerging Markets TVOG in the Asia businesses within Asia and Emerging Markets arises from guarantees and options given to with profits business written in India and China.
Non-economic assumption changes Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed in full on an annual basis. Other non-economic assumption changes, not relating to the full annual review of non-economic assumptions, may be reflected in the half year results, for example non-economic assumption changes resulting from management action or modelling changes.
Where AFS assets are held by an EEV non-covered entity, unrealised gains and losses do not impact EEV profit and are recorded within the EEV consolidated statement of comprehensive income.
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
(p) Employee share-based payments The Company operates share incentive plans for all employees, share-based long-term incentive plans for senior employees and may award annual performance shares to all eligible employees when the Group’s profit targets are met. Further details of the schemes are set out in Note 46 of the Group financial statements. For share-based payment employee transactions, services received are measured at fair value.
Company accounting policies continued (p) Employee share-based payments continued For equity-settled share-based payment transactions, the fair value of services received is measured by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date, which is the date that the Group and the employees have a shared understanding of the terms and conditions of the award. If that award is subject to an approval process then the grant date is the date when that approval is obtained. Market vesting conditions and non-vesting conditions, such as the requirement of employees to save in the Save-as-you-earn scheme, are included in the calculation of the fair value of the instruments at the date of grant. Vesting conditions which are not market conditions are included in assumptions about the number of instruments that are expected to vest. The charge in respect of the services received is recharged by the Company to the subsidiary which receives the services of the employees.
If the equity instruments do not vest until the employee has fulfilled specified vesting conditions, the Group presumes that the services to be rendered by the employee as consideration for those equity instruments will be received in the future, during the period of those vesting conditions (vesting period). Therefore, the Company recognises an amount due from subsidiaries in respect of those services as they are rendered during the vesting period with a corresponding credit to the equity compensation reserve in equity.
(b)(ii) Sensitivity analysis – market risk The table below illustrates the sensitivity of profit after tax and equity to reasonably possible variations in the key assumptions made in relation to the Company’s most significant market risk exposures. The sensitivity analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security prices and to changes in interest rates as at the reporting date, assuming other assumptions remain unchanged. When illustrating the impact of equity risk, the expectations of corporate earnings remain unchanged. Correlation between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously. Equity Interest +20% -20% +10% -10% +1% -1% 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m £m £m £m £m £m £m
(c)(i) Credit exposure of financial assets The following table provides an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. For those financial assets with credit ratings assigned by external rating agencies, classification is within the range of AAA to BBB. AAA is the highest possible rating and rated financial assets that fall outside the range of AAA to BBB have been classified as below BBB. For those financial assets that do not have credit ratings assigned by external rating agencies but where the Company has assigned internal ratings for use in managing and monitoring credit risk, the assets have been classified in the analysis that follows as ‘internally rated’. If a financial asset is neither rated by an external agency nor ‘internally rated’, it is classified as ‘not rated’. The total amounts presented represent the Company’s maximum exposure to credit risk at the reporting date without taking into account any collateral held. The analysis also provides information on the concentration of credit risk.
Liquidity risk is managed by the Company in consultation with the central Group capital management function, which incorporates treasury management. Liquidity risk is primarily managed by placing limits on the value of financial assets held which are neither quoted nor regularly traded on a recognised exchange and by maintaining a portfolio of committed bank facilities. The Company maintains a £500m syndicated revolving credit facility which is currently undrawn and was renewed on 5 March 2013 with maturity due in March 2018. The Company is also responsible for the definition and management of the contingency funding plan which operates on a continuous basis and is fully documented.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2013 the residual credit risk is considered immaterial and no credit risk adjustment has been made.
The valuations received from investment managers of the underlying funds are reviewed and where appropriate adjustments are made to reflect the impact of changes in market conditions between the date of the valuation and the end of the reporting period. The valuation of these securities is largely based on inputs that are not based on observable market data, and accordingly these instruments are treated as level 3 instruments within the fair value hierarchy. Where appropriate, reference is made to observable market data.
Totals 107,416 100 2,376,616,730 100 1 These figures include the Company-sponsored nominee – the Standard Life Share Account – which had 1,128,016 participants holding 947,113,201 shares and the
SIPP A self invested personal pension which provides the policyholder with greater choice and flexibility as to the range of investments made, how those investments are managed, the administration of those assets and how retirement benefits are taken.
If you have any questions about voting at the Annual General Meeting, dividends or your shareholding, please contact our registrar: www.standardlifeshareportal.com (English)