Basis of preparation 36 2. Governance information Good governance is part of ensuring we operate responsibly and act in the interests of our shareholders. In this section you can find out more about our Directors’ background and experience, their specific responsibilities in relation to the Annual report and accounts, the key parts of our governance framework and how it was implemented during 2014 as well as reports from the various Board committees. You can also find out about our approach to Directors’ remuneration and the results of how our Remuneration Policy was carried out during 2014. Board of Directors 37 Directors’ report 40
Integration of Ignis on track to achieve £50m of annual cost savings by
Bank introduced their own quantitative easing measures • The Asian market was impacted by stalling growth in China as fears over property market bubbles, erratic foreign demand and overcapacity have weighed on its manufacturing industry and broader economy • US economic outlook remains unclear with the final quantitative easing programme ending in October 2014, which may threaten short-term growth rates.
Group operating return on equity (including discontinued operations) 14.9% 14.7% 0.2% points
• Spread/risk margin, which mainly relates to UK annuities, increased by 13% to £183m and was largely driven by an increase in asset and liability management, partially offset by the impact of reduced UK annuity sales following the recent Budget changes
The Group capital surplus remains largely insensitive to significant market volatility impacting equities or yields. The estimated impact on the Group capital surplus compared to the 31 December 2014 position due to significant market movements and based on certain assumed management actions appropriate to these stresses is as follows: • 30% fall in equities: Reduction of £0.2bn (2013: £0.2bn) • 100bps rise in yields: Reduction of £0.1bn (2013: £0.1bn) • 100bps fall in yields (minimum yields of zero): Increase of £0.1bn
EEV operating profit after tax from continuing operations 2014 2013 £m £m
Auto enrolment has continued to impact the UK savings market in 2014, giving millions of people access to a pension for the first time. The ability to meet this demand has been a focus of the industry, proving a real challenge for some and an opportunity for us. Our investment in solutions with the capacity and scale to meet this demand has enabled us to implement 3,058 corporate schemes and gain access to over half a million new customers since auto enrolment launched in 2012. The market has seen some employers miss their staging dates in 2014, with The Pensions Regulator beginning to levy fines on these firms. In 2015 we anticipate that small and medium employers will be increasingly focused on the speed of staging and we believe we have the most efficient process in the market, with employers being able to receive a quote and apply for a Good to Go workplace pension scheme in just six minutes.
A life insurance reform law was issued by the German Ministry of Finance in July 2014 which reduces the maximum level of guarantees and is expected to reduce the commission payable by German insurers. The new regulation supports our long term prospect in Germany as we aim to increase our proportion of unit linked business. Our Irish domestic business continues to grow its market share with strong sales of Standard Life Investments’ Global Absolute Return Strategies and MyFolio funds.
In our Europe business fee based AUA increased by 15% to £17.2bn (2013: £14.9bn) due to favourable market movements and steady net inflows of £1.1bn as a result of our strong relationships with Irish and German brokers.
Operating profit before tax increased to £19m (2013: £nil): • Fee based revenue increased by 5% in constant currency to £53m as a result of higher AUA in Hong Kong • Total expenses decreased by 3% in constant currency to £52m, primarily due to cost efficiencies and a reduction in commission payments in Hong Kong amid the changing regulatory environment
• In Hong Kong, the new Aspiration and Fortuity single premium products have been developed which we expect will help continue the growth in AUA.
• The acquisition of Ignis enhances this by deepening the investment capabilities of Standard Life Investments
• Our change process is mature with a culture of continual improvement. Given the volume of change experienced in recent years, we have greater experience of making changes to the portfolio based on business priority and regulatory focus.
We grouped the feedback into themes and ranked these themes in the order of what our stakeholders found most important. We then assessed this against our business objectives to help us understand the most important sustainability issues for us. Through this review, we found that our five areas of focus remain material to our business, and continue to give us a clear picture of what’s important to our stakeholders: • Our customers and clients • Operating responsibly • Our community • Our people • Our environment.
The review also helped us gain a deeper understanding of the priorities within these areas and this has shaped our work in 2014. More information about this review is included in our full sustainability report.
You can read details of our greenhouse gas emissions for our own business operations in the table below. This does not include our greenhouse gas emissions for our global real estate investment portfolio, however these emissions are disclosed in the Standard Life Investments’ annual Sustainable Real Estate Investments report.
Appointed Director in October 2014. Isabel holds nonexecutive directorships at BT Group plc, where she is also a member of its pension committee, and at Phoenix Group Holdings, where she is also a member of its remuneration and audit committees. She is chairman of the National House Building Council. Isabel previously held the positions of chief executive officer at Synesis Life Ltd, executive director at Prudential UK, and chief financial officer of Eureko. She held non-executive director appointments at QBE Insurance Group Ltd, where she chaired the remuneration committee, the Pensions Regulator and MGM Advantage, where she chaired the audit committee. She was previously a member of the With Profits Committee of Standard Life Assurance Limited. Isabel is a member of the Audit Committee and the Risk and Capital Committee.
Share capital You can find full details of the Company’s share capital, including movements in the Company’s issued ordinary share capital during the year, in Note 29 to the Group financial statements. You can also find an analysis of registered shareholdings by size, as at 31 December 2014, in the Shareholder information section.
As far as each Director is aware, there is no relevant audit information that PricewaterhouseCoopers LLP is not aware of as at the date this report was approved.
The Group expects to recognise a gain on sale of approximately £1.1bn which has been estimated based on book values as at 31 December 2014 (the actual gain on sale will be based on book values as at 30 January 2015 when the sale completed). The gain on sale is expected to be exempt from tax under UK and Canadian tax legislation and therefore no tax charge is expected to arise.
As well as covering the formal disclosure requirements of the UK Corporate Governance Code (the Code), this statement describes how the Board meets its governance responsibilities. The Directors view the Code as an important tool in supporting how we deliver the Group’s strategy. They also see it as an opportunity to drive and support effective leadership and behaviours at Board level and across the Group.
Board effectiveness Review process Board effectiveness is key to the Group’s success. The Board has, with the help of the Nomination and Governance Committee, developed a formal review process to assess how well the Board, its Committees, the Chairman and the Directors are performing collectively and individually and how performance could be improved.
Non-executive Directors Colin Buchan2 4/4 3/3 2/3 1/1 Pierre Danon 9 7 8 Crawford Gillies 9 7 3/3 3/3 2 David Grigson 9 6 (c) 7 3 Noel Harwerth 9 6 7 (c) Isabel Hudson3 2/2 2/2 2/2 Kevin Parry4 2/2 2/2 2/2 John Paynter 8 6 9 4 Lynne Peacock 9 6 10 (c) 2 Martin Pike 9 7 7/7
• The results of management’s assessments of the Group’s going concern position and Group solvency position, including recommending to the Board that the going concern assessment was reasonable (you can read more in the Going concern section of this report)
The Committee receives regular reports from the GCIA on: • The implementation of the approved plan and proposed changes to it • Key findings from completed reviews, including the impact on financial reporting processes and related applications • The status of management’s implementation of agreed improvement actions, including where and why dates have been rescheduled • The GCIA’s assessment of the internal control environment at each business unit.
We use a control framework which comprises of: policy framework, control self-assessment (CSA), risk assessment, key risk indicators, risk event and action plan management, supported by the Operational Risk and Control (ORAC) system.
Conduct Risk Conduct risk is the risk that through our culture, strategies, decision making and behaviours we do not deliver fair outcomes for our customers. We have no appetite for behaviours and decisions that knowingly lead to unfair customer outcomes.
In addition, the Group participates in the development of tax policy and legislation through engagement with tax authorities on tax consultations and involvement with representative bodies such as the Association of British Insurers and the Investment Association in alignment with our business strategy and to promote a stable environment for long term savings and investments.
• The organic growth and significantly expanded international reach of the Standard Life Investments business and growth of Standard Life Investments’ Assets Under Management and third party business
Base salary To provide a core reward for undertaking the role, positioned at a level needed to recruit and retain the talent required to develop and deliver the business strategy.
Base salaries are normally reviewed annually, with any increases usually effective from March.
The Remuneration Committee may award increases above this level in certain circumstances, such as: • Where a new recruit or promoted employee’s salary has been set lower than the market level for such a role and larger increases are justified as the individual becomes established in the role
Executive Directors can participate in the all-employee share plans operated by Standard Life on the same basis as all other employees. The two current all employee share plans are: • The Standard Life (Employee) Share
The award for the CE, Standard Life Investments is determined by the Remuneration Committee.
Dividend equivalents accrue over the three-year period. These will normally be paid in shares on a reinvested basis.
Awards (in the form of nil-cost options) that were granted to executive Directors under the Group LTIP prior to 2014 are subject to the achievement of Group operating profit performance targets measured in the final financial year of the three-year performance periods. The Remuneration Committee has the discretion to amend the final vesting level of these awards if it does not consider that it reflects the overall performance of the Group. Awards are also subject to review by the Risk and Capital Committee at the end of the performance period to confirm that vesting of the award is appropriate. The maximum individual award under this plan is 200% of salary. These awards accrue dividend equivalents over the performance period which will normally be paid in shares on a reinvested basis. The performance target ranges for these awards are disclosed in this or previous remuneration reports with the target performance level disclosed retrospectively in the remuneration report for the final year of the performance period.
Awards previously granted to the CE, Standard Life Investments under the Standard Life Investments LTIP are consistent with the remuneration policy table above.
Directors’ remuneration report; and the maximum level of bonus and long-term incentive awards which may be awarded to a new executive Director (excluding the Chief Executive, Standard Life Investments) at or shortly following recruitment shall be limited to 475% of salary. The maximum level for the Chief Executive, Standard Life Investments will be 865% of salary. These limits exclude buyout awards and are in line with the policy table above.
In both the annual bonus plans’ and long-term incentive plans’ rules, the distinction is made between good leavers and other leavers. A good leaver is someone whose employment comes to an end because of death, ill health, injury, disability, redundancy or retirement as determined by their employing company, sale of the employing company or business or any other circumstance at the discretion of the Remuneration Committee. For the purposes of the Standard Life Investments LTIP, a good leaver may also include an individual who is transferred out of Standard Life Investments to another company in the Group. In determining whether an individual is a good leaver, the Remuneration Committee will exercise its judgement in a manner which seeks to be in the Company’s interests taking into account all relevant factors in relation to the departure. Where judgement has been exercised, the Remuneration Committee would provide an explanation in the following year’s Directors’ remuneration report.
3 The other payments comprise a cash award of £540,000 made to Luke Savage in recognition of long-term awards and £141,165 in respect of short-term awards awarded by his previous employer which were forfeited on joining Standard Life. Of the amount of £540,000, £270,000 was paid in 2014 and payments of £135,000 and £135,000 will be paid in 2015 and 2016 subject to ongoing employment requirements. The amount of £141,165 relating to the short-term award will be paid in March 2015.
4 David Nish and Luke Savage participate in the Standard Life Sharesave Plan – their options are not yet exercisable. Both David Nish and Keith Skeoch participate in the Standard Life (Employee) Share Plan – the maximum annual award of matching shares is currently £300.
• The proposed change to employee pensions was a major initiative for the year with a significant impact on many of our employees
Standard Life Investments’ bonuses Keith Skeoch participated in the Standard Life Investments’ personal and company bonus plans, in addition to the Group annual bonus. These plans reward participants based on Standard Life Investments’ corporate and investment performance. Consistent with fund management practice, the amount of the bonus pool is determined by reference to Standard Life Investments’ financial performance, having regard to the total remuneration spend. • Personal bonus plan – rewards participants for personal performance in the year. Keith Skeoch’s opportunity for 2014 was capped at 105% of salary. • Company bonus plan – Keith Skeoch’s company bonus opportunity for 2014 was equal to 200% of salary.
Actual performance £581m 1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited.
Awards granted in 2014 Awards to executive Directors were made in 2014 under the Executive LTIP and the Standard Life Investments LTIP. As set out in the Remuneration Chairman’s report, the performance targets for the Executive LTIP and Standard Life Investments LTIP have been adjusted.
3 Based on the average share price for the month of December preceding the date the awards were granted.
2 The Group LTIP targets for the award granted in 2008 were not met and therefore no Group LTIP award vested for the year ended 31 December 2010. 3 Sir Sandy Crombie stepped down from the role of CE on 31 December 2009.
Maximum % of target award vesting and target for maximum vest 2015 Standard Life Investment
The following table shows the number of Standard Life plc shares held by each of the non-executive Directors: Total number of shares owned at 1 January 2014 or date of appointment if later
A representative from Deloitte LLP attends, by invitation, all Remuneration Committee meetings to provide information and updates on external developments affecting remuneration as well as specific matters raised by the Remuneration Committee. Deloitte LLP also drafted the plan rules and ancillary documentation for the Executive LTIP. Outside of the meetings, the Remuneration Committee's Chairman seeks advice on remuneration matters on an ongoing basis. As well as advising the Remuneration Committee, Deloitte LLP also provided tax, risk, data and real estate advice to the Group during the year. Deloitte Total Rewards and Benefits is an investment adviser to the trustees of the Standard Life Staff Pension Scheme. As well as providing these services, the Group is the current appointed provider for the Defined Contribution Master Plan that Deloitte LLP provides for its employees and Deloitte LLP is one of the employee benefit consultants through which Standard Life has been appointed to provide defined contribution arrangements for Deloitte’s clients through competitive tender.
Activities of the Remuneration Committee The Remuneration Committee met 10 times during 2014. The key issues discussed/approved were: January to March • 2013 Directors’ remuneration report • Approving 2014 executive Director and senior management salaries and the vesting outcomes of the long-term plans and the 2013 bonus plans • Agreeing the 2014 Group scorecard measures • Setting targets for the 2014 Executive LTIP and 2014 annual bonuses.
• In addition, specific audit procedures on certain account balances and transactions were performed at a further 13 reporting units within the Group across all segments. Additional procedures were also performed at the Group level over the group consolidation and other reporting units in order to obtain further audit evidence.
Annuitant mortality assumptions are those related to the life expectancy of annuitants and the rate at which life expectancy is likely to improve. These assumptions are driven by past experience and assumptions about future changes which are based on the Group’s experience together with industry standard tables.
Valuation of complex financial investments Refer to page 56 (Audit Committee Report), page 120 (Critical accounting estimates and judgement), pages 125-128 (Accounting policies) and pages 163 to 164 and 168 to 170 (notes) We focused on this area as the valuation of certain complex investments, specifically in respect of derivatives and real estate investments, remains a complex area which requires the use of judgement and/or the involvement of valuation specialists by the Directors.
In addition, as a result of the Canadian business being treated as a discontinued operation, the comparative numbers and associated disclosures for the year ended 31 December 2013 were required to be restated.
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • Information in the Annual report is: • materially inconsistent with the information in the audited financial statements • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit • otherwise misleading.
We have reported separately on the Company financial statements of Standard Life plc for the year ended 31 December 2014 and on the information in the Directors’ remuneration report that is described as having been audited.
Expenses Claims and benefits paid 4,389 5,137 Claim recoveries from reinsurers (533) (544) Net insurance benefits and claims 3,856 4,593 Change in reinsurance assets and liabilities 34 (60) 741 Change in insurance and participating contract liabilities 34 3,834 (1,495) Change in unallocated divisible surplus 34 (71) (40) Change in non-participating investment contract liabilities 34 5,362 10,047 Expenses under arrangements with reinsurers 6 639 61 Administrative expenses Restructuring and corporate transaction expenses 10 106 73 Other administrative expenses 7 1,430 1,289 Total administrative expenses 1,536 1,362 Change in liability for third party interest in consolidated funds 33 758 829 Finance costs 98 98 Total expenses 15,952 16,196
Profit for the year from continuing operations - - - 335 - 335 30 365 Profit for the year from discontinued operations - - - 131 - 131 - 131 Other comprehensive income for the year from continuing operations - - - 67 (22) 45 - 45 Other comprehensive income for the year from discontinued operations - - - 23 (41) (18) - (18)
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows only two measurement categories for financial assets: amortised cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at fair value through other comprehensive income or fair value through profit or loss (FVTPL) depending on the business model it is held within or whether the option to adopt FVTPL has been applied. IFRS 9 also introduces a new impairment model, an expected credit loss model which will replace the current incurred loss model in IAS 39. An impairment loss may now be recognised prior to a loss event occurring. Financial liabilities may be designated as at FVTPL. The amortised cost measurement basis is applied to most other financial liabilities. For financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability’s credit risk are recognised directly in other comprehensive income.
(b)(i) Subsidiaries Subsidiaries are all entities over which the Group has control. The Group is considered to control an entity when it has power over the entity, is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power. For operating entities this generally accompanies a shareholding of 50% or more in the entity. For investment vehicles, including structured entities, the control assessment also considers the removal rights of other investors and whether the Group acts as principal or agent in assessing the link between power and variable returns. In determining whether the Group acts as principal, and therefore controls the entity, the scope of the Group’s decision-making authority and the magnitude of the variability associated with the returns are also taken into account. As a result, the Group often is considered to control investment vehicles in which its shareholding is less than 50%.
(h)(iii) Change in insurance and participating investment contract liabilities The change in insurance and participating investment contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the consolidated income statement. This also includes the movement in unallocated divisible surplus (UDS) in the period. However, where movements in assets and liabilities which are attributable to participating policyholders are taken directly to equity, the change in UDS arising from these movements is not recognised in the consolidated income statement as it is also recognised in equity. (h)(iv) Change in investment contract liabilities Investment return and related benefits credited in respect of non-participating investment contracts are recognised in the consolidated income statement as changes in investment contract liabilities.
Cash flow hedge relationships A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and could affect the consolidated income statement. A cash flow hedge is therefore used to hedge exposure to variability in cash flows such as those on variable rate assets and liabilities. Where a derivative is designated and qualifies as a cash flow hedge, the effective part of any gain or loss resulting from the
(b) Acquisitions On 1 July 2014, Standard Life Investments (Holdings) Limited (SLIH), a wholly owned subsidiary of the Company acquired the entire share capital of Ignis Asset Management Limited (IAML). IAML is the holding company of the Ignis Asset Management group (Ignis) which provides asset management services to Phoenix Group, a closed life assurance fund consolidator, as well as to third party clients, including retail, wholesale and institutional investors in the UK and overseas.
Impairment of intangible assets 16 - - - - - - - - Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters
Consolidation adjustments mainly relate to expenses attributable to third party interest in consolidated funds which are included in total expenses in the consolidated income statement but excluded from total operating expenses. Finance costs are included in capital management in the analysis of Group operating profit by segment. Non-operating items are the adjustments that relate to total expenses which reconcile operating profit to profit for the year as shown in the analysis of Group operating profit by segment in Note 2(b)(i).
2 In order to be consistent with the presentation of new business information, certain products are included in both Standard Life Investments AUA and other segments. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
Annuity-in-payment contracts (spread/risk business) This class of business consists of single premium contracts that provide guaranteed annuity payments based on the survival of a life or lives or for a specified period. The majority of the portfolio are life contingent annuities and are classified as non-participating insurance contracts. However, there are some term certain annuities classified as investment contracts. The benefits may increase each year at a predefined rate or in line with increases in the Canadian Consumer Price Index (CPI). For contracts under which benefits increase in line with the CPI, benefits will not decrease in periods of deflation.
Registered retirement income plans (fee business and spread/risk business) Registered retirement income plans are non-participating single premium contracts. These contracts permit investment into term funds or segregated funds on a similar basis to the individual savings plans described above. Regular withdrawals are made from the account to provide an income during retirement. The policyholder may vary the amounts withdrawn subject to the regulatory minimum. The components of contracts invested in term funds are classified as non-participating investment contracts. The components of individual contracts invested in segregated funds are classified as non-participating insurance contracts.
3. Financial information – Notes to the Group financial statements continued 6. Expenses under arrangements with reinsurers 2014 2013 £m £m
In addition to interest expense from continuing operations of £11m (2013: £9m), interest expense of £98m (2013: £98m) was incurred in respect of subordinated liabilities and £32m (2013: £33m) in respect of deposits from reinsurers. For the year ended 31 December 2014, total interest expense from continuing operations is £141m (2013: £140m).
11. Tax expense The tax expense is attributed as follows: restated1 £m £m
Total tax expense from continuing operations for the year 292 280 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
(b) Other comprehensive income of discontinued operations The other comprehensive income included in the consolidated statement of comprehensive income in respect of the discontinued operations is as follows: Items that will not be reclassified subsequently to profit or loss: Remeasurement (losses)/gains on defined benefit pension plans (20) 31
Items that may be reclassified subsequently to profit or loss: Fair value losses on cash flow hedges 2 -
Basic earnings per share from continuing operations (pence per share) 15.8 14.2
Profit attributable to equity holders of Standard Life plc 376 15.7 127 5.3 1 Dubai business, the closure of which was announced in November 2014, is included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Dubai was previously included in Asia and Emerging Markets. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations.
Profit attributable to equity holders of Standard Life plc 335 14.1 131 5.5 1 Dubai business, the closure of which was announced in November 2014, is included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Dubai was previously included in Asia and Emerging Markets. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations.
15. Dividends The Company paid a final dividend of 10.58 pence per share totalling £252m (final 2012: 9.80 pence; £230m) in respect of the year ended 31 December 2013 on 22 May 2014. An interim dividend of 5.60 pence per share (interim 2013: 5.22 pence) totalling £134m (interim 2013: £124m) in respect of the year ended 31 December 2014 was paid on 21 October 2014. The dividends were recorded as an appropriation of retained earnings for the year ended 31 December 2014. The company also paid a special dividend of 12.80 pence per share totalling £302m in respect of the year ended 31 December 2012 on 21 May 2013.
(b) Unrecognised deferred tax Due to uncertainty regarding recoverability, deferred tax has not been recognised in respect of the following assets: • Cumulative losses carried forward of £126m (2013: £96m) • Tax reserves of the German branch of Standard Life Assurance Limited of £37m (2013: £71m) • Unrealised investment losses of £17m (2013: £12m).
The Group operates share incentive plans, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any one year is £1,800 (the maximum limit increased from £1,500 from 1 September 2014). The Group offers to match the first £25 of shares bought each month. During the year ended 31 December 2014, the Company allotted 287,120 (2013: 283,126) ordinary shares to Group employees under such share incentive plans.
(5,857) 1 Total change in contract liabilities for the year ended 31 December 2013 includes £175m in respect of total insurance and participating contracts for discontinuing operations and (£58m) in respect of reinsurance contracts discontinuing operations.
Mortality assumptions are derived from studies performed during 2014, with data to 2013, using a blend of industry and The Standard Life Assurance Company of Canada’s (SLCC) experience. The rates are expressed as a percentage per the tables shown. For assurance business, the percentages vary depending on the underwriting classification and the duration of the contracts. For annuity business, the percentages vary depending on the gender of the annuitant.
These components are apportioned in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows: 2014 2013 £m £m
All UK employees will be offered membership of the plan from April 2016 – including those currently in the defined benefit plan.
The Group has no further payment obligation once the contributions are paid.
Change in effect of limit on plan surplus - - - (181) (181) Remeasurement (losses)/gains recognised in other comprehensive income (423) 896 473 (181) 292 188 Standard Life
(d) Plan assets Investment strategy is directed by the relevant trustee boards who pursue different strategies according to the characteristics and maturity profile of each plan’s liabilities. To provide more information on the approach used to determine and measure the fair value of the plan assets, the fair value hierarchy has been used as defined in Note 44 – Fair value of assets and liabilities. Those assets which cannot be classified as level 1 have been presented together as level 2 or 3. The distribution of the fair value of the assets of the Group’s funded plans at 31 December 2014 is as follows: £m £m £m £m £m £m £m £m
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 fee based revenue 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 fee based revenue 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.
Participating business The assets of the participating business are principally managed to support the liabilities of those funds and are appropriately diversified by both asset class and geography.
Information on the methods used to determine fair values for each major category of financial instrument and investment property measured at fair value is presented in Note 44 – Fair value of assets and liabilities and Note 19 – Investment property.
Participating business Office Industrial Retail Other Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m
There is no exposure to residential property in the shareholder and participating businesses.
For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The sensitivities presented in the table are not sufficiently severe to have restricted recourse cash flows in 2014 and 2013. When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant Principles and Practices of Financial Management (PPFM).
Not rated loans of £110m (2013: £199m) relate to very high quality mortgages.
(c)(v) Credit risk on loans and receivables and financial liabilities designated as at fair value through profit or loss (c)(v)(i) Loans and receivables The Group holds a portfolio of financial instruments which meet the definition of loans and receivables under IAS 39 Financial Instruments: Recognition and Measurement and on initial recognition were designated as at FVTPL. These instruments are included in debt securities on the consolidated statement of financial position. The Group’s exposure to such financial instruments at 31 December 2014 was £442m (2013: £193m) of which £237m related to participating business (2013: £144m) and £205m related to shareholder business (2013: £49m). The fair value of these loans and receivables is calculated using a valuation technique which refers to the current fair value of other similar financial instruments in addition to other unobservable market data. During the year, fair value gains of £22m (2013: £11m) in relation to these loans and receivables were recognised in the consolidated income statement. The amount of this movement that is attributable to changes in the credit risk of these instruments was a loss of £3m (2013: £8m gain).
Reinsurance and other risk transfer mechanisms are used to manage risk exposures and are taken into account in the Group’s assessment of demographic and expense risk exposures.
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (e) Liquidity risk continued (e)(i) Maturity analysis continued The analysis that follows presents the undiscounted cash flows payable by remaining contractual maturity at the reporting date for all financial liabilities, including non-participating investment contract liabilities. Given that policyholders can usually choose to surrender, in part or in full, their unit linked contracts at any time, the non-participating investment contract unit linked liabilities of UK and Europe life and pensions business and segregated funds business in Canada presented in the table below have been designated as payable within one year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. The Group can delay settling liabilities to unit linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets. In this analysis, the maturity within one year includes liabilities that are repayable on demand.
Greater than 20 years Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m £m £m £m £m Shareholder business Non-participating investment contract liabilities 4 1,666 - 482 - 291 - 87 - 62 - 117 4 2,705
3. Financial information – Notes to the Group financial statements continued 44. Fair value of assets and liabilities (a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used: Level 1 Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Corporate bonds listed or quoted in an established over-the-counter market including asset-backed securities These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote the instruments are categorised as level 3 instruments.
Total assets at fair value 153,252 166,147 25,624 121 178,876 166,268 112,486 107,955 53,278 47,143 13,112 11,170
The table below presents quantitative information about the significant unobservable inputs for level 3 instruments: Fair value 2014 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 8,753 Income capitalisation Equivalent yield
Investment property and owner occupied property 1,275 Discounted cash flow Internal rate of return
Non-participating investment contract liabilities - - - - 2,285 2,545 2,285 2,545
Change in operating liabilities 11,700 13,867 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Included in other commitments is £300m (2013: £284m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through contractually agreed additional investments in the subsidiary by the Group and the noncontrolling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.
Total operating lease commitments 160 149 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
The HWPF’s capital resources of £4,317m at 31 December 2014 (2013: £4,700m) and future surplus arising can be used to provide support for the HWPF, enhance payments to with profits policyholders or, in relation to the recourse cash flows (as explained in accounting policy (v)), transfer defined amounts out of the fund to accrue to the benefit of equity holders. Additional restrictions are placed on the HWPF by the Scheme of Demutualisation (the Scheme), which provides that the recourse cash flows will be subject to a solvency test which restricts transfers of the recourse cash flows if, as a result of the transfer, the HWPF would have a realistic deficit or would have a regulatory surplus below the level which the board of SLAL considers necessary to declare bonuses, in accordance with reasonable benefit expectations of with profits policyholders, without creating a regulatory deficit.
Group total 2014 £m £m £m £m £m £m £m £m At 1 January 4,815 204 1,763 6,782 1,538 8,320 1,299 9,619 Methodology/modelling changes 351 (2) - 349 15 364 - 364 Change in assumptions used to measure life assurance contract liabilities and experience differences 26 55 - 81 10 91 - 91 New business (11) (157) - (168) (8) (176) - (176) Investment surplus (225) 53 47 (125) 126 1 - 1 Equity holder/inter-fund transfers (37) 22 40 25 14 39 (39) - Dividend transfers - - (296) (296) (191) (487) 101 (386) Redemption of subordinated liabilities - - (294) (294) - (294) - (294) Other factors (419) 39 (112) (492) (49) (541) (137) (678) At 31 December 4,500 214 1,148 5,862 1,455 7,317 1,224 8,541
Equity holder/inter-fund transfers of £37m (2013: £213m) includes the transfer from the HWPF to the PBF and support provided to the German With Profits Fund.
Overseas life operations Capital resources of £1,455m (2013: £1,538m), which relate mainly to operations in Canada classified as held for sale at 31 December 2014, also include operations in Asia. The Canadian regulator sets the minimum required capital for the Canadian regulated entities. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £917m at 31 December 2014 (2013: £866m).
Acquisition of Ignis As explained in Note 1 to the IFRS consolidated financial information, on 1 July 2014 Standard Life Investments (Holdings) Limited, a wholly owned subsidiary of the Company, acquired the entire share capital of Ignis Asset Management Limited (Ignis). The acquired business is reported as non-covered business within the Standard Life Investments segment in the EEV financial information.
Standard Life Savings Limited Standard Life Savings Limited, which was previously treated as a non-covered entity within UK and Europe with a look through in covered business relating to mutual funds profits, was transferred to covered business on the closing EEV consolidated statement of financial position at 31 December 2013. From 1 January 2014, there is no longer a look through and transfer back of net worth in respect of Standard Life Savings Limited.
Markets Discontinued operations Total £m £m £m £m £m £m £m £m
8. Reconciliation of EEV net assets to IFRS net assets and IGD regulatory capital resources
Risk discount rate risk margin: UK HWPF 3.80 2.50 4.10 2.70 UK PBF 2.60 3.30 2.40 3.10 Europe HWPF 1.90 2.70 2.80 2.50 Europe PBF 1.50 2.00 1.50 1.60 SLIL 2.80 2.80 2.20 2.30 Canada 4.30 3.00 3.40 2.70 Hong Kong 2.90 2.90 2.90 2.90
Expense inflation: UK / SLIL 3.61 4.00 4.00 3.39 Europe (Germany) 0.84 1.60 1.60 1.87 Europe (Ireland) 1.90 2.69 2.69 2.84 Canada3 1.50 1.50 1.50 1.50 Hong Kong 2.50 2.50 2.50 2.50 1 The PVIF and cost of required capital of the Asia joint ventures are calculated using a ‘risk neutral’ approach. 2 For Canada, with the exception of AFS assets used to back investment contract liabilities at amortised cost, current holdings are assumed to yield in future years the earned rate for the year preceding the valuation and future reinvestments are assumed to be in a mixture of government and corporate bonds. For AFS assets used to back investment contract liabilities at amortised cost, yields are calculated at acquisition and subsequent changes are ignored.
Investments, including Ignis • Within other and group corporate centre, Standard Life plc and other non life and pensions entities.
Time value of options and guarantees (TVOG) TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.
Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving TVOG, to reflect our best estimate of how policyholder behaviour may vary in such circumstances.
In addition to the above, the Company has restated the statement of cash flows for the year ended 31 December 2013. The overall impact is a decrease in net cash flows from operating activities for the year ended 31 December 2013 of £1m, and an increase in net cash flows from investing activities for the year ended 31 December 2013 of £600m and a decrease in cash and cash equivalents at the beginning of the year of £741m due to the classification of a highly liquid short term investment fund being reclassified from cash and cash equivalents to investments in subsidiaries at FVTPL. There was no impact on cash flows from financing activities.
Temporary differences arising from investments in subsidiaries and associates give rise to deferred tax only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and the timing of the reversal of that difference cannot be controlled.
Included within derivative financial instruments held for trading are certain forward foreign exchange contracts which for the Group hedge part of the currency translation risk of net investments in foreign operations and a portion of the expected cash proceeds for the sale of the Canadian business on 30 January 2015. For details refer to Note 24 of the Group financial statements.
In 2014, the total dividends and appropriations paid were £386m (2013: £656m). Of this, £386m (2013: £636m) was treated as a deduction from retained earnings and £nil (2013: £20m) was treated as a deduction from the special reserve.
Investments in subsidiaries at FVTPL – 2014: £131m (2013: £142m) Investments in subsidiaries at FVTPL primarily comprises an investment in a short term investment fund which is valued daily at net asset value (NAV) adjusted for accrued interest. Although the price is not quoted in an active market the valuation is based on observable market data and as a result has been classified as level 2 in the fair value hierarchy.
• Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit These instruments are valued using models. For unquoted bonds, the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.
Standard Life Investments third party assets includes Ignis assets acquired on 1 July 2014 (£60.5bn) and is reflected within market and other movements. Group assets under administration (summary) 12 months ended 31 December 2014
Discontinued operations AUA1 29.8 4.6 (3.8) 0.8 (1.1) 29.5 Group assets under administration 218.1 35.7 (26.1) 9.6 16.5 244.2
Closing AUM at 31 Dec 2014 £bn £bn £bn £bn £bn £bn
Operating profit also excludes the impact of the following items: • Restructuring costs and significant corporate transaction expenses • Impairment of intangible assets • Profit or loss arising on the disposal of a subsidiary, joint venture or associate • Amortisation of intangibles acquired in business combinations • Where Canadian insurance contract liabilities have changed as a result of a challenge, by either management or a tax authority, to an uncertain tax treatment which has resulted in a change in deferred tax assets for prior years • Items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group.
Regular premium A regular premium contract (as opposed to a single premium contract), is one where the policyholder agrees at inception to make regular payments throughout the term of the contract.
SICAV A SICAV (société d’investissement à capital variable) is an open-ended collective investment scheme common in Western Europe. SICAVs can be cross-border marketed in the EU under the Undertakings for Collective Investment in Transferable Securities (UCITS) directive.
Spread/risk based business Spread/risk based business is a component of operating profit and mainly comprises products where we provide a guaranteed level of income for our customers in return for an investment. A good example of this product line is annuities. The ‘spread’ referred to in the title primarily relates to the difference between the guaranteed amount we pay to customers and the actual return on the assets over the period of the contract.
If you have any questions about voting at the Annual General Meeting, dividends or your shareholding, please contact our registrar: www.standardlifeshareportal.com questions@standardlifeshares.com
Please remember that the value of shares can go down as well as up and you may not get back the full amount invested or any income from it. All figures and share price information have been calculated as at 31 December 2014 (unless otherwise indicated).