Net �ows represent savings and investments made by our customers less the amounts they take out. Positive net �ows are key to growing AUA. Total net in�ows from continuing operations reduced to £1.0bn. Strong net in�ows of £5.2bn in Standard Life Investments wholesale business and £2.1bn in the UK and Europe business were o�set by net out�ows of £2.6bn from the Ignis Absolute Return Government Bond Fund (ARGBF) and £2.3bn of out�ows from two low revenue margin mandates. There was also £1.6bn of expected net out�ows in assets managed for Phoenix Group which is in natural run-o�.
1 Final dividend payable on reduced number of shares following the share consolidation.
Standard Life Investments UK and Europe Asia and Emerging Markets Discontinued operations
The Group’s IFRS financial statements and EEV financial information which include detailed analysis of the Group’s performance, assets and liabilities. You will also find additional analysis of the Group’s assets under administration and net flows and the Company financial statements.
Supplementary Information 285 4. Other information Further information for shareholders such as our financial calendar and how to get in touch. Shareholder information 294
I’m pleased to confirm another year of increased dividends, with our final dividend of 11.43p per share (up 8.0% on 2013) giving a total dividend for 2014 of 17.03p per share (up 7.8% on 2013). If approved at our AGM in May this year, this is due to be paid to shareholders on 19 May 2015.
2014 wasn’t just a year of corporate activity because it also witnessed some very dramatic changes in the UK savings and pensions market. Years of complex regulations were swept away by the Government and people will shortly have far greater freedom over what they can do with the pension savings they build up over their lives. Auto enrolment is encouraging people to save, and the changes make it even more attractive to do so. This is all great news. Giving people the ability to have more control and choice in planning their finances for retirement is a very positive thing. We have developed competitive pension propositions that offer customers alternatives to annuities and this makes us well placed to make the most of these opportunities. We also believe strongly in advice and guidance for customers to help them make their choices.
The sale of our Canadian business reduces the volatility of our earnings by greatly increasing the proportion of our earnings coming from asset management and fee based business. This change lies at the core of our strategy. Standard Life Investments started life as the investment department of an insurance company. It is now firmly at the heart of our strategy providing investment solutions to clients globally, and this is coupled with our powerful UK distribution business, which is a market leader in corporate pensions and a very important participant in the UK savings market.
Standard Life Investments continues to expand globally and had another very successful year. Our German and Irish businesses have continued to grow. Our joint venture business in China operates in 74 cities and reported a profit for the first time, which is a major milestone. Our two very fine businesses in India, life assurance and asset management, both in partnership with HDFC, had a fabulous year helped by the confident way in which the new Indian government has got down to work. Our relationships with all our partners are in very good shape around the world and we pay great attention to this.
A longstanding belief of mine is that effective, robust corporate governance helps create value in companies. To achieve this, boards need to be supportive, with independently-minded board members, able to constructively challenge and who avoid groupthink. We appointed three new board members during the year, as part of our aim to maintain a diverse team of people with relevant experience and fresh perspectives. Luke Savage joined as our Chief Financial Officer and is a highly experienced finance professional. We also welcomed two new non-executive Directors – Isabel Hudson and Kevin Parry – who each bring a wealth of relevant skills and experience to our Board. Malcolm Wood, who was our Company Secretary and General Counsel for a number of years, left with our best wishes to take up a new role with Lloyds Group. David Grigson, our excellent Chairman of the Group Audit Committee, will be retiring from the Board after the AGM and Kevin Parry will become Chairman of that Committee. We try always to have a strong succession framework in place.
It’s your Board’s responsibility to make sure that Standard Life is a sustainable business that looks after its customers, enhances shareholder value, and is rooted in the communities it serves. The pace of activity in 2014 placed a great burden on our people, all of whom responded magnificently and I’m very grateful to everybody. 2015 will no doubt, as always, continue to bring uncertainties and opportunities in equal measure. We will do our best to end the year in even better shape than we start it.
We have made good strategic progress during the year with the acquisition of Ignis Asset Management and the sale of our Canadian business, increasing focus on fee business and enabling a £1.75bn return to shareholders. We are also well positioned to deal with the far-reaching reforms to the savings and retirement income rules in the UK and to support customers through these changes. Standard Life Investments has continued to perform strongly and expand internationally.
Our strategy Standard Life is a long-term investment savings business, with a growing presence in the global institutional investment and wholesale markets, and strong distribution position in the workplace and retail markets in the UK, Europe and Asia. Around 4.5 million customers worldwide trust us with their financial future and we’re responsible for the administration of £296.6bn of their assets. As well as our wholly owned operations, in India and China we also have joint venture businesses supporting a further 20 million customers. Our strategy is to drive sustainable shareholder value by leveraging the capabilities and scale of the Group. We do this by focusing on fee based asset management and administration in markets with strong growth potential. We engage our customers and clients through innovative propositions which provide them with the solutions they need and help to grow our assets, maximise our revenues and lower our unit costs.
To accelerate delivery of these strategic priorities, we have also significantly transformed the Group in the past year. In July 2014 we completed the acquisition of Ignis Asset Management which further accelerates our scale and capabilities in institutional investment management, and brings a new partnership with Phoenix Group. The sale of our Canadian business completed on 30 January 2015. While this saw the corporate and retail businesses in Canada exit the Group, it also brought a new global collaboration agreement with Manulife focused particularly on the institutional and wholesale markets of Canada, the US and Asia. We recently announced the closure of our Dubai business as we no longer feel that we can offer our customers or shareholders long-term sustainable value in this region. Our financial results within the Strategic report therefore focus on a continuing operations basis which excludes the businesses in Canada and Dubai.
1. Strategic report continued 1.1 Chief Executive’s overview continued Our business model and delivery in 2014 Our strategy is underpinned by a simple business model which enables us to generate profit, both to support dividend payments to our shareholders, and to create the funds to reinvest in growing our business.
Strong market positions and a sustainable business During 2014 we continued to make good progress with growth in fee revenue reflecting customer demand for our propositions and this combined with continued work on controlling costs has enabled us to deliver an ongoing improvement in financial performance. • Further growth in assets managed by Standard Life Investments including the acquisition of Ignis in the second half of 2014 and supported by strong investment performance, high levels of client service and expanding global distribution capability • Continuing strong growth from the UK business, where we have now attracted over half a million auto enrolment customers (net of opt-outs), offsetting a fall in the average revenue yield • Increased fee based AUA in Germany where we launched our new 50+ ParkAllee product making us one of the first savings providers to offer a flexible commission model fitting into the post Life Insurance Reform Law market • In India, HDFC Life continues to perform well and is currently ranked 2nd for overall new business sales in the private market • Maintained our positions in DJSI World, DJSI Europe and FTSE4Good sustainability indices, reflecting our continued performance in delivering on our sustainability strategy • Used our award-winning customer insight to drive propositions that help our customers achieve their ambitions • Built on our reputation as a responsible investor with enhanced reporting and thought leadership.
Market overview Financial market conditions can affect the way and the amount that our customers save and invest for their futures. Global financial market conditions continued to expand at a moderate pace in 2014 despite weak activity in Europe, falling oil prices and a slowdown in emerging markets, particularly in China.
Group AUA1 increased by 38% to a record £296.6bn 91% of AUA from fee business
Continued shift in Standard Life Investments product mix towards higher margin propositions
Find out more about these regulatory changes and how we are responding in Section 1.4 – Business segment performance.
Market opportunities We believe there are a wide range of market opportunities we can benefit from, including: • Further expansion of Standard Life Investments global reach including a global collaboration agreement with Manulife, which builds on the existing, highly successful relationship with John Hancock, the US unit of Manulife • Capitalising on regulatory and market changes to position ourselves as customers’ first choice for their life savings • Building on our leading position in UK workplace and auto enrolment to attract and retain customers • Investing in online presence with support, tools and guidance for all UK customers • Offering specialised advice to those customers who seek this in the UK • Maximising asset flows into MyFolio and Standard Life Investments • Seeking to increase our stake in HDFC Life – full details of changes to relevant Indian laws are still being confirmed and we are monitoring developments closely.
In Hong Kong and Singapore, our wholly owned operations are seeing more challenging conditions due to regulatory changes. Our JV in China is continuing to focus on profitable growth and in India, HDFC Life and HDFC AMC continue to perform strongly. We continue to monitor developments in respect of foreign direct investment rules in India.
Group operating profit is a key measure which provides an indication of our ability to deliver returns for our shareholders and of our dividend paying capability. • Group operating profit before tax from continuing operations increased by 19% to £604m due to continued growth in Standard Life Investments and in the UK business. The result also included the H2 2014 operating profit from Ignis. Operating assumption changes had a £43m positive impact in 2014 (2013: positive £44m).
• Group underlying performance from continuing operations increased by 21% to £561m (2013: £462m) and included the benefit of a 14% increase in fee based revenue.
• Total net inflows from continuing operations were £1.0bn. Strong net inflows of £5.2bn in Standard Life Investments wholesale business and £2.1bn in the UK and Europe business were offset by £2.6bn net outflows from the Ignis Absolute Return Government Bond Fund (ARGBF) and £2.3bn of outflows from two low revenue margin mandates. There was also £1.6bn of expected net outflows in assets managed for Phoenix Group which is in natural run-off.
• This increase has been partially offset by a £31m increase in current tax, mainly arising in the UK and Europe business and Standard Life Investments
The Group’s key financial performance indicators and supplementary information have been reviewed following the sale of our Canadian business, the acquisition of Ignis and our increasing focus on fee based business. As a result, a new cash generation key performance indicator has been introduced that aligns more closely with how the business is managed and provides a clear linkage between cash generation and Group underlying performance. A description of this metric is included in Section 1.3 – Chief Financial Officer’s overview. As a further consequence of the changed shape of the Group, EEV operating profit after tax and EEV operating capital and cash generation are no longer key financial performance indicators. EEV supplementary information will not be reported after the 2014 results.
IFRS profit after tax attributable to equity holders of Standard Life plc (including discontinued operations)
• Group corporate centre costs increased slightly to £54m • Capital management generated a gain of £2m due to investment in higher yielding assets • Our share of profit of associates and JVs increased to £39m, benefiting from growth in premium income and investment performance gains in our JV businesses.
The tax expense attributable to equity holders’ profits in 2014 was £42m (2013: £58m). IFRS profit for the year of £507m (2013: £496m) also includes profit attributable to non-controlling interests of £4m (2013: £30m).
Page 112 of the Annual report and accounts 2014 includes a reconciliation of Group operating profit to IFRS profit for the year.
Assets under administration and net flows from continuing operations 2014 2013 Movement Assets under administration £296.6bn £214.7bn 38% Net flows £1.0bn £8.8bn (89%)
Group underlying cash generation is a key financial performance indicator, replacing EEV operating capital and cash generation. It demonstrates our ability to generate cash that supports further investment in the business and the payment of dividends to our shareholders. Group underlying cash is chosen as a non-GAAP key financial performance measure because it presents a shareholder view of underlying cash generation. The IFRS Consolidated statement of cash flows includes policyholder cashflows, and does not exclude non-recurring and non-operating items.
Underlying cash generation adjusts Group underlying performance for the following non-cash items and current tax: • Results of our associates and joint ventures are excluded • Current tax on underlying performance is deducted, this excludes any movements in deferred tax assets or liabilities • Deferred acquisition costs/deferred income reserve (DAC/DIR) are adjusted – replacing the accounting charge/credit for amortisation of DAC/DIR with the actual cash paid/received in year
Group capital surplus The Group capital surplus decreased to £2.9bn (2013: £3.8bn) reflecting the acquisition of Ignis and the redemption of the €360m Euro Tier 1 sub debt in January 2015 which ceased to count as capital in 2014.
The Group capital surplus is expected to reduce by an estimated £0.2bn following the sale of our Canadian business and the subsequent return of value to shareholders in April 2015. This movement consists of: • removal of £0.6bn Canada contribution to the £2.9bn Group capital surplus • reduction of approximately £1.75bn following return of value to shareholders • partially offset by £2.2bn Canada disposal proceeds.
Group underlying performance from continuing operations 561 462 Exclude share of associates and JVs’ PBT (39) (27) Exclude current tax on underlying performance (73) (42)
Shareholders’ capital resources 2.5 2.9 Capital resources arising from subordinated debt 1.5 1.9
Group solvency cover 165% 183% 2 2014 based on draft regulatory returns. 2013 based on final regulatory returns. 3 Net of restricted assets of £1.2bn (2013: £1.2bn).
Future earnings on covered business 1.3 Chief Financial Officer’s overview continued Movement in shareholder capital requirements Capital requirements that are backed by shareholder assets are relatively stable, as illustrated opposite. As a result, the majority of shareholder cash generation is not needed to support increases in capital requirements.
SLAL With Profits Fund requirement (3.4) (3.6) (2.8) Shareholder capital resource requirement from continuing operations 0.4 0.3 0.4 1 2014 based on draft regulatory returns. 2013 and 2012 based on final regulatory returns.
We continue to focus on efficient capital management and cash generation. During 2014, subsidiaries remitted £613m to Standard Life plc. This more than covers the payment of both the 2013 final dividend of £252m that was paid in May 2014 and the 2014 interim dividend of £134m that was paid in November 2014.
The Group maintains a strong liquidity position and this was shown in stress testing undertaken during 2014. This liquidity stress testing ensures that we can withstand a scenario of significant falls in asset values combined with unprecedented levels of surrenders and claims.
Dividends We propose a final dividend of 11.43p per share, which represents an increase of 8.0% per share. This dividend will be paid on the adjusted number of ordinary shares following the share consolidation. We intend to continue to apply our existing ‘pence per share’ progressive dividend policy taking account of market conditions and our financial performance.
Return of value Following the completion of the sale of our Canadian business on 30 January 2015, we intend to return 73p per share (approximately £1.75bn) to shareholders. This is subject to shareholder approval and will have a payment date of 1 April 2015. The residual net sale proceeds will be used for general corporate purposes. In conjunction with the return of value, we will be seeking shareholder approval to carry out a share consolidation with 9 new ordinary shares being issued in exchange for every 11 existing ordinary shares held. This will reduce the number of shares in issue by approximately the same ratio as the return of value (73p) to the share price as at 4 February 2015. On 1 January 2015, Standard Life plc had 2015 opening distributable reserves of £1.0bn. In order to ensure sufficient distributable reserves for the return of value, the company prepared a set of interim accounts (to 4 February 2015) incorporating the impacts of the Canada disposal. This increased distributable reserves to £2.9bn.
Opening 1 January 907 1,064 Dividends received from subsidiaries 613 629
1. Strategic report continued 1.3 Chief Financial Officer’s overview continued EEV operating profit after tax from continuing operations
Total EEV non-operating loss after tax from continuing operations of £127m (2013: profit £370m) included a £160m loss from the impact of UK regulations that restrict future charges on qualifying workplace pension schemes. The remaining non-operating profit of £33m included favourable investment return and tax variances of £182m (2013: profit £212m), profit from economic assumption changes of £nil (2013: profit £229m), restructuring and corporate transaction expenses of £94m (2013: £57m) and other losses of £55m (2013: loss £14m).
2 Institutional pension business previously included in both UK and Europe and Standard Life Investments has now been excluded from UK and Europe and is only included in the Standard Life Investments segment. UK and Europe and eliminations have been adjusted and there is a nil impact on UK and Europe and Group operating profit. Comparatives have been restated.
Contribution from new business 206 231 Contribution from in-force business 242 189 Development costs and non-covered business 52 (13) Operating experience variances and assumption changes 169 7 EEV operating profit after tax from continuing operations 669 414
Exclude: Operating assumption and actuarial reserving changes - - (43) (44) - - - - - - (43) (44)
Group underlying performance from continuing operations 257 197 347 331 19 - (62) (66) - - 561 462 Exclude: Group centre costs/capital management - - - - - - 62 66 - - 62 66
Strategic overview Standard Life Investments is a leading active asset manager with an expanding global reach. Our culture of investment excellence is fundamental to helping our clients to look forward to their future with confidence. Our wide range of investment funds and solutions is backed by our distinctive ‘Focus on Change’ investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. Our ‘Focus on Change’ investment philosophy lies at the heart of our investment performance. It seeks to identify the most important factors that drive the market price of an investment and understand the dynamics behind them. It is not inherently growth, value or momentum driven and provides the opportunity to outperform throughout the investment cycle. This, coupled with our exceptional client service has led us to manage £245.9bn of assets for clients all over the world, as we continue to capitalise on our global reach through organic growth, acquisitions and by developing strategic partnerships and relationships.
Market update The global economy continued to expand at a moderate pace in 2014 despite weak activity in Europe and a slowdown in emerging markets, particularly in China. Investors are increasingly taking a more selective approach to investment opportunities. The advantages of our strategic positioning have been reflected in our ability to attract flows across a range of higher margin products through a broad suite of funds, continuing product innovation and expanding geographic reach. We further expanded our range of funds, including developments in multi-asset portfolios and fixed income markets. We also continue to broaden the diversity of our AUM with £4.1bn of third party5 net inflows coming from outside the UK, including £1.3bn from the US.
We continue to play a leading role in governance and stewardship. Strong corporate governance along with responsible stewardship of a business’ capital, employees, customers and environment has a fundamental impact on long-term investment returns. During 2014, we voted at 1,633 shareholder meetings and undertook 647 Environmental, Social and Governance engagements, promoting high standards of governance and stewardship.
EBITDA from continuing operations £266m £145m £202m 1.4 Business segment performance continued 1.4.1 Standard Life Investments continued A stronger operational and investment link between Standard Life Wealth and Standard Life Investments was created following the acquisition of the private client division of Newton Management Limited (Newton) in September 2013. We believe that there are substantial opportunities to accelerate the growth of Standard Life Wealth by utilising Standard Life Investments’ infrastructure, expertise, distribution and global footprint.
The recent UK regulatory change regarding pension decumulation, where pensioners will no longer be required to convert their defined contribution pension into an annuity, presents opportunities in the multi-asset and absolute return space, which we are well placed to capitalise on. It is a market in which we already lead and have positioned ourselves to be ready for when our clients need us.
Standard Life Investments operating profit before tax 257 197 Interest, depreciation, amortisation and exchange rate movements2 9 5
Standard Life Wealth revenue increased from £21m in 2013 to £39m, at a revenue yield of 68bps (2013: 68bps) while costs increased from £16m to £38m, reflecting the acquisition of Newton. The key highlights were: • Fee based revenue increased by 33% to £686m. The result reflects strong organic growth including the shift in mix towards higher margin products such as UK mutual funds and multi-asset investment solutions as well as the acquisition of Ignis and Newton. The changing mix helped to increase the revenue yield on third party AUM to 53bps (2013: 50bps). Our strategic partner life business AUM revenue yield rose to 16bps (2013: 15bps) and included performance fees of £23m.
Operating return on equity from continuing operations Operating return on equity fell to 36.7% (2013: 61.1%), reflecting a capital injection from the Standard Life Group to fund the acquisitions of Ignis and Newton. The result continues to reflect the profitability of our business and an efficient capital base.
Inflows during 2014 reflected the diverse nature of our product offering, our expanding global distribution capability and the increasingly international nature of our client base. Assets under management globally generated from sales in our Boston office reached US$9bn (£6.0bn), with continued strong net inflows in 2014 of £1.3bn (2013: £2.1bn). At an asset class level, we saw a broad mix of net inflows into multi-asset, real estate and private equity. In the UK and Europe we increased the institutional client base by 12%. Third party1 Third party1 net inflows continued to be good at £1.7bn (2013: £9.6bn). This continued our unbroken record of positive annual third party net flows since our inception in 1998. Ignis business, which is included for the first time, saw net outflows of £4.3bn, including £2.6bn from ARGBF following the restructure of the absolute returns team.
Excluding the Ignis outflows and two low revenue margin mandates (c. 4bps) that disinvested in H2 2014, third party (excluding strategic partner life business) net inflows were £8.3bn.
Phoenix Group (1.6) - 43.8 - Total strategic partner life business (4.0) (3.2)
1. Strategic report continued 1.4 Business segment performance continued 1.4.1 Standard Life Investments continued
• Ignis contributed third party1 AUM of £14.5bn (2013: £nil) and strategic partner life business of £43.8bn (2013: £nil) • Assets managed by investment teams in our Boston office now exceed US$25bn across equities, fixed income and real estate • Our position in the wholesale market in the UK remains strong, with a share of gross sales of 4.5% (2013: 5.0%). UK mutual funds AUM increased by 16% to £21.8bn and represents 19% of third party1 assets. We are now the fifth largest manager, by AUM, in the UK wholesale market.
• Launched the Global Focused Strategies Fund, further developing our multi-asset portfolio of products which comprises our suite of global absolute return strategies and balanced funds
• Strong pipeline of new investment initiatives positions us well to continue to meet the changing demands of our clients through new and innovative investment solutions.
• Sales of higher margin products enabled us to increase the revenue yield on our third party (excluding strategic partner life business and Ignis) gross sales to 59bps (2013: 58bps)
• Standard Life Capital Partners, our private equity business, completed first closures on the Infrastructure Equity Fund and Secondary Opportunities Fund during 2014.
Market update 2014 has seen hugely significant developments in the UK savings market, with large scale changes proposed for the retirement market, new regulations for workplace pensions and millions of people gaining access to a pension through auto enrolment. We are excited about the opportunities these developments present for our UK customers and business and are focused on enhancing our distribution capabilities and customer numbers to capitalise on this.
The 2014 UK Budget announced new flexibility for customers accessing their savings and removed the requirement to purchase an annuity. Annuity sales have subsequently fallen across the industry with our own annuity new business sales falling by 57%. We anticipate however that the changes will increase demand for financial guidance and flexible decumulation propositions which allow customers to access income from their savings in a tax-efficient manner. With our industry-leading drawdown proposition and award-winning Wrap platform we have the scale and operational capability to meet the anticipated drawdown demand from April 2015. Our online informed choice and guidance will help our customers approaching retirement understand their options.
Adviser platforms continue to drive growth in the UK advised savings market with platform assets forecast to grow to £600bn by 2018. Our continuous investment and close working relationship with advisers ensures our Wrap platform remains a market leader. Recent enhancements include improved access to discretionary investment managers, which has attracted AUA of £300m since launch in April 2014. We also became the first major platform to remove all fund rebates and commissions, well ahead of the 2016 regulatory deadline, increasing pricing transparency for customers and removing work for advisers. This allows the 1,340 advisers that use our Wrap platform to focus on meeting their clients’ needs rather than incurring the time and expense of moving clients into modern unbundled funds.
Operating assumption changes Other 1.4 Business segment performance continued 1.4.2 UK and Europe continued
UK and Europe operating profit before tax increased by £15m to £390m with underlying performance increasing by £16m to £347m.
Movements in the UK operating profit from 2013 include: • Fee based revenue increased by 3% to £619m driven by higher AUA as a result of net inflows into our new style retail propositions while our old style retail propositions continue to benefit from ongoing increments, market movements and our retention activity. This has offset a fall in the average revenue yield on fee based business to 62bps (2013: 66bps) which reflects changes in business mix including the growing proportion of newer style propositions.
• Spread/risk margin, which mainly relates to our annuity business increased by 14% to £176m due to ongoing asset and liability management. This was offset by a 57% reduction in annuity sales as a result of the significant changes announced in the recent Budget, with new business margin falling by £38m to £20m.
UK profit contribution 537 495 Indirect expenses and capital management (187) (165)
Net flows into our newer style UK retail propositions which includes SIPP and Wrap increased by 4% to £2.9bn (2013: £2.8bn) with an increase of 7% in gross inflows to £5.9bn (2013: £5.5bn) offset by higher redemptions of £3.0bn (2013: £2.7bn) as more of our SIPP customers reach retirement and enter drawdown.
Our older-style UK retail business achieved a 15% reduction in net outflows due to an increase in retirement deferrals. We continue to benefit from ongoing increments, customers transferring from corporate schemes and positive market movements. We engage with our customers who are approaching retirement or have maturing policies to ensure they are equipped to make informed decisions. This is valued by our customers with many choosing to continue saving with us.
UK corporate pension AUA increased 10% to £32.0bn (2013: £29.2bn). Net inflows increased to £2.2bn (2013: £2.0bn) with growing contributions into our existing schemes and our success in attracting new flows through auto enrolment resulting in a 16% increase in regular premiums. We continue to work closely with employers with upcoming staging dates to ensure their schemes are compliant with the new requirements.
1. Strategic report continued 1.4 Business segment performance continued 1.4.2 UK and Europe continued Maximising revenue – ready for new retirement flexibilities and well positioned across the value chain
• Our MyFolio fund range, managed by Standard Life Investments, continues to secure additional revenue for the Group. This popular investment solution simplifies investment choices for customers and has attracted £5.9bn of AUA (2013: £4.0bn) since it was launched in October 2010.
• Our International Portfolio Bond continues to strengthen with a 5% growth in sales to £721m (2013: £688m), demonstrating the confidence of advisers and customers in our proposition.
Experience Awards 2014 • Named as one of the ‘brands to watch’ and highest movers by highly regarded customer experience expert Nunwood, entering the top 100 for the first time at number 67 out of the top 260 customer experience brands in the UK • Insurance Company of the Year at the City A.M. Awards 2014 • Auto Enrolment Innovation of the Year Award at the UK Pensions Awards for our Good to Go proposition • 5 star Defaqto rating for our Wrap Platform in 2014.
Our life joint venture business in India, HDFC Life, continues to focus on meeting the needs of the customer and providing a unique customer experience. In distribution, we continue to strengthen existing relationships, whilst building on our market-leading offering in alternative channels such as online. HDFC Life paid its second dividend to shareholders in December 2014 from which we received £4m, a 40% increase in constant currency on the 2013 dividend. We expect this business to continue to perform strongly in 2015.
Market update In India, following the results of elections in May 2014 there is optimism that a stable central government will be able to pursue an economic agenda to address India’s macroeconomic challenges. This, coupled with a growing working population, increasing income levels and the currently low life insurance penetration rates should continue to drive demand for insurance and savings in India. At the end of 2014, the Indian government passed the Insurance Laws (Amendment) Ordinance which, in principle, allows foreign companies to increase their holdings in life insurance joint ventures up to 49%. The full details of this are still being confirmed and we are monitoring developments closely.
• The joint venture businesses’ operating profit increased to £18m (2013: £5m) with both businesses benefiting from growth in premium income and investment performance gains. Our China JV recorded a profit for the first time.
• HDFC Life had record gross inflows in 2014, which combined with positive market movements has resulted in a 42% increase in AUA
• HDFC Life is ranked 2nd by overall new business sales in the private market with a market share of 16% at December 2014 • In China, the average productivity rate of the Heng An Standard Life salesforce in the individual business channel increased by approximately 30% compared to prior year. Lowering unit costs with focus on cost efficiencies
Awards and recognitions • HDFC Life was awarded Best Product Innovation and Best Technology Innovation in the Life Insurance sector at the Indian
Operating profit before tax from continuing operations1 2014 2013 £m £m
November 2014. Comparatives have been restated. Results of discontinued operations are included in Section 1.4.4.
Profitability Operating profit before tax Following the announced sale of the Canadian business, planned regular management actions were no longer pursued and a significant reduction in operating profit was expected for 20141. Operating profit before tax decreased by 46% (39% in constant currency) to £136m (2013: £251m) and consisted of Canada £132m (2013: £251m) and SLI Canada of £4m (2013: £nil).
• Total expenses decreased 11%, however were stable in constant currency due to higher asset based commissions offset by efficiency improvement initiatives
• Capital management increased by 4% in constant currency due to higher returns on surplus assets. Non-operating gain/(loss) The non-operating gain from our Canadian business of £52m (2013: loss £87m) included favourable short term fluctuations on investment return of £73m (2013: loss £70m) offset by £21m restructuring and other corporate expenses (2013: £2m), primarily relating to the sale. There was also a £15m loss in 2013 in relation to changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters which did not recur in 2014.
Assets under administration and net flows Total AUA for the Canadian business increased by 11% in constant currency to £31.8bn, largely as a result of strong net flows into retail segregated funds and favourable market movements.
Dubai Recent developments in the UAE regulatory landscape, and resulting business environment, have impacted our business in Dubai and we no longer feel that we can offer our customers or shareholders longterm sustainable value in this region. As a result, we announced the closure of this business in November 2014. The Dubai business made an operating loss before tax of £5m (2013: loss £6m) and non-operating loss before tax of £17m (2013: £nil) in relation to the closure of this business. The closure does not impact our wider plans in Asia and Emerging Markets.
1 In the Q3 2014 Interim management statement, we indicated that the previous operating profit forecast for Canada of £155m for the year ended 31 December 2014 (as disclosed in the Class 1 Circular published in relation to the disposal of Standard Life’s Canadian business) would be impacted by management actions no longer pursued. The impact of this is detailed above.
Our purpose At Standard Life we're in the business of helping build a more prosperous world. We're dedicated to making sure that everything we do helps our customers to save and invest for their future, our industry to improve and our society to progress.
Spread business – Fluctuations in financial markets could cause the value of financial assets and financial liabilities in the spread business, or the value of cash flows relating to these, to fluctuate by different amounts potentially leading to losses. For this type of business we aim to ‘cash flow match’ the assets and liabilities to reduce this risk.
Optimisation of the balance sheet – Fluctuations in financial markets could cause a fall in the value of assets held to back shareholders’ equity and subordinated debt that has been issued.
• We set risk appetites to control our exposure to different sources of market risk
• Under our stress and scenario testing programme we consider a wide range of financial scenarios
• We use cash flow matching to manage the mismatch in cash flows between our subordinated debt liabilities and the assets backing them
Our strategy and business model Standard Life is a long-term investment savings business, with a growing presence in the global institutional investment and wholesale markets, and strong distribution positions in the workplace and individual markets of the UK, Europe and Asia. Find out more about the strategy of our individual businesses and how they apply our business model in Section 1.4 – Business segment performance.
Group risk strategy The risk function actively supports the creation of longterm value by ensuring well informed risk-reward decisions are taken in pursuit of the Group’s business plan objectives and by ensuring capital is delivered to areas where most value can be created for the risks taken.
Increasing AUA is a key part of our business model in order to maximise revenue and drive IFRS profits. To achieve this we need to attract new retail, workplace and institutional customers to Standard Life and encourage existing customers to stay and place more assets with us. We are therefore exposed to demand failing to materialise or more customers leaving than expected (persistency risk). There are a number of risks that could result in a fall in demand including reputational and conduct risks, products that don’t meet customer needs, poor investment performance or the loss of key personnel. The main impact of lower customer demand would be that AUA in our fee based business falls or fails to increase by as much as planned, resulting in lower fee based revenue than expected.
Annuities are a major component of our spread business. As a result of the changes in the 2014 UK Budget we currently expect to sell fewer annuities in future but they remain a core part of our existing liabilities.
• A strong credit risk management framework is in place with risk appetites set and pro-active management of positions
• The business uses limits by issuer, sector and credit rating in order to manage the risk of loss from the failure of debt security issuers and commercial mortgage borrowers
• Standard Life Investments focuses on delivering excellent investment performance across a broad investment spectrum operating through a variety of distribution channels and geographic locations. This helps ensure strong customer demand for our propositions.
• We carefully monitor customer exits and complaints to understand and address potential drivers for poor persistency.
• A risk appetite is set for exposure to longevity risk
Regulatory and legislative changes adversely impact our risk profile and delivery of our strategy
Failure of a material outsourcing partner increases our cost base and adversely impacts delivery of our strategy
Changes in regulations and legislation may result in the introduction of additional requirements that add to the complexity of our business, increase the cost of meeting additional regulatory demands and require additional capital to be held.
We are also exposed to the risk that our processes and practices are not compliant with existing regulations and legislation.
The Group is therefore exposed to the operational risk that the failure of one or more outsourcing partner results in possible customer or processing disruptions, increased costs from having to perform the activity in-house or in seeking an alternative outsourcing partner to perform the activity.
• As part of our emerging risk process, we actively scan the external environment to identify potential sources of regulatory and legislative change
• We work to mitigate the impact of legislative and regulatory changes and to ensure that change is positive for both the industry and our customers by engaging early and constructively in consultations and field testing
• Where we identify potential sources of change we assess the situation and seek to manage any risks and maximise opportunities that arise
• The policy requires that appropriate risk committee approval is obtained prior to entering into new outsourcing arrangements
• The policy requires that control procedures are in place to identify and monitor any material risk that the Group is exposed to through the outsource service provider, to take into account failure in the provision of the outsourced services and to establish and maintain an exit plan to facilitate transition of the outsourced services back into the business unit or to another provider.
IT security issues, including the results of cyber-attacks, adversely impacts our operational capability and customer confidence
Political uncertainty, including the extent of further devolution within the UK and the potential for an in/out referendum on the UK’s position in the EU
IT security issues, including the results of cyber-attacks, could still arise and result in the failure of systems and processes.
Other sources of political risk remain, for example the recommendations of the Smith Commission on further devolution of powers to the Scottish Parliament and the possibility of an in/out referendum on the UK’s position within the EU following the 2015 UK general election.
• We have developed our defence in depth approach to cyber security throughout 2014 and into 2015. We have invested in technology, enhancing key business processes and have improved our staff education programme to reflect the evolving nature of the risk.
• Major change initiatives within the business receive full project support from an aligned change risk consultant, working alongside regulatory and technical specialists to successfully deliver change. For smaller initiatives, the change risk team champions the importance of effective risk management within business areas and has introduced guidelines to be used when implementing non-portfolio change. In 2014 significant changes to the pensions market were announced which provide additional flexibility to customers. Change risk input has been provided from initial launch of the proposition to the Group’s board and key governance forums and throughout the project lifecycle to date. Operational and conduct risks are being considered to ensure that changes to the risk profile are fully understood and mitigated prior to launch.
All of our sustainability work in 2014 was overseen by our Board’s Corporate Responsibility Committee. To strengthen the focus we have on sustainability at Board level, we now intend to make it a key part of our plc Board agenda, with time dedicated to discussions on the topic and regular reporting. Because of this stronger sustainability focus for the plc Board, we plan to no longer have this separate committee to deal with corporate responsibility matters. 1. Our customers and clients Being a sustainable business means offering products and services built around our customers’ and clients’ needs. We aim to do this by putting customers at the centre of our decision making, with pricing that is fair and transparent, while building meaningful relationships for the long term.
Getting closer to our customers and clients Across our Group we look to capture rich insight that can inform how we develop products and services, so we can help customers and clients realise their financial ambitions. This includes things such as who our customers feel they’re responsible for, what they worry about, and what the important things are in their lives. The insight helps us understand more about the behaviour of our customers in the different countries we operate in, and can develop our services to be more relevant and engaging.
Insight and innovation to support clients worldwide In 2014, Standard Life Investments’ annual client survey provided insight from around 750 clients globally on how they feel about the services we provide. We also use studies by academics and research institutions we have established relationships with. The insight we gather helps us make sure we have the right products and capabilities to meet our clients’ diverse needs – at the same time as supporting our global growth ambitions. By the end of 2014, this kind of insight had played a big part in Standard Life Investments launching 14 new products and opening new international offices – helping to serve clients in 41 countries across five continents. Standard Life Investments now operates out of 17 countries worldwide, and we plan to open more offices in 2015.
Hong Kong manage their money on the go • UK customers can apply for an ISA in less than five minutes, buy a pension or consolidate existing pension plans.
2. Operating responsibly Risks and opportunities To run our business responsibly we need to stay alert to opportunities to grow our business sustainably, and to improve the outlook for our customers and shareholders. When Standard Life Investments acquired Ignis Asset Management in 2014, it provided an opportunity to improve the value we offer our customers and shareholders, and our capabilities for managing their assets. The sale of our Canadian business to Manulife has also further strengthened the value we provide for shareholders.
Recent developments in the regulatory landscape in the United Arab Emirates, and the resulting business environment, have impacted our business in Dubai. As a result, we feel that we can no longer offer our customers or shareholders long-term sustainable value in this region. We therefore announced the closure of this business in November 2014.
We also believe this responsibility extends to our suppliers and the companies we invest in, and encouraging good business practice among them. We feel it’s important that we use a diverse range of suppliers across our Group, and that we share our knowledge to help them be more sustainable in how they do business. We ran four events in 2014 focused on making our business more accessible for small-to-medium enterprises and sharing sustainability best practice, and the feedback we’ve received has been very positive.
3. Our community Our focus on employability Employability remains the main focus for how we contribute to the communities in which we operate across the world – and a strong presence in each of our sustainability themes. For us it’s about helping to improve the opportunities that people, particularly young people, are afforded in society. It’s our responsibility as a large employer to maintain a diverse, sustainable workforce and help the people in the communities around us make real progress.
Our employability focus includes giving people a start in their careers outside of our company as well. Our involvement with The Prince’s Trust has extended to the Standard Life Charitable Trust supporting a programme in London, helping young people into jobs with small-to-medium sized businesses. It allowed 27 young people to take part in placements across 27 businesses during 2014. They are all given 12-month contracts and the Standard Life Charitable Trust funds the first six months of each placement.
Supporting the Living Wage Since 2012 it’s been a principle of ours to pay at least a Living Wage to all of our people, including the young people on placements with us. In 2014 we furthered this commitment by formally becoming accredited as a UK Living Wage employer. We hope that this commitment will give more people, particularly young people, the ability to save and have a future they can look forward to. It reflects our belief that, by having employment that pays enough and allows people to save for the future, we can make a big contribution to building a more prosperous society.
We offer our people lots of encouragement to get involved in supporting good causes. In 2014 we launched our new Raise and Match initiative across our Group, which offers our people additional support in raising money for causes that are important to them. It means that when an employee raises money for charity, we match their fundraising up to the value of £250 a year.
4. Our people Career and talent development It’s our responsibility to listen and respond to our people, their aspirations and development needs, and make clear how their role fits with the wider contribution we make to society’s progress. It’s also important that all of our people have goals that continually motivate and challenge them to improve. This year we introduced our career partnership, which is a clearly defined agreement between the company and our people: we support our people in achieving their development goals and aspirations and we ask them to take responsibility for their career.
We continue to invest in talent programmes as part of our Group Development Framework, and we ensure that our senior leadership group have meaningful and stretching development goals. This year we have had a particular focus on external board appointment or directorships as a great way to gain experience and help talented senior leaders become ‘board ready’ for their career. We’ve also expanded our programme of individual coaching and mentoring for women in our leadership and talent pipeline.
By fostering a culture like this – where our people can be themselves – it helps us deliver a customer experience that can be more meaningful and long lasting. Through our InterAction survey, we measured for the first time what our employees think about diversity and inclusion in our business. 80% of employees responded favourably – higher than both the financial services sector and high-performing company norm.
1. Strategic report continued 1.6 Our sustainable business overview continued Throughout the year, we continued our focus on actively improving diversity in the workplace. We took part in a number of discussion forums and events, including co-founding a leadership diversity network of senior HR and diversity professionals. We’ve agreed to work only with executive search partners who follow similar values as us in the approach they take to attracting talented people. At our company Inspiration Awards, we presented two additional awards for inspiring initiatives that support diversity and inclusion in our business. One award was for a programme focused on helping young people into work and the other was for the creation of a Lesbian, Gay, Bisexual and Transgender Network at Standard Life.
Our Board also benefits from diversity in its widest sense by ensuring an overall balance of skills, independence, knowledge and experience. The Board continues to follow the principles of our Diversity statement, which you can read in the Corporate governance section. As at 31 December 2014 the Board consisted of 13 Directors, made up of 10 males (77%) and 3 females (23%) (2013: males 82%, females 18%).
Environment Including discontinued operations Continuing operations only target Actual target Actual change
1 Scope 1 emissions include gas and fuel oil. 2 Scope 2 emissions include electricity. 3 Scope 3 emissions include business travel and transmission and distribution losses for electricity. 4 New ratio based on a full-time equivalent (FTE) employee figure which includes contingent FTE.
Where possible we aim to report on emissions from any office building containing over 1% of our FTE. In some cases, for example where we are renting space in a multi-tenanted office, this is not always feasible. Our reporting covers 95% of our FTE. For Scope 3 we’ve used the records provided by our third party travel providers for the source of data on business travel (air or rail) and kWh of electricity use for transmission and distribution. For accuracy we calculate our emissions from air travel based on travel class, rather than using average passenger. All emissions are calculated in CO2e using the DEFRA/DECC (2014) emission factors.
For waste, we surpassed our group diversion from landfill target of 80% achieving an overall figure of 97% recovery for our waste. This is due to very high waste recovery rates in both the UK and Ireland where we are sending less than 5% of our waste to landfill.
As a global business, emissions from business travel are an increasing challenge for us. Awareness and education have again played a big part here. We launched our Environmental Champions programme, educating influencers from around the business and engaging them in developing environmental communications around our Group. In November 2014, we also ran our second group-wide Green Travel Week, spotlighting the ways everyone can find greener ways to travel. This included a dedicated ‘no-fly’ week, where we allowed no air travel except where it was critical to our business. We know that air travel is unavoidable for a business like ours, but through education – in particular a focus on using digital and virtual meeting technologies – we can help foster more use of online collaboration and less use of traditional business travel.
We aimed to reduce our emissions from travel by 6% this year and exceeded this with a 22% reduction. We also met our overall target of reducing our CO2 emissions by 4% for continuing operations.
IFRS and EEV reporting The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in the Strategic report and in the Group financial statements section of this report have been prepared on the basis of the IFRS accounting policies, as amended for new standards effective from 1 January 2014, as described in the Group financial statements section of this report. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued by the Chief Financial Officers Forum. The EEV financial results in the Strategic report and in the EEV financial information section have been prepared in accordance with the EEV methodology in the EEV financial information section of this report. Group operating profit and EEV operating profit The 2014 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 112 of this report, presents profit before tax expense attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in the Group accounting policies (jj). Group operating profit has not been audited by our independent auditors. The 2014 EEV consolidated income statement on page 240, presents EEV profit showing both operating and nonoperating items. By presenting our results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.
Keith Skeoch Executive Director Age: 58 Tenure: 9 years Nationality: British
Qualifications: BA, University of Sussex and MA, University of Warwick. Fellow of the Chartered Institute for Securities & Investment and Fellow of the Society of Business Economists.
Sir Gerry Grimstone Chairman Age: 65 Tenure: 9 years Nationality: British
Appointed Director in May 2006, having been a director of The Standard Life Assurance Company since March 2006. He is chief executive of Standard Life Investments Limited. Keith joined Standard Life Investments Limited in 1999 as chief investment officer after nearly 20 years’ investment experience at James Capel & Company Limited in a number of roles, including chief economist and managing director international equities. He is a director of the Investment Association and a non-executive director of the Financial Reporting Council, where he is a member of the audit committee. He has been awarded honorary doctorates from the University of Sussex and Teesside University for services to the financial services industry. In 2013, he was awarded European Personality of the Year by Funds Europe.
Appointed Director and Chief Financial Officer in August 2014. Luke was previously director of finance and operations at Lloyd’s of London. In addition, he held senior finance roles at Deutsche Bank (UK), Morgan Stanley & Company (UK) and Lloyds Bank plc. He is a member of the governing body of Queen Mary University of London. Luke was awarded Chief Financial Officer of the Year at the Insurance Insider Honours 2013.
Appointed Chief Executive in January 2010, having been group finance director since November 2006 when he was appointed to the Board. He is also deputy chairman of the board of the Association of British Insurers, a non-executive director of the UK Green Investment Bank plc, where he also chairs the audit committee, a member of the advisory council of TheCityUK and a member of the Financial Services Advisory Board of the Scottish Government. David was previously a partner with Price Waterhouse, and subsequently group finance director and executive director, infrastructure division at Scottish Power plc. David is a member of the Corporate Responsibility Committee.
Crawford Gillies Non-executive Director Age: 58 Tenure: 8 years Nationality: British
Appointed Director in October 2011. Pierre is vice chairman of TDC, executive chairman of Volia, independent director of CIEL Investment Limited, a director of Cordial Consulting Limited and vice chairman of AgroGeneration. From 2000 to 2005, Pierre was chief executive officer of BT Retail and, subsequently, chief operating officer of Capgemini Group and chairman of Eircom. Until June 2012, he served as chief executive officer and then non-executive chairman of Numericable Completel in Paris. Pierre is a member of the Remuneration Committee and the Risk and Capital Committee.
Qualifications: Degree in Civil Engineering, Ecole Nationale des Ponts et Chaussées, Paris, Law Degree Faculté de droit, Paris, and MBA, HEC Paris.
Qualifications: Law Degree, University of Edinburgh and MBA, Harvard Business School. Member of the Institute of Chartered Accountants in England and Wales.
John Paynter Senior Independent Director Age: 60 Tenure: 3 years Nationality: British
Appointed Director in January 2012. He is the Company’s senior independent director and the non-executive chairman of Standard Life Investments (Holdings) Limited. John is also a senior adviser to Greenhill & Co. International. From 2008 to 2014, John was a non-executive director of Standard Chartered plc, where he also sat on the audit and remuneration committees. From 2001 to 2005, John was deputy chairman of Cazenove Group plc and then vice chairman of JP Morgan Cazenove from 2005 to 2008. He served as a non-executive director of Jardine Lloyd Thompson Group plc from October 2008 until June 2012, including three years as chairman of its remuneration committee. John is a member of the Audit Committee, the Remuneration Committee and the Nomination and Governance Committee.
Qualifications: BA, University of Manchester. Member of the Institute of Chartered Accountants in England and Wales.
Kevin Parry Non-executive Director Age: 53 Tenure: appointed October 2014 Nationality: British
Appointed Director in October 2014. Kevin is a non-executive director of Daily Mail and General Trust plc, where he is chairman of the audit committee and a member of the risk committee. He is senior independent director of Intermediate Capital Group plc, where he is chairman of both the audit committee and the risk committee, and is a member of the remuneration and nomination committees. He is also a nonexecutive director of the Homes and Communities Agency and deputy chairman of the board of trustees and chairman of the finance and investment committee at the Royal National Children’s Foundation. From 2009 to 2013, Kevin was chief financial officer of Schroders plc where he also chaired, from 2002 to 2008, the audit and risk committee. He was also group chief executive of Management Consulting Group PLC from 2000 to 2008. Kevin is a member of the Risk and Capital Committee and will be appointed chairman of the Audit Committee following the 2015 AGM.
Qualifications: BA and MA, University of Oxford. Fellow of the Institute and Faculty of Actuaries.
Noel Harwerth Non-executive Director Age: 67 Tenure: 3 years Nationality: British and American
Appointed Director in July 2012. Noel is chairman of Sumitomo Mitsui Banking Corporation Europe Limited and chairman of GE Capital Bank Limited. She also holds non-executive director appointments with Alent plc, the London Metal Exchange and the British Horseracing Authority. Last year, Noel was appointed as a director of London First. Noel was previously with Citicorp for 15 years, latterly as the chief operating officer of Citibank International and she previously held non-executive director appointments at Logica PLC, LME Holdings Limited, Avocet Mining PLC, RSA Insurance Group plc and Dominion Diamond Corporation. Noel is a member of the Audit Committee and will stand down as chairman of the Risk and Capital Committee following the 2015 AGM.
Isabel Hudson Non-executive Director Age: 55 Tenure: appointed October 2014 Nationality: British
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 2014 are given in the Strategic report.
The results of the Group on IFRS and EEV bases are presented in the Group financial statements and EEV financial information respectively. A detailed description of the basis of preparation of the IFRS (including operating profit) and EEV results are set out in the Group accounting policies section of the Group financial statements and in Note 1 to the EEV financial information respectively. More information about the Group’s use of financial instruments and related financial risk management matters can be found in Note 24 and Note 42 of the Group financial statements.
The total payment is estimated at £224m for the final dividend and together with the interim dividend of 5.60p per share totalling £134m paid on 21 October 2014, the total dividend for 2014 will be 17.03p per share (2013: 15.80p) totalling £358m (2013: £376m).
As at 31 December 2014, there were 2,394,373,744 ordinary shares in issue held by 106,666 registered members. The Standard Life Share Account (the Company-sponsored nominee) held 925,969,894 of those shares on behalf of 1,097,356 participants. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid.
BlackRock, Inc. 8 December 2014 Acquisition of voting rights 119,737,536 5%
The Trustees of the Standard Life (Employee) Share Plan voted the appropriate shares in accordance with any instructions received from participants in the plan. Details of the Company’s employee share plan can be found in Note 48 to the Group financial statements.
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 at our registered address (details of which can be found in the Contact details section). The Articles may only be amended by a special resolution passed by the shareholders.
• An uncertificated share, in the circumstances set out in the uncertificated securities rules (as defined in the Articles) and, in the case of a transfer to joint holders, where the transfer is in favour of no more than four joint transferees
pre-emption rights in respect of new ordinary shares issued for cash • Make market purchases of the Company’s ordinary shares up to a maximum of 237,668,053 or 10% of its issued ordinary shares. The Company did not make any market purchases of its ordinary shares during the year ended 31 December 2014, and has not done so since then and up to the date of this report.
• Under a shareholders' agreement dated 10 June 2003 (as amended) between Standard Life Investments Limited (SLI) and HDFC, pursuant to which the relevant Group company holds its interest in HDFC Asset Management Company Limited (HDFC AMC), upon a change in the ownership structure of SLI that results in the acquisition by a third party, either directly or indirectly, of more than 20% of the issued, subscribed and paid-up capital of SLI, HDFC will have 90 days from the date upon which SLI notifies it in writing of the occurrence of such a change to purchase the relevant Group company’s shares in HDFC AMC at a mutually agreed price.
• 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 Company 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 Company’s shares in Heng An Standard Life for a price determined in accordance with the agreement.
A number of other agreements contain provisions that entitle the counterparties to exercise termination or other rights in the event of a change of control of the Company. However, these agreements are not considered to be significant in terms of their likely impact on the business of the Group as a whole.
Details of the Directors’ interests in the Company’s ordinary shares, the Standard Life (Employee) Share Plan, the Standard Life Sharesave Plan and the share-based executive long-term incentive plans (LTIPs) are set out in the Directors’ remuneration report together with details of the executive Directors’ service contracts and non-executive Directors’ appointment letters.
No Director has any interest in the Company’s listed debt securities or in any shares, debentures or loan stock of the Company’s subsidiaries. No Director has any material interest in any contract with the Company or a subsidiary undertaking which was significant in relation to the Company’s business, except for the following: • The benefit of a continuing third-party indemnity provided by the Company (in accordance with company law and the Articles) • Service contracts between each executive Director and subsidiary undertakings (Standard Life Employee Services Limited and
Appointment and retirement of Directors The appointment and retirement of Directors is governed by the Articles, the Companies Act 2006, the UK Corporate Governance Code and related legislation.
Directors’ liability insurance During 2014, the Company maintained directors’ and officers’ liability insurance on behalf of its Directors and officers to provide cover should any legal action be brought against them. The Company also maintained a third-party indemnity policy for the boards of trustees of the UK, Irish and Canadian staff pension schemes. The trustees include individuals who are directors of subsidiaries within the Group.
The Group remains committed to creating a high-performing, diverse and healthy working environment where everyone is respected, valued and included as an individual. We treat people with disabilities fairly in relation to job applications, training, promotion and career development. Adjustments are made to train and support employees who become disabled during their employment to enable them to continue and develop in their role. As part of our performance culture, each employee takes part in regular discussions with their manager. They agree performance goals and how their aspirations, strengths and limitations can be developed and addressed at work. We believe great performance should be rewarded, and we think the process we follow to do that should be 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.
We believe what is offered provides a consistent and competitive level of support for our people's retirement savings, as well as being sustainable for our business.
We also use our internal intranet to communicate with our staff on matters which may concern them as employees and to ensure that our employees are fully aware of any financial and economic factors which may affect the performance of the Group.
There are now over 3,100 employees in the UK and Ireland participating in Sharesave plans. The exercise price is £1.57 under the 2011 invitation; £2.21 (€2.81) under the 2012 invitations; £2.72 (€3.22) under the 2013 invitations and £2.96 (€3.70) under the 2014 invitations.
Sustainability Our sustainability strategy is mapped to our Group’s business strategy, so that the commercial aims of our business are linked to our environmental, social and governance responsibilities. You can find out more in Section 1.6 of the Strategic report – Our sustainable business overview and in the Environmental, social and governance risks paragraph of the Corporate governance section.
Greenhouse gas emissions Details of our greenhouse gas emissions can be found in Section 1.6 of the Strategic report – Our sustainable business overview.
Political donations We did not make any political donations in the year ended 31 December 2014. The Company has limited authorisation from shareholders to make political donations and incur political expenditure (Resolution 13, 2014 AGM). We request this as a precaution against any inadvertent breach of political donations legislation, as defined in the Companies Act 2006. While Standard Life has regular interaction with government and elected politicians in the UK and other jurisdictions in which we operate, we are strictly apolitical. We have a long-standing policy of not making political donations and we have no plans to do so.
Auditors The Audit Committee is responsible for considering the Group’s external audit arrangements. Resolutions proposing the re-appointment of PricewaterhouseCoopers LLP as auditors to the Company and giving authority to the Directors to determine their remuneration will be submitted at the AGM to be held on 12 May 2015.
Following the sale, the Group proposes to return to shareholders 73 pence per Ordinary Share (approximately £1.75bn). This will be through an issue of B Shares and/or C Shares which is intended to enable the majority of shareholders to receive their cash proceeds as capital, income or a combination of the two. This is subject to shareholder approval (such approval being sought at a general meeting of the company being held in Edinburgh on 13 March 2015) and, if approved, will be paid on 1 April 2015. In conjunction with the return of value, we will be seeking shareholder approval to carry out a share consolidation with 9 New Ordinary Shares being issued in exchange for every 11 Existing Ordinary Shares held. This will reduce the number of shares in issue by approximately the same ratio as the return of value (73 pence per Ordinary Share) to the share price as at 4 February 2015, being the last practicable date prior to printing of the circular. Further information can be found in the circular relating to the B/C share scheme and the share consolidation which can be found on our website at www.standardlife.com
All the information cross-referenced above is hereby incorporated by reference into this Directors’ report.
Directors’ responsibility statement Each of the Directors, whose names and functions are listed in the Board of Directors section on pages 37 to 39, confirms that to the best of their knowledge and belief: 1. The Group and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and of the Company and taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.
The Nomination and Governance Committee (the Committee) oversees the governance framework so the report on its activities is integrated through the relevant parts of the statement. The Committee members are Sir Gerry Grimstone (Chairman), Crawford Gillies (appointed 13 May 2014), David Grigson and John Paynter. Colin Buchan retired from the Committee on 13 May 2014. David Nish, Chief Executive, is invited to Committee meetings to discuss relevant topics, such as talent development and management succession.
During the year, the Committee met four times. Its duties are to support the composition and effectiveness of the Board, to oversee the development and implementation of the Group’s governance framework and to oversee the Group’s activities to strengthen its talent pipeline at all levels. Here, you can read about the Committee’s role in: • Reviewing Board diversity, skills and experience • Identifying and recommending Directors to be appointed to the Board • Supporting the review of the Board’s effectiveness • Overseeing succession planning, leadership and talent development and diversity levels throughout the Group.
More details of Niall FitzGerald’s overall Board effectiveness review are given later in this section.
Governance framework The Group’s governance framework is approved by the Board and documented in the Board Charter. You can read the Board Charter in the governance section of our website at www.standardlife.com/about/governance
The Group’s Code of Business Conduct complements the Board Charter. It sets out our standards of conduct and governing principles for operational excellence, compliance responsibilities, customer service, our people, and other stakeholders.
The Board expects the Group to be a leader in corporate governance activities through its own actions and through its stewardship activities. The Nomination and Governance Committee regularly reviews the Group’s corporate governance framework against relevant generally accepted standards, guidance and best practice, and, as appropriate, recommends to the Board changes to the Board Charter. The Committee has reviewed the revisions to the Code, which will be in place for 2015, and approved the changes needed to ensure our continued compliance. To contribute to external developments, the Committee, generally on behalf of the Board, submits responses to corporate governance consultation documents. The Group Company Secretary is responsible for advising the Board on governance matters.
Role and responsibilities of the Board The Board’s role is to organise and direct the affairs of the Company and the Group to maximise value for shareholders, in accordance with the Company’s constitution, all relevant laws, regulations, corporate governance and stewardship standards. The Board’s role and responsibilities, collectively and for individual Directors, are set out in the Board Charter. The Board Charter also identifies matters that are specifically reserved for decision by the Board. These include approving, overseeing and challenging: • The development and implementation of strategy, objectives and business plans • Capital and management structures, including the return of value and share consolidation being proposed in 2015 • Dividend policy • Financial reporting, including preparation for the introduction of Solvency 2 • How risks are managed, including the Enterprise Risk Management (ERM) framework, risk strategy, risk appetite limits and internal controls • Significant corporate and other transactions, which during 2014, focused on the proposals to acquire Ignis Asset Management and the sale of the Canadian business • Remuneration policy • Succession planning • The sustainability of the Group’s business, our ethical standards and behaviours and our corporate responsibilities • Significant external communications • Terms of reference of Board Committees • Appointments to the Board and to Board Committees • The matters to be escalated from subsidiary boards to the Board for approval.
The Chairman: • Leads the Board and ensures that its principles and processes are maintained • Promotes high standards of corporate governance • Together with the Chief Executive and the Group Company Secretary, sets agendas for meetings of the Board • Ensures Board members receive accurate, timely and clear information on the Group and its activities • Encourages open debate and constructive discussion and decision making • Leads the Board and individual Director performance assessments and training needs • Speaks on behalf of the Board and represents the Board to shareholders.
The Chief Executive, within authorities delegated by the Board: • Leads the other executive Directors and the executive team in the day-to-day running of the Group • Develops appropriate capital, corporate, management and succession structures to support the Group’s objectives • Makes and implements operational decisions • Develops strategic plans and structures for presentation to the Board • Reports to the Board with relevant and timely information • Together with the Chairman, represents the Group to external stakeholders, including shareholders, customers, suppliers, regulatory and governmental authorities, and the local and wider communities.
The Nomination and Governance Committee receives updates on progress towards achieving and maintaining diversity throughout the Group. This includes reviewing statistics on age, gender and full/part time working at all levels. The Group also promotes initiatives and programmes to raise awareness of why diversity matters. You can read more about our diversity activities in Section 1.6 of the Strategic report – Our sustainable business overview.
Retirals Colin Buchan retired at the conclusion of the 2014 AGM after more than six years’ service. David Grigson will retire at the conclusion of the 2015 AGM having served two three-year terms.
The Committee reviews the list of potential candidates and agrees a shortlist. Following interviews with potential candidates, the Committee then makes recommendations to the Board on any proposed appointment, subject always to the satisfactory completion of all background checks and regulatory approvals. The other Board members are also offered the opportunity to meet the recommended candidates. The Committee considers the external commitments of candidates to assess their ability to meet the necessary time commitment and whether there are any conflict of interest matters to address.
Each non-executive Director is appointed for a three-year fixed term and shareholders then vote on whether to re-elect him or her at every AGM. Once a three-year term has ended, a non-executive Director can continue for further terms if the Board is satisfied with the non-executive Director’s performance, independence and ongoing time commitment. There is no specified limit to the number of terms that a non-executive Director can serve, although the Board recognises the Code provisions regarding length of service when considering whether or not their appointment should be continued. The current average length of service of the non-executive Directors (excluding the Chairman) is just over three years. The Nomination and Governance Committee oversees the process to recommend continued appointments, but members of the Committee do not take part in discussions when their own performance – or continued appointment – is being considered. During 2014, the Committee recommended to the Board that the appointments of Pierre Danon should be continued from 20 October 2014 and John Paynter from 1 January 2015.
Director election and re-election Since 2011, shareholders can vote on whether to re-elect each Director. At the 2015 AGM, all of the current Directors except David Grigson, Luke Savage, Isabel Hudson and Kevin Parry will retire and stand for re-election. Luke, Isabel and Kevin, having been appointed since the previous AGM, will retire and stand for election. David Grigson will retire from the Board following conclusion of the AGM.
Director independence, external activities and conflicts of interest The Board carries out a formal review of the independence of non-executive Directors annually, including an assessment of their character, judgement and their relationships or circumstances which may affect their independence. The review considers all relevant issues including the number and nature of their other appointments, any other positions they hold within the Group, any potential conflicts of interest they have identified and their length of service. Their individual circumstances are also assessed against independence criteria, including those in the Code. Following this review, the Board has concluded that all the nonexecutive Directors are independent.
Advice Directors may sometimes need external professional advice to carry out their responsibilities. The Board’s policy is to allow them to seek this where appropriate and at the Group’s expense. Directors also have access to the advice and services of the Group Company Secretary, whose appointment and removal is a matter for the Board. No Directors sought external advice in 2014.
As mentioned above, the 2014 review was led by an external facilitator, Niall FitzGerald, who is an experienced independent director who has chaired a number of large international public company boards. The Committee believed that he would engage openly with the Directors, understand fully the context of the Board’s processes, and would be able to relate directly to the points they raised. The Committee noted that he has provided mentoring support to the Chief Executive since 2011 and, following discussion and consideration, did not believe that this would prevent him from carrying out an independent review.
The external facilitator’s report recognised the Board’s successes and strengths and proposed enhancement actions, which could take the Board’s performance from upper quartile to top decile in each of these five areas: 1. Board content and reporting – focusing on the balance between comprehensive yet concise and tailored reporting 2. Board organisation and Committees – focusing on the need for strong links from the work of the Committees to the Board 3. Strategy development – focusing on the balance between flexibility and a strong framework around setting strategy 4. Succession planning and talent – focusing on all levels throughout the organisation 5. Leadership and organisational transition – focusing on the Board’s opportunity to match talent with needs.
Progress to implement the recommendations is monitored by the Group Company Secretary and reported to the Nomination and Governance Committee. Each Committee followed a similar questionnaire, reporting and feedback process and reviewed its own results and recommendations in detail.
Directors The Chairman led the performance review of the Directors. He held one-to-one meetings to assess their individual performance and contribution against duties set out in the Board Charter and in their appointment letters.
When directors are appointed to the Board, they make a commitment to broaden their understanding of the Group’s business. Our group corporate centre monitors relevant external governance and financial and regulatory developments and keeps the on-going Board training and information programme up to date. During 2014, specific Board sessions took place on the UK Workplace pensions market, Solvency 2 implementation, regulatory trends, with profits matters and the Scottish Referendum. Similarly, the relevant Board Committees received updates on developments in financial reporting, remuneration and corporate governance. Non-executive Directors are actively invited to all parts of the Group’s business in order to familiarise themselves with how our business is conducted and to meet with people.
The Committee believes that the plans and programmes continue to evolve to strengthen succession planning and talent development, while recognising the changing needs of the Group. The results of the Committee’s discussions are presented at least annually to the Board. In 2014, the non-executive Directors held specific discussions on Board and executive succession, the results of which fed into the overall plan.
Board meetings and meeting attendance The Board and its Committees meet regularly, operating to an agreed timetable. Meetings are usually held in Edinburgh or London and, on occasion, at the offices of one of our international businesses. During the year, the Board held specific sessions to consider the Group’s strategy and business planning. The Chairman and the non-executive Directors also met on three occasions during the year, formally and informally, without the executive Directors present. At these meetings, matters including executive performance and succession were discussed.
Directors’ attendance at the 2014 Board and Committee meetings is shown in the following table. The Chairman is not a member of the Audit, Risk and Capital, and Remuneration Committees. He does, however, attend the meetings of all Committees, by invitation, in order to keep abreast of their discussions. The Board met nine times during the year.
Number of meetings 9 6 7 10 4 2 Chairman Sir Gerry Grimstone 9 4 (c) 2(c)
Executive Directors David Nish 9 2 Keith Skeoch 9 Luke Savage1 3/3
As at 20 February 2015 1 Appointed to the Board on 18 August 2014. 2 Retired from the Board on 13 May 2014. 3 Appointed to the Board on 15 October 2014. 4 Appointed to the Board on 27 October 2014. (c) Committee Chairman Board Committees The Board has established Committees that oversee, consider and make recommendations to the Board on important issues of policy and governance. At each Board meeting, the Committee Chairmen provide reports of the key issues considered at recent Committee meetings, and minutes of Committee meetings are circulated to the appropriate Board members. The Committees operate within specific terms of reference approved by the Board and kept under review by the Nomination and Governance Committee. These terms of reference are published within the Board Charter on our website at www.standardlife.com/about/board and are also available from the Group Company Secretary. All Board Committees are authorised to engage the services of external advisers at the Company’s expense, whenever they consider this necessary. The Chairman of each Committee and of the Nomination and Governance Committee review Committee membership at regular intervals. The Nomination and Governance Committee considers all proposed appointments before they are recommended to the Board.
Report from the Chairman of the Audit Committee “The Board draws on the views of the Audit Committee to support its effective governance over internal and external financial reporting. As Chairman of the Audit Committee I have had regular meetings with the Chief Financial Officer, the Group Financial Controller and Treasurer, the Group Chief Internal Auditor and the engagement partner from the external auditors. The accounting and disclosure requirements arising from the acquisition of Ignis Asset Management, the sale of the Canadian business and planning for Solvency 2 implementation have meant that the Audit Committee has had another very busy year.” David Grigson, Chairman
The Committee members are David Grigson (Chairman), John Paynter, Lynne Peacock, Noel Harwerth, Isabel Hudson (appointed 15 October 2014) and Kevin Parry (appointed 27 October 2014). Colin Buchan retired from the Committee on 13 May 2014. The Board considers them all to be independent non-executive Directors. The Board is satisfied that David Grigson, who is a chartered accountant and served as chief financial officer of Reuters Group, has recent and relevant financial experience. The Board believes that the members of the Committee have both the broad commercial knowledge and experience of financial management and reporting to bring the right mix of skills to the Committee. This has been enhanced further with the appointment of Kevin Parry who is also a chartered accountant and served as chief financial officer of Schroders plc. As announced, Kevin will succeed David as Chairman of the Committee at the conclusion of the 2015 AGM.
The Committee’s remit is to consider and to make appropriate recommendations to the Board on: • Any matter relating to the financial affairs of the Group • The Group’s internal and external audit arrangements • The Group’s internal controls over financial reporting.
During the year, the Committee met six times to coincide with the Company’s financial reporting cycle requirements. It met regularly with each of the external and internal auditors without management being present to allow the Committee to discuss any issues of emerging concern in more detail. Invitations to attend the Committee meetings are extended on a regular basis to the Chairman, the Chief Executive, the Chief Financial Officer, the Chief Executive of Standard Life Investments, the Group Financial Controller and Treasurer, the Group Chief Internal Auditor (GCIA) and the Group Chief Risk Officer.
Valuation of financial instruments, commercial mortgages and properties The Committee’s review focused on the fair value of complex financial instruments, including private equity investments and derivatives, and securities where a recent market price was not available. The Committee also considered the fair value of commercial mortgages, taking into account increased investment into these assets during 2014, and the fair value of investment properties. The Committee was satisfied with management’s analysis. Note 44 of the Group financial statements provides further details on the fair value of assets and liabilities. For each of the matters discussed, the Committee: • Considered the management information provided to support the Committee’s review of the matter, including the strength and operation of the controls to prevent management override and management’s responses to the challenges raised by Committee members
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 2014 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 the UK and Canada. In addition, the Committee reviewed the projected release of the future taxes included in the Canadian liabilities. The Committee also discussed the impact of the future charge cap on corporate pensions announced by the UK Department of Work and Pensions. The Committee challenged the assumptions and agreed with management’s proposals. In light of the decision to sell our Canadian business and the resultant changing shape of the Group, the Committee agreed that 2014 would be the last year when EEV reporting would be used.
Non-GAAP measures The Committee reviewed the non-GAAP measures that are presented by management and which complement the statutory IFRS results in order to give a more complete view of the performance of the business.
• To provide a clearer presentation of the source of assets under administration and net flows, particularly to reflect the significant transformation within Standard Life Investments following the integration of Standard Life Wealth in January 2014 and the acquisition of Ignis Asset Management in July 2014.
Disclosure The Committee also considered the processes to prepare and review the Annual report and accounts 2014 (ARA). In particular, the Committee sought assurance on the internal and external verification and compliance processes which had taken place as well as the quality of the internal review of the ARA. Following its review, and recognising available external comment and guidance, the Committee was able to confirm to the Board that it believed the ARA, taken as a whole, is fair, balanced and understandable.
• Relevant external financial reporting developments and guidance, including in relation to the Strategic report.
The Committee is satisfied that the external auditors continue to fulfil the terms of the engagement.
Following the review, the Committee recommended that the current auditors be reappointed at the 2015 AGM until the conclusion of the 2016 AGM. A resolution to reappoint them at the 2015 AGM was recommended to and accepted by the Board. The Committee’s recommendation is not restricted by any contractual obligations. The Committee agreed to comply with the relevant revisions to the Code and to the FRC Guidance on Audit Committees with regard to the external audit tendering timetable which came into force in October 2013 as well as considering the provisions of the EU Regulation on Audit Reform and the Competition and Markets Authority Orders (CMA Orders) with regard to mandatory auditor rotation and tendering. As the Committee believes that the current auditors’ performance continues to be satisfactory, the Committee will implement the relevant transitional provisions as set out by the EU Regulation, the CMA Orders, together with the FRC’s suggestions for transition, taking account of the Group’s status as a public interest entity throughout the periods considered by the transitional provisions. It is not intended that the external audit will be subject to tender during 2015 and the Committee will consider whether an external audit tender would be appropriate at each year end in advance of the required rotation under the transitional provisions. The Committee will adopt a policy of tendering at least once every ten years in future, once the transitional periods are over.
The Policy permits non-audit services to be purchased, following approval, when they are closely aligned to the external audit function and when the external audit firm’s skills and experience make it the most suitable supplier. These include: • Accounting consultations and audits in connection with acquisitions and sales of businesses • Due diligence related to mergers and acquisitions • Tax compliance and advisory services • Employee benefit plan audits • Attesting to services not required by statute or regulation • Assurance services relating to regulatory developments affecting the Group • Consultations concerning financial accounting and reporting standards not relating to the audit of the Group’s financial statements • Sustainability audits/review.
Internal audit The Group has an internal audit function (GIA), and the Committee considers its effectiveness annually, in particular monitoring its independence, objectivity and resourcing in the context of the Institute of Internal Auditors’ (IIA) professional standards. The Committee approves the scope and content of the annual internal audit plan, which is updated on a rolling basis to allow GIA to address any emerging issues and reflect changes in the Group’s organisation. The plan is based on the audit universe, discussed with management and the external auditors and mapped to the key risks within the Own Risk and Solvency Assessment (ORSA).
The Committee is keen to see how the output from GIA reviews is implemented by management and, during 2014, this led to specific presentations on data governance, end user applications and Solvency 2 assurance.
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.
At every meeting the Committee reviewed and discussed: • Updates from Group Finance on significant financial accounting, reporting and disclosure matters • Findings of Group Internal Audit (GIA) reports and how the high-priority findings are being followed up by management • Results of the monitoring of financial crime, fraud risk assessments and calls to our dedicated Speak Up helpline • Reports from the chairmen of the subsidiary audit committees • Findings from external audit work • The non-audit services requested of the external auditors by the business units, both in terms of the nature of the service and the level of proposed fee.
As well as the following specific items: January to March July to September • Annual report and accounts 2013 • Strategic report and financial highlights 2013 • Current material legal actions and litigation to support contingencies and commitments disclosure.
• Q3 Interim management statement • Initial findings from Financial Year 2014 year end work • Effectiveness of GIA, the GIA Global Charter and the GIA
The Board’s review also confirmed that it was satisfied with the performance of the Committee.
The Group Chief Risk Officer attends the Committee meetings. Others invited to attend Committee meetings on a regular basis include the Chairman, the Chief Executive, the Chief Financial Officer, the Chief Executive of Standard Life Investments and the Group Chief Internal Auditor as well as the external auditors. The Group Chief Risk Officer and the Chairman of the With Profits Committee have right of access to the Committee Chairman. The Committee members have the authority to meet without management being present if they consider this necessary.
At every meeting in the scheduled reporting cycle, the Committee reviews and considers: • Matters escalated from the Group Enterprise Risk Management Committee (Group ERMC) • Regular risk reporting from the Group Chief Risk Officer • Material with profits risk and capital matters • Other matters as required by the Committee’s terms of reference • Thematic developments of relevance to the business.
Other items discussed during the year included: • The Group’s position in relation to the referendum on Scottish independence in September 2014 and subsequent external announcements regarding proposals to devolve further powers to Scotland • The provision of guaranteed products by the UK and Europe business in Germany in the context of the low interest environment • Steps being taken to ensure that capital was being used efficiently across the Group • The Group’s response to developments regarding the landscape for annuity provision in the UK following the 2014 Budget presented to the UK parliament and the announcement of a charge cap on default funds of defined contribution qualifying schemes
As a key component of the Group’s ERM framework, the Committee received a ‘deep dive’ presentation on risk culture within the Group which took into consideration the Financial Stability Board’s publication “Guidance on Supervisory Interaction with Financial Institutions on Risk Culture”. In discussing risk culture and the “tone from the top”, the Committee noted the overall positive responses received in the employee survey to questions on risk culture and the multiple layers of control designed to identify and act upon any issues.
2. Governance information – Corporate governance continued reverse stress testing, European Insurance and Occupational Pensions Authority (EIOPA) stress testing and field testing performed for the International Association of Insurance Supervisors (IAIS).
Regulatory compliance At the start of the year the Committee reviewed and assessed the 2014 regulatory compliance plans detailing the planned assurance activities to be performed across the Group. The Committee also considered and agreed the proposed approach for Group Compliance to monitor and report on these assurance activities.
During the year, reporting on regulatory compliance was provided to the Committee through the Group Chief Risk Officer’s regular risk reporting. This included relevant updates on the activities contained in the 2014 plan, significant regulatory developments expected to impact the Group and the Group’s planned response to those regulatory developments.
The Committee has also received regular reporting on the Group’s progress towards the implementation of Solvency 2. These updates have focused on model development activity, the enhancement of systems and tools and the overall pace challenge associated with Solvency 2 reporting timescales.
Report from the Chairman of the Remuneration Committee “The Committee supports effective governance over remuneration. You can read my full introduction in the Directors’ remuneration report which follows this section”. Lynne Peacock, Chairman
The Chairman, Chief Executive Officer and Chief Operations Officer (who has overall responsibility for the Group's People function) are invited to attend Committee meetings on a regular basis. The Director of Group Reward and Employment Policy attends all meetings in his capacity as secretary to the Committee.
In 2014, the Committee met twice and provided guidance on the Group’s sustainability programme. It also supported the Board’s role in providing leadership on environmental and social issues. The Committee’s duties included keeping under review the Group’s sustainability strategy and policies and making recommendations to the Board on sustainability issues. During the Board effectiveness review in 2014, the Board concluded that as sustainability was central to our strategy, sustainability and corporate responsibility should form a core part of the Board’s agenda and should be reported on at each Board meeting. The Committee will therefore be stood down in early 2015.
The Committee reviews its remit and effectiveness annually. The 2014 review was carried out by means of a self-assessment questionnaire and the Committee discussed the results of the review formally at one of its meetings. The WPC members concluded that they had used their available time effectively, focusing on the key issues and providing appropriate challenge. The Committee provides information on its composition and how the Committee protects the interests of policyholders and makes its views known at the following website www.standardlife.co.uk/1/site/uk/fund-info/with-profits/with-profits-committee
A General Meeting was held on 3 October 2014 at which shareholders were asked to consider the resolution, recommended by the Board, that Manulife’s offer to purchase our Canadian business should be accepted. Directors were available to answer shareholders’ questions and the voting procedures were consistent with our AGM process. 45% of the shares in issue were voted and the resolution was passed.
These include: • Chairing a Technical Review Committee (TRC), attended by senior finance managers, which makes decisions on IFRS
In line with the Code and the further guidance in the Turnbull Report, the Board has conducted a review of the effectiveness of the risk management system which includes our system of internal control. The system was in place throughout the year and up to the date of approval of the Annual report and accounts 2014. In preparation for Solvency 2 requirements which will be introduced in 2016, the review has been expanded this year to include all elements of the system of governance as follows: • Functions (Internal Audit, Compliance, Actuarial and Risk Management) • ‘Fit and Proper’ • Boards and Committees • Outsourcing • Remuneration Policy • The ERM framework. A certification exercise was completed by each of the business unit chief executive officers, finance directors, chief risk officers and Group function executives. They were asked to confirm that: • An effectiveness review over each component of the system of governance has been conducted and that, where any material issues had been found, recommendations have been made to restore process effectiveness. • Significant control breakdowns identified through the risk management system were reported during the year and that actions are in place to remedy these • The external auditors had been made aware of relevant information.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report. The Strategic report includes details on our cash flow and capital management in Section 1.3 – Chief Financial Officer’s overview and our key risks in Section 1.5 – Principal risks and uncertainties. Further details of the Group's risk and capital management procedures and governance are outlined later in this section. In addition, the Group’s financial statements include notes on the Group’s borrowings and subordinated liabilities (Notes 36 and 37), management of its risks including market, credit and liquidity risk (Note 42), its contingent liabilities and commitments (Notes 46 and 47), and its capital structure and position (Note 50).
The recommendation of Group Finance and supporting information regarding the appropriateness of the going concern basis were submitted to the Audit Committee. The Committee reviewed the recommendation taking into account the relevant FRC guidance (Going Concern and Liquidity Risk; Guidance for Directors of UK Companies). After making appropriate enquiries, and taking account of the above, the Directors have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
We have operated our ERM framework for a number of years and we believe that our framework is consistent with the requirements of emerging regulatory frameworks relating to risk management and systems of governance including Solvency 2.
We continue to strengthen and evolve the framework to ensure that it is consistent with our evolving Group portfolio and external best practice.
There are five key elements to the framework which are set out in the adjacent diagram. You can find out more about each element of the framework below.
The Own Risk and Solvency Assessment (ORSA) is a process that supports our implementation of the ERM framework and comprises of all the processes that exist within the ERM framework. It is how we identify, assess, control and monitor the risks that inform our capital requirements.
Capital and risk are managed within the Group to support the strategic objective of generating sustainable, high quality, returns for shareholders. Risk and capital metrics support the delivery of the strategy and the objective of maintaining financial strength and security – underpinning customer, regulatory, investor and wider stakeholder confidence.
You can find out more information about our risk exposures at 31 December 2014 in Note 42 – Risk management which shows the impact of applying this framework in managing our business and in Section 1.5 – Principal risks and uncertainties.
Risk culture Risk culture is a core component of our ERM framework. It is the way we think and act as individuals and as a group – our attitudes, capabilities and behaviours. Our culture drives how we identify, understand and openly discuss, and act on, current and future risks. Fair treatment of our customers is at the heart of our culture. We are committed to building valuable relationships with our customers that help them to protect and grow their assets.
Risk culture is influenced by: • The “tone from the top” - the way we raise awareness of risk at all levels in the company • Our business model - how we structure our business and use risk management insight to drive business actions and • The governance and processes we establish.
Risk governance structure Our risk culture is strongly influenced by our risk governance structure including our risk committees. The Risk and Capital Committee (the RCC), is our most senior risk committee and a Committee of the Board. A full description of the attendees and objectives of the RCC can be found in the Report from the Chairman of the RCC above. At the Group Executive level the Group Enterprise Risk Management Committee (the Group ERMC) consists of the executive team which includes the Group Chief Risk Officer. The Group ERMC meets at least quarterly, and usually in conjunction with the executive team. The main role of the Group ERMC is to: • Oversee compliance with the Group’s ERM framework • Support the executive team in the management of the risk profile of the Group.
Three lines of defence The Group operates a ‘three lines of defence’ model of risk management, with clearly defined roles and responsibilities for committees and individuals: First line: day-to-day risk management is delegated from the Board to the Chief Executive and, through a system of delegated authorities and limits, to business managers.
Third line: independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by the GIA function. This is subject to supervision and challenge from the Audit Committee.
Qualitative risk appetites The Group has defined qualitative risk appetite principles and statements to provide guidance to our businesses and help to drive our strategy in line with the Group’s appetite for risk. The general principles are: • The Group only has appetite for rewarded risk • The Group only has appetite for risks that are consistent with the delivery of our business plan objectives • The fair treatment of customers is paramount when assessing risks to be accepted • Prices charged for our products should fully reflect all risks • The Group’s appetite for accepting risk is dependent on the expected return which should exceed the cost of capital • Risks accepted should help maintain risk diversification and avoid excessive concentrations of risk.
This metric enables us to measure risk and capital consistently across the Group’s diverse range of businesses, activities and projects. It supplements, rather than replaces, the wide range of risk, capital and profit metrics currently used throughout the Group and, where appropriate, makes allowance for local regulatory capital considerations. The Group’s risk profile is assessed and reviewed regularly.
Risk control processes Risk control processes are the practices by which we manage financial and non-financial risks, including conduct risk, within the Group. They are used to identify, assess, control and monitor risk within the Group.
Policy framework The policy framework supports the Group’s corporate purpose by providing a consistent, high-level approach to managing the key risks faced by the Group and operates on five levels: The five levels of the policy framework interact as follows: • Governing principles: articulate the Group’s approach to managing our key risks at the highest level, and assist the Group’s businesses to operate effectively, efficiently and in compliance with applicable laws and regulations • Risk appetite framework: defines the key principles under which the Group should seek to take risks • Policies: state the standards that business units must comply with in managing the key risks that threaten the achievement of our strategy and business objectives 68 Standard Life
Our Conduct Risk Policy sets out the ways we make sure that wherever in the world we operate, we manage our conduct risk by ensuring that our customers are treated with consideration and fairness. Key principles include that: • We have no appetite for behaviours and decisions that knowingly lead to unfair customer outcomes • We will place the fair treatment of customers central to our culture • All propositions and services will be designed and reviewed in line with the needs of the identified target customers.
Tax policy and risk management As part of the policy framework, the Group operates the Tax Risk and Transfer Pricing Policy which supports the delivery of the Group’s business objectives. The key principles of this policy are: • The principles apply to all taxes and levies payable by the Group or operated/collected by the Group on behalf of governmental authorities • We will be compliant with all legally required reporting, disclosures and approvals and will pay all tax that we consider to be legally due in any territory acting in an open, honest and transparent manner with tax authorities and other relevant bodies at all times
• Our Health & Safety policy sets out our commitment to creating a safe and healthy environment for our people. This includes safety on our premises, employee health and wellbeing, and our approach to flexible working time
• Through our Community Investment policy, we aspire to contribute actively to our communities in a positive and sustainable way. The policy lets our people know what is expected of them and provides guidance on which charities we can support.
You can read more about our sustainability strategy by visiting www.standardlife.com/sustainability
Our approach • Modelling and understanding our business • Managing complexity, achieving consistency and clarity with common metrics • Risks effectively quantified and business fully profiled.
Within our model, the capital of the Group is quantified according to the Economic Capital metric 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 in response to specific risk events, covering the full range of risks to which the Group is exposed.
Emerging risk management The aim of the emerging risk management component of the ERM framework is to identify risks before they emerge and to plan so that we are able to respond quickly as they become an active business concern. As part of this process we use our emerging risk process to inform reverse stress testing and capital adequacy requirements across the Group.
Emerging Risk Process The Group has defined a clear and simple process for identifying and managing emerging risks which includes: • The identification of emerging financial and non-financial risks including Environmental, Social and Governance Risks • The creation of action plans and identification of early warning indicators • The effective management of emerging risks by the appropriate risk committee • The passage of any risks identified into ‘business as usual’ processes where appropriate.
Remuneration Committee Chairman’s statement Introduction I am pleased to present the Remuneration Committee’s report on Directors’ remuneration for the year ended 31 December 2014. This sets out our remuneration policy for the Directors and how our remuneration policy was applied during 2014.
The Group has had another strong year, delivering increased growth in underlying performance, Group operating profit before tax and Group operating return on equity from continuing operations. Furthermore, 2014 has been a pivotal year in the development of the Group as a global investment solutions provider. This development has been accelerated through the acquisition of Ignis and the planned sale of our Canadian business to Manulife which completed on 30 January 2015. The sale of our Canadian business was the most significant of these corporate actions in terms of size.
As a result of the scale of these corporate actions the Remuneration Committee has determined that it is appropriate to restate the financial performance targets for the long-term incentive plans and 2014 annual bonus award to account for the changes in the structure of the Group.
Performance targets The Remuneration Committee considered that the targets previously set for the long-term incentive plans and 2014 annual bonus plan had become inappropriate for rewarding our executives for the delivery of our goal of driving shareholder value. These targets were based on budgets set, and structures in place, prior to the decisions to proceed with the corporate actions noted above. As such, whilst the Remuneration Committee will continue to drive performance through the existing incentive plans, we have restated the performance targets set for the awards on a plan by plan basis. We have adjusted the targets for the awards made in 2012 and 2013 under the Group Long-Term Incentive Plan (Group LTIP) which are based on Group operating profits in the final year of the three-year performance periods and the targets for the awards made in 2014 under the Standard Life plc Executive Long Term incentive plan (Executive LTIP). We have also adjusted the targets for the 2014 annual bonus scheme. In addition, the awards made in 2012, 2013 and 2014 under the Standard Life Investments Long-Term Incentive Plan (Standard Life Investments LTIP) have been adjusted.
In respect of the 2012 Group LTIP awards the Remuneration Committee discussed a number of methods of adjustment, including attempting to restate the targets as if our Canadian business had not been sold, and trying to estimate the impact of the various management actions and business opportunities that did not proceed. However, given the complexity and subjectivity involved in making such adjustments, and with the 2012 target being based only on the profits in 2014, we decided that the most appropriate and transparent methodology for adjustment was to remove the 2014 operating profits of the Canadian business from both the target and the 2014 financial results used to determine the vesting of the 2012 award.
Further details of the adjustments made to the targets for the 2013 Group LTIP and the 2014 Executive LTIP awards and details of the restated Group and Executive LTIP targets are provided on pages 91 to 94.
In respect of Standard Life Investments, the adjustments made to the targets and results for the 2012 and subsequent Standard Life Investments LTIP awards are as follows: • Removal of Canadian business, sold in January 2015 (in line with the approach taken for the 2012 Group LTIP) • Inclusion of Ignis, acquired in July 2014 • Inclusion of Standard Life Wealth, accounted for within Standard Life Investments from January 2014 • Use of earnings before interest, tax, depreciation and amortisation (EBITDA) rather than earnings before interest and tax (EBIT).
How our remuneration policy was applied in 2014 Given the performance delivered in 2014 relative to the restated 2012 Group LTIP targets, the operating profit measured against the restated 2012 target is above the maximum resulting in 100% vesting of the award. In addition, the Remuneration Committee determined that the awards granted in 2012 under the Standard Life Investments LTIP, measured against the restated targets, should vest at 83.6% of the maximum award.
Reflecting on the strong financial and non-financial performance including the delivery of the strategic objectives, the Remuneration Committee decided to approve payments under the Group annual bonus, for 2014, of 94.86% of the Chief Executive’s (CE) maximum potential bonus (166% of salary), 89.8% of the Chief Finance Officer’s (CFO) maximum potential bonus 72 Standard Life
(134.7% of salary), pro-rated for the period of employment during 2014 and, for the Chief Executive, Standard Life Investments (CE, Standard Life Investments) of 95.5% of his maximum potential bonus (57.3% of salary). In addition, the Remuneration Committee approved a total of 100% of the CE, Standard Life Investments maximum potential bonus (305% of salary) under the Standard Life Investments annual bonus arrangement. The Remuneration Committee reviews the way that the performance has been achieved and receives formal input from the Risk and Capital Committee to assist with its deliberations. This is in order to ensure that the performance has been achieved in a manner consistent with the Group’s risk strategy and is an appropriate reflection of the Group’s performance. The total remuneration in respect of 2014 for the CE is £5,473k, the CFO is £1,305k (for the period from 18 August 2014), and for the CE, Standard Life Investments is £5,272k reflecting the strong performance of the Group. The breakdown is set out on page 87 of this report.
In setting salaries for 2015 for the executive Directors, the Remuneration Committee considered the individual’s skills and performance; the size, complexity and responsibility of the role and the context of the anticipated salary increases to be awarded to employees across the Group. In recognition of his personal performance, and the typical level of salary increases across Standard Life, the Chief Executive has been awarded a 3.1% increase moving his base salary from £810,000 to £835,000 from 16 March 2015. The salary for the CFO, who joined the group on 18 August 2014, will remain unchanged at £600,000.
• The continued expansion of our global distribution and extension of our global network of strategic partners, John Hancock and Manulife in North America, Sumitomo Trust and HDFC AMC in Asia.
Remuneration policy Our remuneration policy report is set out on pages 75 to 86 and we propose that, subject to shareholder approval, the policy is effective from 12 May 2015 – the date of the 2015 Annual General Meeting (AGM).
Furthermore, to support our transition to becoming a global investment solutions provider and to create alignment across our most senior leadership population we are proposing, for this population, the application of a consistent long-term incentive arrangement. In order to be able to provide a consistent long–term incentive arrangement across the leadership population two rule changes to the Executive LTIP plan rules are proposed.
Agenda for 2015 As the strategy and structure of the company continues to develop, and we continue to move to become a global investment solutions provider, during 2015 we will continue to review the remuneration arrangements for our executive Directors and the performance measures used to determine the vesting of the Standard Life plc Executive LTIP to ensure that the awards are aligned to the company’s strategy and structure. We will consult the Company’s major institutional investors as part of this review.
Future policy report This section sets out the remuneration policy for executive Directors and non-executive Directors, which is subject to a binding vote of shareholders and will, if approved, take effect from 12 May 2015 – the date of the 2015 AGM.
Executive Directors are provided with a package of core benefits funded by the Company and are invited to participate, in line with other employees, in their employing company’s voluntary benefits programme which they fund themselves through salary sacrifice.
Where the Remuneration Committee considers it appropriate, other benefits may be provided on recruitment or relocation.
(including shipping costs, legal fees and stamp duty associated with the purchase of a house and other professional advice).
To promote share ownership by all employees to drive performance aligned to the Company’s shareholders’ interests.
Pension To provide a competitive, flexible retirement benefit in a way that does not create an unacceptable level of financial risk or cost to the Group.
Executive Directors are auto enrolled into the Group’s defined contribution pension plan and are offered the alternative of a cash allowance.
We would continue to honour defined benefit pension arrangements in the event of an individual with a contractual entitlement to such a pension benefit being promoted to an executive Director role.
To support the delivery of the Group’s annual business plan. The focus is on the delivery of the annual financial, strategic, customer and people objectives.
The maximum award opportunity in respect of any financial year is based on role and is up to 175% of salary.
Performance is measured against a range of key financial metrics, strategic, customer and people indicators and personal performance.
Company bonus awards are made from the bonus pool after deduction of personal bonus payments and the size of the award reflects the value of total reward positioned against market.
Normally, 50% of the combined Standard Life Investments’ personal and company bonuses above 25% of salary is deferred into shares which vest after two years from the date of award (subject to the deferred amount being at least 10% of salary).
Deferred bonus shares are normally granted in the form of nil-cost options, however may be awarded in other forms if it is considered appropriate.
Deferred bonus shares are subject to malus between grant and vest and cash awards are subject to clawback for two years from the date of award (details set out later in this report).
Deferred awards will accrue dividend equivalents, or equivalent for other forms of awards, over the deferral period. These will normally be paid on a reinvested basis.
The deferral will apply to bonuses paid in 2016 and onwards.
The maximum award opportunity for the CE, Standard Life Investments in respect of any financial year is 105% of salary in respect of the personal bonus award and is 200% of salary in respect of the company bonus award.
To reward participants for the delivery of the Group’s goals of driving shareholder value through customer experience including measures such as cumulative Group operating profit and cumulative Group net flows.
Awards are subject to review by the Remuneration Committee and the Risk and Capital Committee at the end of the three-year performance period to confirm that vesting of the award is appropriate. This will take into account performance relative to the Group’s scorecards over the plan period.
Dividend equivalents, or equivalents for other forms of awards, accrue over the five-year period. These will normally be paid on a reinvested basis.
Vesting of awards takes place on a straight line basis between threshold and target performance and target and maximum performance.
The cumulative Group operating profit and cumulative Group net flows performance condition ranges will be disclosed in the Directors’ remuneration report published in the year in which the awards are made.
The maximum award opportunity possible under the plan rules is 500% of salary.
The Remuneration Committee’s current intention is that award levels for executive Directors will be based on role and will be up to a maximum of 200% of salary for the CE and CFO.
Vesting of the award for the CE, CFO and, for 2015, the CE, SLI is based on the following Group performance measures: • Cumulative Group operating profit performance before tax weighted at up to 100% of the award (for 2015 this is 70%)
Standard Life Investments Long-Term Incentive Plan (Standard Life Investments LTIP) (only to be used in 2015)
Awards are normally granted in the form of nil-cost options. They may however be awarded in other forms if it is considered appropriate.
The maximum award opportunity for the CE, Standard Life Investments is 200% of salary.
This plan will not be used to grant awards to the CE, Standard Life Investments after 2015.
Vesting of the award is based on Standard Life Investments’ consolidated cumulative three-year third party earnings before interest, tax, depreciation and amortisation.
The vesting of awards is subject to an investment performance gateway which requires Standard Life Investments’ performance to be above the lower quartile of the moneyweighted average of all assets under management (captive and third party assets) compared to other asset managers.
The award opportunity at threshold performance is zero, with up to 50% of the award normally vesting for target performance. 100% of the award vests for maximum performance.
The Remuneration Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed: (i) before the policy set out above, or any previous policy came into effect or (ii) at a time when a previous policy, approved by shareholders, was in place provided the payment is in line with the terms of that policy or (iii) at a time when the relevant individual was not a Director of the Company and the payment was not in consideration for the individual becoming a Director of the Company.
Remuneration Committee discretion in relation to future operation of the remuneration policy
In the event of a variation of share capital, demerger, special dividend or similar event, the Remuneration Committee may adjust or amend awards in accordance with the rules of the relevant plan. The Remuneration Committee retains the discretion to amend the performance target in exceptional business or regulatory circumstances. If discretion is exercised in this way, the Remuneration Committee will consult with major shareholders as appropriate. All awards are subject to Remuneration Committee discretion and may be adjusted (or reduced to zero) where it determines that the overall level of the Company or Group performance does not warrant payment of variable remuneration, or it considers that risks (such as financial, regulatory, compliance or brand risk) have not adequately been reflected in awards.
Malus or clawback may apply where stated in the policy table.
Performance targets for the Group’s incentive arrangements are set on an annual basis by the Remuneration Committee. The Remuneration Committee takes into account a range of factors including internal business forecasts, prior year performance, degree of stretch against the performance targets in the business plan, the economic environment, market conditions and expectations.
The following table sets out why the performance conditions that are currently used for the annual Group performance scorecard, used to determine the Group annual bonus awards, were chosen.
Focuses management on the delivery of the business’ strategic priorities across the Group to drive improved performance in future years.
Develops organisational capability by building the resources for the future, and encouraging the desired behaviours.
The table below sets out why the performance conditions for the Executive LTIP were chosen.
Rationale Chosen measure of profitability and closely linked to cash generation. A key measure of the profit the Group makes. Excludes items which create short-term volatility and that are not within management control. Targets the Group’s ability to deliver returns to the Company’s shareholders and provides an indication of the Company’s dividend paying capability.
The table below sets out why the performance conditions used in the Standard Life Investments’ personal and company bonus plan were chosen.
The following table sets out why the performance conditions for the Standard Life Investments LTIP were chosen: Performance metric Consolidated cumulative three-year third party earnings before interest, tax, depreciation and amortisation (EBITDA).
Awards will not be granted to the CE, Standard Life Investments under the Standard Life Investments LTIP after 2015. The performance conditions used in the Standard Life Investments LTIP will be included in the Executive LTIP and will apply for the CE, Standard Life Investments only.
Remuneration arrangements throughout the Group Throughout the Group the following overarching principles and practices are applied to our remuneration policy: • Remuneration is linked to performance, is transparent and is easy to understand • The policy encourages behaviours that deliver results which are aligned to the interests of the Group’s key stakeholders • Remuneration is competitive and reflects financial and personal performance and the individual’s value in the market, without paying more than is necessary • The policy provides an appropriate balance of fixed and variable remuneration.
Rationale Measures chosen to support the delivery of financial performance as set out in the Standard Life Investments’ annual business plan.
Embeds the Standard Life and Standard Life Investments brands to drive competitive advantage.
Develops organisational capability by building resource capabilities and the behaviours needed to deliver the Standard Life Investments’ annual business plan.
Board membership fees are subject to a maximum cap which is stated in the Company’s articles of association. Any changes in this would be subject to shareholder approval.
The Board annually sets the fees for the nonexecutive Directors, other than the fee for the Chairman of the Company which is set by the Remuneration Committee.
The remuneration policy for non-executive Directors 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 (Holdings) Limited, in each case to take into account the additional responsibilities and time commitments of the roles.
The Board retains discretion to remunerate the non-executive Directors in shares rather than cash where appropriate.
The Chairman and non-executive Directors are not eligible to participate in any incentive arrangements. Additional fees or benefits may be provided at the discretion of the Remuneration Committee in the case of the Chairman, and the Board in the case of the other non-executive Directors, to reflect, for example, housing, office, transport and other business related expenses incurred in carrying out their role.
Any payment in lieu of notice will be up to 12 months' salary, pension contributions and the value of other contractual benefits. A duty to mitigate applies. The payment may be made in phased instalments. Rights to bonus and existing long-term incentive awards are governed by the rules of the respective plans.
Salary, pension contributions and core benefits are specified in the contracts and are treated as described above. There is no contractual entitlement to participate in the annual bonus plan or receive long-term incentive awards. Individuals are notified of these discretionary schemes at the beginning of each year.
Non-compete clauses Applies during the contract and for up to six months after leaving at the Company’s choice.
Sir Gerry Grimstone 6 June 20031 as Director and 28 February 2007 as Chairman (continuation 27 May 2010 and 28 May 2013)
• In all plans, the Remuneration Committee retains the discretion to disapply time pro-rating for good leavers (see below) and, in the case of the Group LTIP and Executive LTIP, performance pro-rating
This section sets out the annual remuneration report and is subject to an advisory vote of shareholders at the AGM.
2 The figure reported for long-term incentives in 2014 is the market value of Group LTIP and Standard Life Investments LTIP awards, granted in 2012, that will vest in 2015. The share price at the date of vesting was not known at the date of publication of this report and therefore the number of Standard Life plc shares that will vest has been multiplied by the average share price over the quarter ending 31 December 2014 (£4.01). This amount includes additional Standard Life plc shares received in respect of accrued dividends from grant through to 31 December 2014.
5 Luke Savage joined Standard Life on 18 August 2014. Salary, taxable benefits, annual bonus and pension allowance shown are paid from that date.
Annual base salary as at 1 January 2014 Annual base salary from 16 March 2014 Total base salary paid in 2014
Pension (audited) No Directors are members of, or have benefits in, the Standard Life Staff Pension Scheme. Executive Directors received a cash allowance in lieu of pension as follows: Cash allowances in lieu of pension contribution as a % of salary Paid in 2014
Annual bonus plans Group annual bonus The target and maximum bonus award opportunities (expressed as a percentage of base salary at 31 December 2014) that could be earned in respect of 2014’s Group performance were: Target Maximum opportunity
Officer and the Risk and Capital Committee on the level of underlying risk within the business • The actual financial performance targets and the detailed non-financial measures used for the determination of the annual bonus plans have not been disclosed in this Directors’ remuneration report as the Board deems that, given the annual bonus rewards the achievement of the Group’s business plan, the disclosure of these could seriously prejudice the Group’s business. The financial targets will be disclosed, at the earliest, in the Directors’ remuneration report published for the financial year following the year in which the bonus is paid.
Group operating profit before tax (excluding our discontinued Canadian business and life joint ventures).1
• EVOP (excluding our discontinued Canadian business and life joint ventures)1 of £627m – above maximum
• Operating RoE (excluding our discontinued Canadian business and life joint ventures)1 of 17.6%– above maximum.
We have announced the two most significant transactions in the Group’s history: • Acquisition of Ignis Asset Management and associated strategic partnership with Phoenix Group. This was funded from existing resources making more efficient use of our capital
secured significant new business without capacity issues • Responded quickly and constructively to March Budget and
• First to market with “clean” platform to comply with regulation taking effect from 2016, with greater discounts and assets invested in discounted clean funds than any other platform
• Made necessary preparations in advance of Scottish Independence referendum in September
• Took swift action in response to regulatory change in Dubai. During this period of significant change we maintained our external financial strength ratings and stable outlooks.
• Established a clear customer vision, My Life Savings, for our UK business and completed the integration of our entire UK customer operations to a single site, improving customer focus, enabling greater collaboration and driving process efficiency.
• Received a number of industry excellence awards, including City A.M. Insurance Company of the Year, Multi-Asset Manager of the Year at the Financial News 2014 Awards for Excellence and Best Customer Insight and Feedback at the UK Customer Experience Awards
• Promoted our brand to a worldwide audience through our high profile sponsorship of the Ryder Cup and our partnership with Andy Murray
• Defined a clear common purpose and guiding principles for our brand that will help strengthen engagement with customers and other stakeholders.
Develop our organisational capability by building the environment, the resources, capabilities and developing the behaviours we will need. This will include: • Ensuring the environment we work in creates a culture of continuous improvement
• Redefined the role of the centre, creating the Strategic Corporate Centre and adoption of a lead business model for agreed services
• Launched two more cohorts of our award winning talent programmes with over half of the next emerging leaders cohort being female and our first group wide graduate intake with increased international diversity
• We’ve seen an encouraging shift in our InterAction results with 87% of employees completing the survey and strong levels of engagement when compared externally
• Started to embed a more inclusive approach to career and talent development for all our people including an increase in international assignments at all levels of the organisation
• Continued our role in supporting the youth employment agenda extending our support to placements across the UK and supporting some of the hardest to reach young people. We have increased our employees under 25 from 0.5% to 5.4% in three years.
• Received full recognition as a Living Wage employer in the UK from the Living Wage Foundation
1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited.
Actual 75.47% 14.33% 89.8% 134.7% £301,138 1 Bonuses are paid based on base salary at 31 December 2014. Luke Savage’s bonus has been prorated to reflect his appointment during the performance period.
In 2014, Standard Life Investments continued to expand globally and had another very successful year. The key achievements during the year in which the bonus outcome was determined were: • Very strong EBITDA performance • Standard Life Investments operating profit before tax increased compared to 2013 • Total assets under management increased compared to 2013 • Maintaining strong investment performance with 98% of third-party funds ahead of the 3 year benchmark • Successful acquisition of Ignis • Collaboration agreement with Manulife.
Based on Keith Skeoch’s and Standard Life Investments’ performance in 2014, the Remuneration Committee approved a personal bonus award of 105% of salary and a company bonus award of 200% of salary.
Luke Savage1 £178,514 £122,624 - £301,138 1 Luke Savage was appointed a Director on 18 August 2014 and the bonus payable is pro-rated accordingly.
Long-term incentives Standard Life Long-Term Incentive Plan (Group LTIP) The plan under which awards were made in 2012 is the Group LTIP. The Executive LTIP has been used to grant awards since May 2014.
The awards granted in 2012 under the Group LTIP have a performance condition based on Group operating profit before tax (excluding profits of the life joint ventures – HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited). The awards are also subject to two underpins when assessing the Group performance. The first requires the Risk and Capital Committee to be satisfied that performance obtained has been achieved within acceptable defined risk parameters. The second requires the Remuneration Committee to be satisfied that Group operating profit performance reflects overall Group performance.
2012 Group LTIP awards vesting in respect of performance ending in 2014 (audited) Awards were made in March 2012 of 200% of salary to David Nish and Keith Skeoch.
As a result of the corporate actions during 2014, and as detailed more fully in the Remuneration Committee Chairman’s statement, the following adjustments have been made to the 2012 LTIP targets and results: • Removal of Canadian business, sold January 2015 • Inclusion of Ignis, acquired in July 2014 • Inclusion of Newton Private Client business, acquired in September 2013 • Removal of interest no longer receivable due to Canadian capital restructuring.
The tables below summarise the original performance targets for the awards, the amended performance targets and the outcome.
In line with the above results, the Remuneration Committee determined that 100% of awards granted to David Nish and Keith Skeoch in 2012 should vest in 2015.
Maximum 140% of target 200% 1 Vesting takes place on a straight line basis between 60% of target cumulative three-year third party EBITDA and 140% on target cumulative three-year third party
The following table sets out performance against targets for the 2012 award.
Consolidated cumulative threeyear third party EBITDA <60% of target 60% of target 100% of target 140% of target
As performance was above the lower quartile of the money-weighted average of all assets under management (both captive and third-party assets) and the consolidated cumulative three-year third party EBITDA was 126.8% of target, the Remuneration Committee determined that 167.1% of target awards (83.6% of the maximum award) granted in 2012 should vest in March 2015.
The targets for awards granted under the Standard Life Investments LTIP in 2013 have been adjusted on the same basis.
The table below summarises the key details of the awards made in 2014 with the amended performance targets (audited): Award Type of interest
David Nish – 200% – £1,620,000 Cumulative Group operating profit before tax3 (70%) and cumulative Group net flows4 (30%) for the three-year period ended 31 December 2016
Maximum: £24.3bn 2014 Standard Life Investments LTIP award, vests on [28] March 2017 Nil-cost option
EBITDA to 31 December 2016 and subject to an investment performance gateway
Insurance Company Limited. 4 Cumulative Group net flows includes life joint ventures which refer to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance
Company Limited and excludes flows in relation to money market and liquidity funds. 5 Vesting between threshold and maximum levels will be on an incremental basis using predetermined milestones. These will be disclosed on a retrospective basis in the Directors’ remuneration report for the year for which the Executive LTIP awards vest. 6 Vesting takes place on a straight-line basis between 60% and 140% of Standard Life Investments consolidated cumulative three-year target third party EBITDA.
Revised targets for LTIP awards granted in 2013 Again as a result of the corporate actions taken in 2014 the Group operating performance targets for awards granted in 2013 under the Group LTIP have also been restated.
Insurance Company Limited • Inclusion of expected interest income on proceeds of the sale of the Canadian operations less the planned equity return.
2015 performance level Below threshold Threshold Maximum Original performance range 2015 Group operating profit before tax (excluding life joint ventures)1 <£725m £725m £875m Restated performance range 2015 Group operating profit before tax (including life joint ventures)1 <£610m £610m £740m 1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited.
David Nish and Keith Skeoch are required to hold 300% of the value of their base salary in the form of Standard Life plc shares. Luke Savage will be required to acquire and hold Standard Life plc shares to the value of 200% of his base salary from awards granted under the Executive LTIP and deferred annual bonus plan.
The shares which the executive Directors will be required to hold to reach their respective shareholding requirement are based on the net vested shares arising from the exercise of an award. Net vested shares are those shares which the executive Director could retain after selling sufficient shares to cover the costs of the income tax and employee national insurance payable when the award is exercised. Executive Directors will be required to hold shares arising from the following awards: • 100% of the net vested shares that could be acquired from the exercise of awards granted from 2014 onwards (this includes the awards arising from the deferral of annual bonus and awards granted under the Executive LTIP and the Standard Life Investments LTIP)
• 50% of the net vested shares that could be acquired from the exercise of awards granted prior to the introduction of the new requirement (this includes awards arising from the deferral of annual bonus and awards granted under the Group LTIP and the Standard Life Investments LTIP)
Total value2 of shares owned at 31 December 2014 as a % of salary at 31 December 2014
Luke Savage - - - -% - 1 Includes shares held by the Director and by their connected persons. 2 Closing share price at 31 December 2014 was 400.1p.
As is shown from the table, David Nish and Keith Skeoch met the share ownership requirements in 2014. Luke Savage was appointed in August 2014 and as such does not yet meet the shareholding requirement.
Luke Savage 184,329 5,116 - - 1 This comprises awards made under the Group, Executive and Standard Life Investments LTIPs in 2012, 2013 and 2014 excluding shares to be awarded in lieu of dividend equivalents. 2 This comprises deferred bonus awards made in 2013 and 2014 and options granted under the Standard Life Sharesave Plan excluding shares to be awarded in lieu of dividend equivalents. 3 This comprises exercises of awards made under the 2011 Group and Standard Life Investments LTIPs and deferred share awards from the 2011 Group bonus plan including dividend equivalents.
Directors’ interests in the Company’s shares through the medium of the Group’s share plans are shown below: Group, Executive and Standard Life Investments LTIPs Awards are subject to vesting conditions that are based on continuous employment and on satisfying corporate performance targets over the performance period.
Total value on exercise date David Nish 31/03/11 31/03/14 752,573 - 127,965 563,544 316,994 - £2.0596 £3.9453 03/04/14 £2,223,350 29/03/12 29/03/15 665,750 - 97,969 - - 763,719 £2.3282 - - - 25/03/13 25/03/16 427,050 - 54,075 - - 481,125 £3.6998 - - - 20/05/146 20/05/19 - 416,645 17,375 - - 434,020 £3.8882 - - - 1,845,373 416,645 297,384 563,544 316,994 1,678,864 Keith Skeoch 31/03/115 31/03/14 412,701 - 70,173 290,325 192,549 - £2.0596 £3.8529 02/04/14 £1,118,593 31/03/11 31/03/14 412,701 - 70,173 309,039 173,835 - £2.0596 £3.8529 02/04/14 £1,190,696 29/03/125 29/03/15 365,088 - 53,723 - - 418,811 £2.3282 - - - 29/03/12 29/03/15 365,088 - 53,723 - - 418,811 £2.3282 - - - 25/03/135 25/03/16 236,634 - 29,962 - - 266,596 £3.6998 - - - 25/03/13 25/03/16 236,634 - 29,962 - - 266,596 £3.6998 - - - 28/03/145 28/03/17 - 237,818 9,949 - - 247,767 £3.7844 - - - 20/05/146 20/05/19 - 231,469 9,652 - - 241,121 £3.8882 - - - 2,028,846 469,287 327,317 599,364 366,384 1,859,702 Luke Savage 10/09/146 10/09/19 - 184,329 2,654 - - 186,983 £4.0688 - - - - 184,329 2,654 - - 186,983 1 All awards lapse six months after the expected first date of exercise. 2 The Remuneration Committee has invoked the power within each of the LTIP rules in relation to the 2011, 2012, 2013 and 2014 awards for the awards to carry a right to receive rolled-up dividends, but only to the extent that the awards vest. As such, these awards include shares equivalent to the level of dividends for which the record dates (or payment dates in the case of the Executive LTIP) between March 2011 and December 2014 fall within the relevant vesting periods. All awards were made under the Group LTIP unless otherwise stated.
4 Based on the average share price for the five dealing days immediately before the awards were granted. 5 Keith Skeoch’s awards under the Standard Life Investments LTIP. 6 Awards granted under the Executive LTIP.
Bonus awards–deferred shares These awards are the deferred share elements of the 2011, 2012 and 2013 bonus awards. The value of the bonus deferred into share awards is reported within the annual bonus figures shown in the Directors’ remuneration for the year for which the bonus is payable.
Luke Savage was granted options over 5,116 Standard Life plc shares exercisable from 1 November 2019 under the Sharesave Plan on 12 September 2014. The exercise price for these options is £2.961.
Luke Savage Member of Council, Queen Mary University of London £nil 1 David Nish stepped down from the ABI long term savings committee on 11 November 2014. 2 Keith Skeoch stepped down from the advisory board of Reform Scotland on 9 May 2014. 3 Keith Skeoch continues to waive his fees from the FRC.
Loss of office payments in 2014 (audited) No loss of office payments were made in 2014.
Payments made to former directors during the year (if not reported elsewhere) will in future be reported here if they are in excess of £20,000. No such payments were made in 2014.
The following table shows the single figure of total remuneration for the Director in the role of Chief Executive (CE) for the same six 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.
2013 5251 376 5061 1 Comparatives for the year ended 31 December 2013 have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to Note 12 – Discontinued operations.
Percentage change in remuneration of the director in the position of Chief Executive The table below shows the percentage year-on-year change in salary, benefits and annual bonus earned between the year ended 31 December 2013 and the year ended 31 December 2014 for the Chief Executive compared to the average UK based Group employee: % change in base salary % change in bonus % change in benefits
CE 3.1% 29.45% 0% UK based employees of the Group 3.2% 13.08% 0%
Total shareholder return of Standard Life plc compared to the FTSE 100 index
Performance graph: The graph shows the difference in value at 31 December 2014 between having invested £100 on 1 January 2009, respectively, in Standard Life plc and in the FTSE 100. 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.
Further details on the rationale for the increase for Keith Skeoch are set out in the Remuneration Committee Chairman’s statement.
The financial performance targets and the detailed non-financial measures used for the determination of the Group and Standard Life Investments’ annual bonus plans, and financial and non-financial performance against these, will not generally be disclosed. The Board and the Remuneration Committee believe that, given the annual bonus rewards the achievement of the Group’s business plans, the disclosure of these could seriously prejudice the Group’s business. In evaluating the non-financial metrics, the Remuneration Committee will reference, where possible, objective data and will exercise judgement in determining achievement of objectives when assessing performance. Disclosure on performance and how performance has been evaluated by the Remuneration Committee will be provided in the Directors’ remuneration report at the end of the performance period. The Group financial targets will be disclosed at the earliest in the Directors’ remuneration reports published for the financial year following the year in which the bonus is paid. This will allow shareholders to assess whether awards are appropriate in the context of the performance and progress made at the end of the year.
Pension Cash allowances are paid in lieu of pension as follows: • David Nish – 30% of salary • Keith Skeoch – 25% of salary • Luke Savage – 25% of salary.
Long-term incentive arrangements The Remuneration Committee proposes to grant awards equivalent to 200% of salary to David Nish and Keith Skeoch and 125% of salary to Luke Savage, in the form of nil-cost options under the Executive LTIP. Vesting of these awards, in 2020, is based on the following performance measures measured over the period to 31 December 2017: • Cumulative Group operating profit before tax performance weighted at 70% of the award • Cumulative Group net flows weighted at 30% of the award.
Basis of award (% of salary and face value at grant)
2015 Executive LTIP award, to vest in March 2020 Nil-cost option
Cumulative Group operating profit before tax (70%) and cumulative Group net flows
Keith Skeoch will also be granted an award, in the form of a nil-cost option equivalent to 200% of salary under the Standard Life Investments LTIP. This award will vest in 2018 subject to performance in the period to 31 December 2017. The award will vest provided the Standard Life Investments’ investment gateway is passed. The level of vesting is based on the consolidated cumulative three-year third party Standard Life Investments (Holdings) Limited EBITDA achieved in the three years to 31 December 2017. The performance targets will not generally be disclosed as the Board and the Remuneration Committee deem that, given the vesting of the Standard Life Investments LTIP rewards the achievement of its business plans, the disclosure of these could seriously prejudice the Group’s business.
LTIP award, vests in March 2018 Nil-cost option Keith Skeoch -
Single total figure of remuneration – non-executive Directors The following table (audited) sets out the single total figure of remuneration for each of the non-executive Directors who served as director at any time during the financial year ending 31 December 2014. Non-executive Directors do not participate in bonus or long-term incentive plans and do not receive pension funding.
December £000s 1 Sir Gerry Grimstone received an allowance of £15,000 towards his business related accommodation costs in Edinburgh in addition to his Chairman’s fees. Other amounts reported relate to expenses such as travel and accommodation expenditure incurred on Group business. While these payments are the reimbursement of expenses and not benefits, they are included as being a payment which is subject to tax.
2 Colin Buchan resigned from the Board at the close of the AGM on 13 May 2014. 3 Isabel Hudson was appointed on 15 October 2014. 4 Kevin Parry was appointed on 27 October 2014. 5 Martin Pike was appointed on 27 September 2013.
Martin Pike 40,000 - 40,000 - 1 Includes shares held by the Director and by their connected persons. 2 Colin Buchan resigned from the Board at the close of the AGM on 13 May 2014.
Chairman of Standard Life Investments (Holdings) Limited £38,250 £38,250 1 The core fee of £71,400 paid to each non-executive Director (including the Chairman) is expected to total £714,000 for 2015 (2014: £642,600). This is within the maximum £1,000,000 permitted under Article 87 of Standard Life plc’s articles of association. Total fees including additional duties are expected to amount to £1,152,350 for 2015 (2014: £1,068,450).
2 The Chairman’s fee is inclusive of the non-executive Directors core fee and no additional fees are paid to the Chairman where he chairs, or is a member of, other committees/boards. In 2015 the Chairman will also receive £15,000 (2014: £15,000) as an allowance towards his business related accommodation costs in Edinburgh.
4 The Investment Committee met once in 2014 on 28 January and stood down at that meeting.
As noted on page 37, Sir Gerry Grimstone is an independent non-executive of Deloitte LLP. He was appointed to this role to represent the public interest following a recommendation by the Financial Reporting Council that all major audit firms should have such representation. His remuneration for that role is a fixed sum and has no relationship to Deloitte's business activities. Both the Chairman and the Remuneration Committee recognised the need to ensure there is no conflict of interest arising from the appointment of Deloitte LLP to advise the Remuneration Committee. The Chairman did not play a part in the tender and selection process. We were satisfied at the date of the appointment that the nature of the Chairman's appointment to Deloitte LLP did not create a conflict of interest. We continue to monitor this position and are satisfied that the continuing appointment does not give rise to a conflict of interest. Deloitte LLP operates appropriate safeguards to maintain the independence of its advice, for example, the team responsible for providing advice to the Remuneration Committee are not rewarded for cross-selling non-related services to Standard Life and work is contracted for independently from work performed by the rest of the firm. Whilst Sir Gerry Grimstone has access to the Remuneration Committee advisor to the extent that he is invited to attend Remuneration Committee meetings, he does not meet with the Remuneration Committee advisor other than in those meetings to discuss matters relating to Standard Life. Communication between Deloitte LLP and the Remuneration Committee is on instruction from the Remuneration Committee Chairman.
October to December • Investor consultation on restatement of targets and changes to the Executive LTIP plan rules • Chairman’s 2015 fee • Performance in 2014.
Shareholder voting We remain committed to on-going shareholder dialogue and take an active interest in voting outcomes. Where there are substantial votes against resolutions in relation to Directors’ remuneration, we seek to understand the reasons for any such vote, and will detail here any actions in response to it.
• The Standard Life Ireland Sharesave Plan which launched in August 2012. Invitations have been made annually from August 2012. As at 31 December 2014, 73 employees in Ireland had accepted one or more of the Sharesave Ireland invitations.
Directors participate (Executive LTIP, Group LTIP and Standard Life Investments LTIP) • 3.7% where the guideline is no more than 10% in any 10 years under all share plans (Executive LTIP, Group LTIP, Standard
Our opinion In our opinion, Standard Life plc’s Group financial statements (the ‘financial statements’): • Give a true and fair view of the state of the Group’s affairs as at 31 December 2014 and of its profit and cash flows for the year then ended • Have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the
European Union • Have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
What we have audited Standard Life plc’s Group financial statements comprise: • The Consolidated statement of financial position as at 31 December 2014 • The Consolidated income statement and Consolidated statement of comprehensive income for the year then ended • The Consolidated statement of cash flows for the year then ended • The Consolidated statement of changes in equity for the year then ended • The Group accounting policies • The notes to the Group financial statements, which include other explanatory information.
We have not audited the Proforma reconciliation of consolidated operating profit for the year ended 31 December 2014 set out on page 112 which was prepared by Standard Life plc.
Certain required disclosures have been presented elsewhere in the Annual report and accounts 2014 (the ‘Annual report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
• Overall Group materiality was set at £37 million which represents 5% of operating profit before tax.
3. Financial information – Independent Auditors’ Report on the Group financial statements continued
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud.
As part of our consideration of the assumptions used to value these liabilities we gave specific focus to the annuitant mortality assumptions given the sensitivity of the Group’s profit to changes in these assumptions and the level of judgement involved in setting the assumptions.
In evaluating the valuation of life insurance contract liabilities, our audit work involved the following: • We obtained audit evidence in respect of the key controls over the key actuarial models, data collection and analysis and the assumption setting processes used by management, evaluated their design and implementation and tested their operating effectiveness
• Considering the experience investigations carried out by management on annuity contracts which compared actual experience in the last five years to the assumptions used
• Evaluating the choice of the industry standard Continuous Mortality Investigation (‘CMI’) model and the parameters used.
We determined, based on our audit work, that the assumptions used in the models were appropriate and the methodologies and models used are in line with the prior year and industry accepted practice whilst reflecting the nature of the Group’s life insurance contracts.
The value of the intangible asset was determined as at the date of the acquisition in accordance with the requirements of IFRS 3 ’Business combinations‘. The assumptions which had the biggest impact on that valuation, and which also required the Directors to make significant judgements, and were therefore the focus of our work, were those related to the expected growth from future fund flows and performance, profit margins and discount factors.
• Considering the forecast operating margin against our own expectation of a reasonable range based on our experience across the industry.
• The impairment charge recognised in the Consolidated income statement for the year appropriately reflected post acquisition changes.
Due to the nature of these investments, there are a number of key judgements because there is no active market price available. These key judgements include: • The selection of an appropriate standard market methodology and model for valuing derivatives
In obtaining sufficient audit evidence over the valuation of derivatives and real estate investments, our testing included: • Understanding and then testing the key controls over the asset valuation processes and techniques used in respect of the valuation of derivatives and real estate investments
• Evaluating the methodology, inputs and assumptions used in a sample of real estate investment valuations by comparing the yields and market rents used by third party valuers against published market benchmarks in order to identify any valuations where the main driver or value movement fell outside our expected range. We also met with the third party valuers to understand and challenge the valuation approach and inputs which were in accordance with our expectations based on our own industry experience.
Presentation and disclosure of business disposals Refer to page 56 (Audit Committee Report), page 132 (Accounting policies) and pages 171 to 172 (notes) We focused on this area following the announcement of the sale of the Canadian business on 4 September 2014, and which completed on 30 January 2015.
As a result of the announcement, IFRS 5 ‘Non-current assets held for sale and discontinued operations’ required the Canadian business to be treated as a discontinued operation in the financial statements. This resulted in a number of presentational changes and disclosures in the financial statements. This could have resulted in the requirements of IFRS 5 not being fully met.
Our work to audit the presentation and disclosure of the disposal of the Canadian business included: • Obtaining and reading the Share Purchase Agreement, Business
Transfer Agreement, Global Collaboration Agreement and Indemnity Agreement and associated correspondence in respect of the disposal of the Canadian business to assess whether the classification as ‘Held for Sale’ was appropriate
• Testing the Group’s restatement of the comparative numbers and associated disclosures to assess whether business associated with the sale had been appropriately recognised as discontinued.
Based on the testing undertaken, the presentation and disclosures in respect of the disposal of the Canadian business as a discontinued operation are consistent with the requirements of IFRS 5.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account our assessment of the risk of material misstatement for each individual account balance and the financial statements as a whole, the geographic structure of the Group, the accounting processes and controls and the industry in which the Group operates.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work performed at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole. As a result the Group engagement team visited the Canadian operations as the largest overseas component of the audit. This visit involved discussing the audit approach and any issues arising from their work, as well as meeting local management. In addition, the Group engagement team attended internal clearance meetings with component teams either in person or by call.
Rationale for benchmark applied In determining our materiality, we have considered financial metrics which we believe to be relevant and concluded that operating profit before tax was a relevant benchmark as it is the key performance measure reported by management and used by others to reflect the underlying performance of the business in both its internal and external reporting to stakeholders, including shareholders and analysts.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2 million (2013: £2 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern Under the Listing Rules we are required to review the directors’ statement, set out on page 47, in relation to going concern. We have nothing to report having performed our review.
As noted in the directors’ statement, set out on page 47, the Directors have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit, we have concluded that the Directors’ use of the going concern basis is appropriate.
• The section of the Annual report on pages 56 to 58, as required by provision C.3.8 of the Code, describing the work of the Group Audit Committee does not appropriately address matters communicated by us to the Group Audit Committee.
Adequacy of 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. We have no exceptions to report arising from this responsibility.
Stephanie Bruce (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 20 February 2015
The Notes on pages 135 to 237 are an integral part of these consolidated financial statements.
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss 11 (6) 3
Total items that may be reclassified subsequently to profit or loss 18 (26)
Other comprehensive income for the year from continuing operations 311 45
Total comprehensive income for the year from continuing operations 691 410
From continuing operations 4 30 800 523 1 Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group’s Canadian business as discontinued operations. Refer to Note 12 – Discontinued operations.
Pro forma reconciliation of consolidated operating profit to profit for the year For the year ended 31 December 2014 2014 2013
Impairment of intangible assets (43) (4) (47) - - - Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters - - - - (15) (15)
Non-operating (loss)/profit before tax 2 (159) 35 (124) (100) (87) (187)
Dubai included in discontinued operations segment2 2 (22) 22 - (6) 6 -
Profit attributable to non-controlling interests 2 4 - 4 30 - 30 Profit before tax expense attributable to equity holders’ profits 422 188 610 423 163 586
Dubai included in discontinued operations segment2 2 - - - - - - Total tax expense attributable to equity holders’ profits (42) (61) (103) (58) (32) (90)
Profit for the year 380 127 507 365 131 496 1 The split of operating profit before tax for the year ended 31 December 2013 has been updated to reflect changes in segmental reporting. Refer to Note 2 –
The Group’s chosen supplementary measure of performance is operating profit. The Directors believe that operating profit provides a more useful indication of the long-term operating performance of the Group. To align the measure of the Group’s performance with the long-term nature of its business, operating profit excludes items which create short-term volatility. Operating profit includes the impact of significant actions taken by management during the year. Refer to accounting policy (jj) for further details.
The consolidated financial statements on pages 110 to 237 were approved by the Board of Directors on 20 February 2015 and signed on its behalf by the following Directors: Sir Gerry Grimstone, Chairman Luke Savage, Chief Financial Officer
Consolidated statement of changes in equity For the year ended 31 December 2014
interests Total equity 2013 Notes £m £m £m £m £m £m £m £m
Total comprehensive income for the year - - - 556 (63) 493 30 523 Distributions to equity holders 15 - - - (636) (20) (656) - (656) Issue of share capital 29 2 - - - - 2 - 2 Reserves credit for employee share-based payment schemes 32 - - - - 32 32 - 32 Transfer to retained earnings for vested employee share-based payment schemes 31, 32 - - - 33 (33) - - - Transfer to retained earnings of sale of owner occupied property - - - - - - - - Shares acquired by employee trusts - (11) - - - (11) - (11) Shares distributed by employee trusts 31 - 12 - (12) - - - - Other movements in non-controlling interests in the year - - - - - - (38) (38) Aggregate tax effect of items recognised directly in equity 11 - - - 9 (1) 8 - 8
Acquisition of subsidiaries and unincorporated businesses net of cash acquired 1 (297) (57)
Distributions paid to third party interest in consolidated funds and non-controlling interests (172) (100)
Cash and cash equivalents at the end of the year2 28 11,243 10,253
Rental income received on investment property 597 591 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
IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation. 2 Cash and cash equivalents at the end of the year include cash and cash equivalents in respect of operations held for sale. Refer to Note 28 – Cash and cash equivalents for reconciliation to consolidated statement of financial position.
Group accounting policies (a) Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of investment property, owner occupied property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss (FVTPL).
The application of IFRS 10 has resulted in the consolidation of entities which were previously out of scope of consolidation. The impact of IFRS 10 on the consolidated income statement and the consolidated statement of financial position for the comparative period is shown in the tables in (a)(iii).
IAS 28 Investments in Associates and Joint Ventures (2011) IAS 28 (2011) is revised to include joint ventures as well as associates. Additionally, the scope exception within IAS 28 for investments in associates held by venture capital organisations, or mutual funds, unit trusts and similar entities, including investment linked insurance funds, has been removed and as a result the scope of the standard has been widened to include all investments in any entity over which the Group has significant influence. The standard has been revised to allow an entity to elect to measure an investment in associate at fair value through profit or loss (FVTPL) where that investment is held by, or indirectly through, venture capital organisations, or mutual funds, unit trusts and similar entities, including investment linked insurance funds.
(a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group’s annual accounting periods beginning on or after 1 January 2015. The Group has not early adopted the standards, amendments and interpretations described below: IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2017) IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements on the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC-31 Revenue Barter Transactions Involving Advertising Services. IFRS 15 provides a new revenue recognition model for contracts with customers. The model provides a five step process for determining recognition and measurement of revenue, and considers two approaches to recognise revenue: at a point in time or over time. Extensive new disclosure requirements and estimate and judgment thresholds have been introduced. The adoption of IFRS 15 is expected to have a significant impact on the measurement and presentation of revenue and related balances in the consolidated financial statements of the Group. The standard has not yet been endorsed by the EU.
As well as presentation and measurement changes, IFRS 9 also introduces additional disclosure requirements. The standard has not yet been endorsed by the EU.
The adoption of IFRS 9 is expected to have a significant impact on the measurement and presentation of financial instruments and related balances in the consolidated financial statements of the Group.
Group accounting policies continued (a) Basis of preparation continued (a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group continued Other In addition to IFRS 9 and IFRS 15, the following interpretations and amendments to existing standards have not been early adopted and are not expected to have a significant impact on the financial statements of the Group: Standard, amendment or interpretation
IFRIC 21 Levies 17 June 2014 The interpretation clarifies that an entity recognises a liability for a levy when and only when the triggering event specified in the legislation occurs.
Annual improvements 20102012 cycle and Annual improvements 2011-2013 cycle 1 July 2014 These annual improvement cycles make 11 minor amendments to existing standards.
Amendments to IAS 27 Separate Financial Statements: Equity Method in Separate Financial Statements 1 January 2016 The amendments now permit the application of the equity method of accounting in separate financial statements for associates and joint ventures as well as subsidiaries.
Annual improvements 20121 January 2016 This annual improvements cycle makes five minor amendments to existing standards.
Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates and Joint Ventures: Applying the Consolidation Exception
Amendments to IAS 1 Presentation of Financial Instruments: Disclosure Initiative 1 January 2016 The amendments clarify guidance on presentation in relation to materiality, disaggregation and subtotals, notes, disclosure of accounting policies and other comprehensive income arising from investments accounted for under the equity method.
Less discontinued operations Continuing operations 2013 £m £m £m £m £m £m £m Total revenue 20,545 110 3 - 20,658 (3,842) 16,816 Effect of restatement analysed as
Investment return 15,449 141 3 - 15,593 (2,259) 13,334 Fee and commission income 977 (31) - - 946 (130) 816
Total expenses 19,769 103 3 - 19,875 (3,679) 16,196 Effect of restatement analysed as
Administrative expenses 1,825 8 3 - 1,836 (474) 1,362 Change in liability for third party interest in consolidated funds 865 95 - - 960 (131) 829
Share of profit from associates and joint ventures 25 - - - 25 - 25 Profit before tax 801 7 - - 808 (163) 645
The following tables show the impact of the accounting policy changes as a result of the adoption of the new consolidation standards (IFRS 10; IFRS 11, and IAS 28 (2011)) on the consolidated statement of financial position for the year ended 31 December 2013.
At 31 December 2013 £m £m £m £m £m Total assets 184,605 4,528 7 - 189,140 Effect of restatement analysed as
Determination of the acquisition costs to be deferred on insurance and and investment contracts Determination of the amortisation pattern to be applied to deferred acquisition costs
Determination of the fair value of complex financial instruments (q) and Note 44
Determination of the recoverable amount (i), (j), (k), (o), (p) and Notes 16, 17, 18, 20, 23 and 42
Business combinations Identification and valuation of identifiable intangible assets arising from business combinations
Intangible assets Determination of useful lives of intangible assets (j)(ii) and Note 16
(b) Basis of consolidation The Group’s financial statements consolidate the financial statements of the Company and its subsidiary undertakings. Associate and joint venture undertakings are accounted for either using the equity method from the date that significant influence or joint control, respectively, commences until the date this ceases, or at fair value through profit or loss (FVTPL).
Subsidiaries are fully consolidated from the date on which control is transferred to the Group until the date that control ceases.
Intra-group transactions, balances and unrealised gains on intra-group transactions are eliminated. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Subsidiaries’ accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.
Where the Group is considered to control an investment vehicle, such as an open-ended investment company, a unit trust or a limited partnership, and it is therefore consolidated, the interests of parties other than the Group are assessed to determine whether they should be classified as liabilities or as non-controlling interests. Those that are liabilities are separated into two components being an investment management services component and a financial liability. The financial liability component is recognised in the third party interest in consolidated funds line in the consolidated statement of financial position and any movements are recognised in the consolidated income statement. The financial liability is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets. The interests of parties other than the Group in all other types of entities are recorded as non-controlling interests.
(b)(ii) Associates and joint arrangements Associates are entities over which the Group has significant influence but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee. The Group considers itself to have significant influence over entities where, through its role as investment manager, it has decision making power over the relevant activities of that entity. As a result the Group classifies all Group managed investment vehicles as associates even though it may hold less than 20% of the voting rights of the investment vehicle.
Where the Group has an investment in an associate, a portion of which is held indirectly through a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at fair value through profit or loss (FVTPL) in accordance with IAS 39. All other investments in associates are accounted for using the equity method.
The Group also has investments in joint arrangements which are classified as joint operations when the Group has joint control of rights to the assets and obligations for the liabilities of the arrangement and classified as joint ventures when the Group has joint control of the rights to the net assets of the arrangements.
Where the Group’s share of losses from an associate or joint venture accounted for using the equity method equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations in connection with or made payments on behalf of the associate.
(c) Business combinations and Group reconstructions (c)(i) Business combinations The Group uses the acquisition method to account for business combinations. At the acquisition date the assets acquired and liabilities assumed as part of the business combination are identified and assessed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. Only assets acquired and liabilities assumed as part of the exchange in the business combination are considered in applying the acquisition method of accounting.
additional benefits are based on the performance of with profits funds and their amount and timing is at the discretion of the Group. These contracts are referred to as participating contracts.
(i) Impairment of non-financial assets The carrying amounts of non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, at least at each reporting date. An impairment loss is recognised in the consolidated income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. Nonfinancial assets other than goodwill, which have been impaired are reviewed for possible reversal of impairment losses at each reporting date.
Impairment losses are calculated and recorded on an individual basis in a manner consistent with policy (i). Amortisation commences at the time from which an intangible asset is available for use.
(k)(ii) Canada and Asia and Emerging markets – insurance contracts The Group’s policy for acquisition costs incurred on insurance contracts issued by overseas subsidiaries is to apply the policy used in the issuing entity’s local statutory or regulatory reporting or, where local reporting did not explicitly or implicitly defer acquisition costs at the time the overseas subsidiary was first consolidated, to adjust those policies to apply a policy similar to that described in policy (k)(i) for non-participating insurance contracts. Implicit allowance is made for deferred acquisition costs in the Canadian Asset Liability Method (CALM). Therefore, no explicit deferred acquisition costs have been recognised separately for business written by the Canadian subsidiaries.
(l) Investment property Property held for long-term rental yields or investment gain that is not occupied by the Group and property being constructed or developed for future use as investment property are classified as investment property. Investment property is initially recognised at cost, including any directly attributable transaction costs. Subsequently investment property is measured at fair value. Fair value is determined without any deduction for transaction costs that may be incurred on sale or other disposal. Gains or losses arising from changes in fair value are recognised in the consolidated income statement. Investment property is not depreciated. Property located on land that is held under an operating lease is classified as investment property as long as it is held for long-term rental yields and is not occupied by the companies in the Group. The initial cost of the property is the lower of the fair value of the property and the present value of the minimum lease payments. Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income and are also spread over the term of the lease.
Deferred tax is provided using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities.
The income tax expense is determined using rates enacted or substantively enacted at the reporting date.
(o) Reinsurance assets and reinsurance liabilities Reinsurance assets and reinsurance liabilities arise under contracts that are classified as reinsurance contracts (refer to policy (f)).
Management determines the classification of loans at initial recognition. Certain loans are designated as at fair value through profit or loss (FVTPL) as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis so as to maximise returns either for policyholders or equity holders. All other loans are classified as loans and receivables. Loans classified as at FVTPL are measured at fair value with changes in fair value recognised in the consolidated income statement.
Impairment on individual loans is determined at each reporting date. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group. This would include a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease 126 Standard Life
Equity securities, debt securities and derivatives are recognised at fair value on the trade date of the transaction. In the case of derivatives, where no initial premium is paid or received, the initial measurement value is nil. For instruments classified as HFT or designated as at FVTPL, directly attributable transaction costs are not included in the initial measurement value but are recognised in the consolidated income statement. AFS debt securities are initially recognised at fair value plus directly related transaction costs.
Where a valuation technique is used to establish the fair value of a financial instrument, a difference could arise between the fair value at initial recognition and the amount that would be determined at that date using the valuation technique. When unobservable market data has an impact on the valuation of derivatives, the entire initial change in fair value indicated by the valuation technique is recognised over the life of the transaction on an appropriate basis, or when the inputs become observable, or when the derivative matures or is closed out.
(q)(i) Hedge accounting A hedge relationship will qualify for hedge accounting by the Group if, and only if, the following conditions are met: • Formal hedging documentation at inception of the hedge is completed, detailing the hedging instrument, hedged item, risk management objective, strategy, effectiveness testing methodology and hedge relationship • The hedge relationship is expected to be highly effective at inception in achieving offsetting changes in fair value or cash flow attributable to the hedged risk • The effectiveness of the hedge can be reliably measured and the hedge is assessed for effectiveness regularly during the reporting period for which the hedge was designated to demonstrate that it is has been highly effective.
If a cash flow hedge no longer meets the relevant hedging criteria, hedge accounting is discontinued and no further changes in the fair value of the derivative are recognised in the cash flow hedges reserve. Amounts that have already been recognised directly in the cash flow hedges reserve are recognised in the consolidated income statement in the same period or periods during which the hedged item affects the profit or loss.
Where the forecast transaction is no longer expected to occur or the asset or liability is derecognised, the associated accumulated amounts in the cash flow hedges reserve are recognised immediately in the consolidated income statement.
Net investment hedge relationships A hedge of net investments in foreign operations is the hedge against the effects of changes in exchange rates in the net investment in a foreign operation, that is, the hedge of the translation gains or losses that are recognised in equity.
A hedge of net investments in foreign operations is accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. In the event of disposal of the foreign operation, gains and losses accumulated in equity are included in the consolidated income statement.
(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. (t) Equity (t)(i) Share capital and shares held by trusts An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in the share premium reserve. Incremental costs directly attributable to the issue of new equity instruments are shown in the share premium reserve as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments in a business combination are excluded from the consideration transferred.
(u) Insurance and investment contract liabilities For insurance contracts and participating investment contracts, IFRS 4 Insurance Contracts permits the continued application, for measurement purposes, of previously applied Generally Accepted Accounting Principles (GAAP), except where a change is deemed to make the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable, and no less relevant to those needs. The Group therefore adopts UK GAAP, including the requirements of Financial Reporting Standard 27 Life Assurance in relation to its UK-regulated with profits funds, for the measurement of its insurance and participating investment contract liabilities. As permitted under UK GAAP, the Group adopts local regulatory valuation methods, adjusted for consistency with asset measurement policies, for the measurement of liabilities under insurance contracts and participating investment contracts issued by overseas subsidiaries.
cash flows arising on participating contracts • Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to adjust the value of participating insurance and participating investment contract liabilities.