Receivables and other financial assets 21 1,255 1,447 Current tax recoverable 11 166 168
Assets held for sale 26 263 327 Cash and cash equivalents 21 7,938 9,640 Total assets 190,495 176,722 Equity Share capital 28 242 241 Shares held by trusts 29 (2) (6) Share premium reserve 28 634 628
Equity attributable to equity holders of Standard Life plc 4,347 4,002 Non-controlling interests 32 297 347 Total equity 4,644 4,349 Liabilities Non-participating insurance contract liabilities 33 23,422 21,206 Non-participating investment contract liabilities 34 102,063 92,894 Participating contract liabilities 33 31,273 29,654 Deposits received from reinsurers 35 5,093 5,134 Third party interest in consolidated funds 32 16,835 17,196
Deferred tax liabilities 11 259 205 Current tax liabilities 11 113 113 Derivative financial liabilities 23 965 1,254 Other financial liabilities 35 3,916 2,900
Liabilities of operations held for sale 26 - 83 Total liabilities 185,851 172,373 Total equity and liabilities 190,495 176,722
The consolidated financial statements on pages 113 to 219 were approved by the Board and signed on its behalf by the following Directors: Sir Gerry Grimstone Luke Savage Chairman Chief Financial Officer 24 February 2017 24 February 2017 116 Standard Life 2016
interests Total equity 2016 Notes £m £m £m £m £m £m £m £m
Profit for the year from continuing operations - - - 276 - 276 62 338 Profit for the year from discontinued operations 12 - - - 1,147 - 1,147 - 1,147 Other comprehensive income for the year from continuing operations - - - 169 (13) 156 - 156 Other comprehensive income/(expense) for the year from discontinued operations - - - (14) (173) (187) - (187) Total comprehensive income for the year - - - 1,578 (186) 1,392 62 1,454 Dividends paid on ordinary shares 15 - - - (343) - (343) - (343)
Cash flows from operating activities Profit before tax from continuing operations 789 549 Profit before tax from discontinued operations 12 - 1,167
(a)(i) New interpretations and amendments to existing standards that have been adopted by the Group The Group has adopted the following new interpretations and amendments to existing standards which have been endorsed by the EU.
Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations 1 January 2016 The amendment requires the application of business combination accounting for the acquisition of an interest in a joint operation which constitutes a business.
Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortisation 1 January 2016 The amendment clarifies when a method of depreciation or amortisation based on revenue may be appropriate.
(a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group’s annual accounting periods beginning after 1 January 2016. The Group has not early adopted the standards, amendments and interpretations described below: IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018) IFRS 15 will replace IAS 18 Revenue and related interpretations. IFRS 15 provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. New disclosure requirements including estimate and judgement thresholds will also be introduced.
In 2015 the IASB issued amendments to the standard and delayed the mandatory adoption date until 1 January 2018. In April 2016, the IASB issued further clarifications to IFRS 15 which have not yet been endorsed by the EU. The Group does not intend to early adopt the standard.
A detailed impact assessment was continued in 2016, reviewing contracts and analysing the revenue recognised by the Group. This work has been completed for all major revenue streams and no significant impacts to profit or net assets have been identified.
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018 with option to defer for certain insurance entities) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows two measurement categories for financial assets in the statement of financial position: amortised cost and fair value. All equity instruments and derivative instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows represent principal and interest, otherwise it is classified at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL) depending on the business model it is held within or whether the option to adopt FVTPL has been applied. Changes in value of all equity instruments and derivative instruments are recognised in profit or loss unless an OCI presentation election is made at initial recognition for an equity instrument or a derivative 120 Standard Life 2016
Additionally IFRS 9 amends the current requirements for assessing hedge effectiveness in IAS 39 and also amends what qualifies as a hedged item and some of the restrictions on what qualifies as a hedging instrument. The accounting and presentation requirements for designated hedging relationships remain largely unchanged.
In September 2016 the IASB issued amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4, Insurance Contracts. The amendments address the consequences of the different effective dates of IFRS 9 and the new insurance contracts standard, IFRS 17, expected to be issued in 2017. Insurers are permitted to defer implementation of IFRS 9 until periods beginning on or after 1 January 2021 if they satisfy criteria regarding the predominance of their insurance activities, or to apply an overlay approach to remove incremental volatility from the income statement. Management has determined that the Group is eligible to defer the implementation of IFRS 9 and intends to defer. The amendments have not yet been endorsed by the EU.
The impact of the implementation of IFRS 9 will be dependent on the implementation of the new insurance contracts standard.
IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019 with earlier adoption permitted if IFRS 15 has also been applied) The IASB issued IFRS 16 Leases on 13 January 2016 with a mandatory effective date of 1 January 2019. The new standard replaces IAS 17 Leases and introduces a new single accounting approach for lessees for all leases (with limited exceptions). As a result there is no longer a distinction between operating leases and finance leases, and lessees will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The accounting for leases by lessors remains largely unchanged.
Contingent liabilities Assessment of whether the Group has a contingent liability in relation to conduct matters
Determination of the fair value of private equity investments, debt securities categorised as level 3 in the fair value hierarchy and over-the-counter derivatives
The Group’s financial statements consolidate the financial statements of the Company and its subsidiary undertakings.
Notes to the Group financial statements 1. Group structure (a) Composition The following diagram is an extract of the Group structure at 31 December 2016 and gives an overview of the composition of the Group.
(b) Acquisitions (b)(i) Subsidiaries On 31 October 2016 Standard Life Savings Limited (SLS) purchased the Elevate adviser platform (Elevate) through the purchase of the entire share capital of AXA Portfolio Services Limited from AXA UK plc. The acquisition enhances the Group’s position as a leading platform provider for professional advisers by bringing together award-winning platforms to create one of the largest and fastest growing adviser platform businesses in the UK.
Customer-related intangible assets relate to the existing customer contracts in place at the acquisition date. The deferred tax liability of £1m relates to the temporary difference arising from the recognition of the customer-related intangible assets and will be released as these intangible assets are amortised or impaired.
The amount of revenue contributed to the Group’s consolidated income statement for the year ended 31 December 2016 from the acquired Elevate entity was £6m, with a reduction in profit after tax of £1m.
If the acquisition had occurred on 1 January 2016, the amount of revenue that would have been contributed to the Group for the year ended 31 December 2016 would have been £28m, increasing the Group’s revenue to £18,757m with a reduction in profit after tax of £9m reducing the Group’s profit from continuing operations to £410m.
(c) Prior year disposal On 3 September 2014 the Group announced its intention to sell its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife). The sale of the Group’s Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc.) and Canadian investment management business (Standard Life Investments Inc.) completed on 30 January 2015. The assets and liabilities of the Canadian branch of Standard Life Assurance Limited (SLAL Canada branch) were transferred on 31 December 2015 following the fulfilment of certain conditions to completion, including regulatory approval. Until disposal the operations of the Canadian business were classified as discontinued and the assets and liabilities were classified as held for sale. The consideration, which was received on 30 January 2015, was CA$4.0bn (£2.1bn) and a further £0.1bn was received from the settlement of related hedging derivative contracts. The Group recognised a gain on disposal in respect of the sale which is included in profit from discontinued operations in the consolidated income statement for the year ended 31 December 2015.
Pensions and Savings (formerly UK and Europe) Pensions and Savings provide a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
(b)(i) Analysis of Group operating profit by segment Operating profit is the key alternative performance measure utilised by the Group’s management in their evaluation of segmental performance and is therefore also presented by reportable segment.
Share of associates’ and joint ventures’ profit before tax1 35 - 41 - - 76 Operating profit/(loss) before tax 383 362 36 (58) - 723
Share of associates’ and joint ventures' tax expense 11 (11) - (2) - - (13) Operating profit/(loss) after tax 300 291 34 (42) - 583 Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes 14 3 13 - (8) - 8 Restructuring and corporate transaction expenses 10 (23) (38) (3) (3) - (67)
Tax on non-operating items 9 46 - 4 - 59 Profit/(loss) for the year attributable to equity holders of Standard Life plc 259 130 31 (52) - 368 Profit attributable to non-controlling interests 51 Profit for the year 419 1 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company
Discontinued operations1 Total 31 December 2015 Notes £m £m £m £m £m £m £m £m
Share of associates’ and joint ventures' tax expense 11 (11) - (2) - - (13) - (13) Operating profit/(loss) after tax 267 303 25 (57) - 538 3 541 Adjusted for the following items
(b)(ii) Total income and expenses The following table provides a reconciliation of total operating income and total operating expenses from continuing operations, as presented in the analysis of Group operating profit by segment, to total revenue and total expenses respectively, as presented in the consolidated income statement: Income Expenses Income Expenses £m £m £m £m
(d) Non�current non�financial assets by geographical location 2016 2015 £m £m
Standard Life International Designated Activity Company (formerly Standard Life International Limited) The Pensions and Savings reportable segment also contains the International Bond issued by Standard Life International Designated Activity Company (SL Intl) (formerly Standard Life International Limited) to UK residents. SL Intl operates using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element are held in the non-unit linked fund.
(a)(ii) India and China The entity in the India and China reportable segment that issues insurance and investment contracts, other than associates and joint ventures, is Standard Life (Asia) Limited (SLA) which is a Hong Kong entity. SLA operates using a shareholder fund and a long-term business fund which is subdivided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund.
The total liability at 31 December 2016 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £445m (2015: £373m) and this represents approximately 10% (2015: 9%) of the total liability for UK annuity in payment contracts held within the PBF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall. If the market moves in line with the adverse scenarios as shown in the market risk sensitivity analysis in Note 41(b), then the impact on shareholder equity from these RPI linked annuities and corresponding assets is not significant.
Germany unit linked deferred annuity contracts (fee business) This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more unit linked funds. These contracts provide a return of premiums guarantee on death and the option to take up an annuity on guaranteed terms. They are classified as non-participating insurance contracts. These contracts do not contain a with profits investment option.
As shown in the market risk sensitivity analysis in Note 41(b), there is no impact on shareholder equity arising from contracts in the HWPF for either of the market movements scenarios. As explained in the limitations of the sensitivity analysis, this is because although shareholders are potentially 130 Standard Life 2016
Under endowment and whole life contracts, guaranteed benefits are payable on death. Regular bonuses may be added to the guaranteed sum assured over the term of the policy and, in addition, a final bonus may be paid on death and maturity. Certain endowment assurances have minimum surrender value provisions and minimum paid-up values.
Under pension contracts, a minimum level of benefit is set at the outset and applies at the date(s) specified in the policy, for example under pure endowment contracts. Regular bonuses may be added to this initial minimum over the term of the policy and, in addition, a final bonus may be paid. Guaranteed annuity options providing for payment of a minimum annuity, in lieu of a cash sum, are available under pure endowment contracts. Under some of these contracts the guarantee applies only at the maturity date. Under other contracts, the option also applies for a specified period preceding the maturity date, in which case the sum assured and bonuses are reduced by specified factors and different guaranteed annuity rates apply.
UK and Ireland unitised with profits pension contracts (fee business via RCF) This class of business comprises single or regular premium contracts held in the HWPF under which a percentage of the premium is used to allocate units on a participating basis. Such contracts include hybrid contracts (see Note 33) resulting in the unitised with profits investment elements being classified as participating investment contracts, although there are some contracts that are classified as participating insurance contracts, for example those with guaranteed minimum pensions. The major unitised with profits pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.
The significant options and guarantees under these contracts are the following:  Contracts where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per year or that the unit price will not fall and that there will be no unit price adjustment (UPA) at specified retirement dates or death
Under some contracts effected in connection with house purchase, provided the original contract is still in force, the following options can normally be exercised at any time before the 55th birthday of the life assured:  Future insurability option under which a new contract can be effected on then current premium rates, in connection with a further loan, up to the level of life and basic critical illness cover available on the original contract, without any further evidence of health
UK and Ireland annuity-in-payment contracts (spread/risk business in relation to longevity risk transferred to PBF otherwise no impact on shareholder profits in absence of burnthrough) This class of business consists of the same type of contracts described in (b)(i) and also includes the With Profit Pension Annuity (WPPA), under which changes to the level of annuity are based on a declared rate of return but reductions in the level of the annuity are limited. These contracts are classified as non-participating insurance contracts, except for the WPPA which is classified as a participating insurance contract.
The total liability at 31 December 2016 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,983m (2015: £1,811m) and this represents approximately 22% (2015: 21%) of the total liability for UK annuity contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.
(b)(iii) India and China – Insurance and investment contracts Unit linked life contracts (fee business) The main contract issued by SLA is the Harvest 101 product. This contract was closed to new business in 2015. It is a regular premium savings product with a term ranging from 5 to 25 years. The customer has the option to invest in unit linked funds offered by SLA and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the initial account value is paid subject to a USD10,000 cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
Interest and similar income Cash and cash equivalents 86 94 Available-for-sale debt securities 12 15
8. Group financial statements continued 5. Fee income Fee income from investment contracts, fund platforms and third party funds under management relates to the provision of investment management and administration services, and is recognised as services are provided and it is almost certain that the fee income will be received. Where fee income is received in advance (front-end fees), this income is deferred and recognised as a deferred income liability until the services have been provided (see Note 38).
Interest payable on deposits from reinsurers 31 34 Premium Adjustments 478 8 Expenses under arrangements with reinsurers from continuing operations 509 42
Total staff costs and other employee-related costs 596 635 16 651
The average number of staff employed by the Group during the year: Standard Life Investments2 1,681 1,496 Pensions and Savings 4,026 4,116 India and China 112 136
Total average number of staff employed 6,302 6,431 1 Allocation between India and China and Pensions and Savings restated. 2 2015 includes all staff employed by the Canadian business including Standard Life Investments Inc. until its sale on 30 January 2015. 3 Includes staff in group corporate centre and group information technology.
Information in respect of Directors’ remuneration is provided in the Directors’ remuneration report on pages 80 to 102.
In addition, the audit fees in respect of the UK staff defined benefit plan and the Ireland staff defined benefit plan were £71,000 (2015: £65,000).
For more information on non-audit services, refer to the Audit Committee report in Section 4 – Corporate governance statement.
8. Group financial statements continued transaction expenses in determining operating profit from continuing operations. Further details of the defined benefit pension plan expense for the year are included in Note 37.
Restructuring and corporate transaction expenses from continuing operations 62 88 Pension plan restructuring 5 35 Expenses incurred by the Heritage With Profit Fund - (1) Closure of Singapore1 - (7) Restructuring and corporate transaction expenses used to determine operating profit from continuing operations 67 115 1 Singapore business, the closure of which was announced in June 2015, was included as a discontinued operation for segmental reporting purposes under IFRS 8 as this was reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Singapore did not constitute a discontinued operation and was included under continuing operations in the consolidated income statement.
11. Taxation The Group’s tax expense comprises both current tax and deferred tax expense.
Current tax is payable on taxable profit, as adjusted for items that are not taxable or tax deductible.
A deferred tax asset represents a tax deduction that is expected to arise in a future period. It is only recognised to the extent that there is expected to be future taxable profit or investment return to offset the tax deduction. A deferred tax liability represents taxes which will become payable in a future period as a result of a current or prior year transaction. Where local tax law allows, deferred tax assets and liabilities are netted off on the statement of financial position. The tax rates used to determine deferred tax are those enacted or substantively enacted at the reporting date.
In 2016 unrecognised tax losses from previous years of £6m (2015: £1m) were used to reduce the current tax expense. Unrecognised losses and timing differences of £3m were used to reduce the deferred tax expense (2015: £nil).
Current tax recoverable and current tax liabilities at 31 December 2016 were £166m (2015: £168m) and £113m (2015: £113m) respectively. Current tax assets and liabilities at 31 December 2016 and 31 December 2015 are expected to be recoverable or payable in less than 12 months.
The standard rate of UK corporation tax is 20%. The UK corporation tax rate will reduce to 19% from 1 April 2017 and 17% from 1 April 2020. These future rate changes have been taken into account in the calculation of the UK deferred tax balance at 31 December 2016.
 The tax expense for the year includes policyholder tax, as described in the accounting policy above. Profit before tax includes an equivalent amount of income in relation to this policyholder tax and this therefore gives rise to a reconciling item.
 Prior year adjustments will vary depending upon the specific items to which they relate and are regarded as non-recurring in nature  The ability to value tax losses and other tax assets will also affect the actual tax charge. These items are expected to be non-recurring. In 2016 we were able to recognise historic tax losses valued at £9m and there was a write down of a deferred tax asset in the Germany Pension and Savings business valued at £11m. In 2015 there was a one-off item of £18m relating to tax losses arising in our Singapore and Germany businesses for which deferred tax was not recognised due to uncertainty of recoverability.
All of the amounts presented above are in respect of equity holders of Standard Life plc.
Tax relating to expiry of unclaimed asset trust claim period 7 Tax credit on reserves for employee share-based payments - (4) Tax relating to items taken directly to equity 7 (4)
(d) Deferred tax assets and liabilities (d)(i) Movements in net deferred tax liabilities 2016 2015 £m £m
Deferred tax assets comprise: Actuarial liabilities - 5 Losses carried forward 12 9 Depreciable assets 42 38 Deferred income 12 20 Employee benefits 26 25 Provisions and other temporary timing differences 14 13 Insurance related items 5 12
Deferred tax assets and liabilities are expected to be recovered or settled after more than 12 months.
(e) Unrecognised deferred tax Due to uncertainty regarding recoverability, deferred tax has not been recognised in respect of the following assets:  Cumulative losses carried forward of £165m (2015: £215m)  Tax reserves of the Germany branch of Standard Life Assurance Limited of £20m (2015: £26m)  Unrealised investment losses of £12m (2015: £20m)
12. Discontinued operations The Group classifies as discontinued operations areas of business which have been disposed of or are classified as held for sale at the year end and which either represent a separate major line of business or geographical area, or are part of a plan to dispose of one. The results of discontinued operations are shown separately on the face of the consolidated income statement from the results of the remaining (continuing) parts of the Group’s business.
There are no discontinued operations for the year ended 31 December 2016. Discontinued operations for the year ended 31 December 2015 relate solely to the Group’s Canadian business. As discussed in Note 1, the sale of Standard Life Financial Inc. and Standard Life Investments Inc. completed on 30 January 2015 and the results of these operations until that date and the gain on their disposal are included in discontinued operations. The results of the SLAL Canada Branch, the assets and liabilities of which were transferred on 31 December 2015, are also included until that date.
Total administrative expenses 40 Change in liability for third party interest in consolidated funds 30 Finance costs 1 Total expenses from discontinued operations 1,208
Total tax expense 20 Less: Tax attributable to policyholders’ returns Tax expense attributable to equity holders’ profits 20 Profit for the year from discontinued operations 1,147
Items that will not be reclassified subsequently to profit or loss: Remeasurement losses on defined benefit pension plans (19) Revaluation of owner occupied property Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 5 Total items that will not be reclassified subsequently to profit or loss (14)
Items that may be reclassified subsequently to profit or loss: Fair value gains on cash flow hedges 58 Net investment hedge 57 Fair value gains on available-for-sale financial assets 15 Exchange differences on translating foreign operations (62) Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (4) Total items that may be reclassified subsequently to profit or loss 64 Items that were transferred to profit or loss on disposal of subsidiaries: Release of available-for-sale financial assets reserve (17) Release of cash flow hedges reserve (60) Release of net investment hedge reserve (110) Release of foreign currency translation reserve (50) Total items that were transferred to profit or loss on disposal of subsidiaries (237) Other comprehensive income/(expense) for the year from discontinued operations (187)
The net cash flows from investing activities represent the cash and cash equivalents of the operations disposed of at the date of disposal and do not include cash consideration received of £2,100m.
Operating profit before tax 723 665 3 Tax on operating profit (127) (114) Share of associates’ and joint ventures’ tax expense (13) (13) Operating profit after tax 583 538 3 Total non-operating items (274) (257) 1,122 Tax on non-operating items 59 37 (20) Singapore included in discontinued operations segment1 - (42) 42 Profit attributable to equity holders of Standard Life plc 368 276 1,147
Basic earnings per share 18.7 13.5 55.9 Diluted earnings per share 18.6 13.4 55.7 Alternative earnings per share 29.6 26.2 0.1 Diluted alternative earnings per share 29.5 26.1 0.1 1 Singapore business, the closure of which was announced in June 2015, was included as a discontinued operation for segmental reporting purposes under IFRS 8 as this was reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Singapore did not constitute a discontinued operation and was included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit above includes the reclassification of Singapore results between discontinued and continuing operations.
As disclosed in our Annual report and accounts 2015, from 1 January 2016 we changed the operating profit accounting policy so that items which, due to their size or nature, are not indicative of the long-term operating performance of the Group are excluded from operating profit (even if they are within the control of management). The objective of the change is to make operating profit a more useful indication of the long-term performance of the Group. This change has had no impact on comparative reporting periods presented.
For annuities this means that all fluctuations in liabilities and the assets backing those liabilities due to market interest rate (including credit risk) movements over the year are excluded from operating profit.
There have been no actual defaults or impairments of assets backing subordinated liabilities during the year ended 31 December 2016 or 31 December 2015. If these were to arise they would be excluded from operating profit.
For the year ended 31 December 2016, short-term fluctuations in investment return and economic assumption changes resulted in gains of £8m (2015: £63m losses) from continuing operations. Short-term fluctuations in investment return from continuing operations relate principally to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities. Short-term gains in investment return from discontinued operations of £63m for the year ended 31 December 2015 related principally to investment volatility in Canada non-segregated funds.
(b) Other In the pro forma reconciliation of consolidated operating profit to profit for the year the Other non-operating sub-total includes:  Amortisation of intangibles acquired in business combinations and fair value movements in contingent consideration  The impact of restructuring on deferred acquisition costs, claims, and change in investment and insurance contract liabilities
Current year final recommended dividend 13.35 262 12.34 243 1. Estimated for current year final recommended dividend
The final recommended dividend will be paid on 23 May 2017 to shareholders on the Company’s register as at 18 April 2017, subject to approval at the Annual General Meeting on 16 May 2017. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2016 is 19.82p (2015: 18.36p).
16. Intangible assets Intangible assets are created when the Group acquires a business and the amount paid exceeds the value of the net tangible assets acquired. These assets are reflective of the additional value that the Group determines to be attached to the acquired business. Intangible assets acquired by the Group through business combinations consist mainly of investment management contracts and technology in place in acquired businesses. Any remaining value that cannot be identified as a separate intangible asset on acquisition is recognised as goodwill.
Accumulated amortisation and impairment At 1 January 2015 - (54) (22) (118) (21) (215) Amortisation charge for the year - (16) (4) (23) (8) (51)
Amortisation charge for the year 7 - (16) (3) (37) (8) (64)
The Group’s goodwill has been acquired through a series of business combinations, most recently through the acquisitions discussed in Note 1. Of the Group’s goodwill of £223m (2015: £219m) at 31 December 2016, £145m (2015: £145m) is attributed to the Standard Life Investments cashgenerating unit. This primarily relates to the Ignis acquisition in 2014. The remaining goodwill of £78m (2015: £74m) is attributable to a number of smaller cash-generating units in the Pensions and Savings segment.
Included in investment management and customer contracts intangible assets of £154m (2015: £165m) are £114m (2015: £136m) relating to investment management contracts acquired through the acquisition of Ignis, comprising life company contracts, institutional client contracts and retail client contracts, each of which formed a cash-generating unit.
The determination of amounts to be recognised as internally developed software requires judgement and assumptions in respect of whether assets are capable of being separated and the extent to which development costs form part of the separable asset. Additionally judgement is required to determine which costs have been incurred in relation to the research phase, which are not capitalised, and which have been incurred in relation to the development phase of a project, which are capitalised. We consider that costs are directly attributable to the software asset and can therefore be capitalised, where they would not have been incurred if the software development had not taken place.
Goodwill allocated to the Standard Life Investments cash-generating unit is significant in comparison with the total value of goodwill. The recoverable amount of this cash-generating unit is based on fair value less costs of disposal. The key assumption used to measure fair value is a price/earnings ratio which is derived from market price/earnings ratios of similar businesses to Standard Life Investments. This fair value measurement would be categorised as level 3 in the fair value hierarchy. A reasonably possible change in the price/earnings ratio would not result in an impairment.
Included within the impairment charge of £73m for the year ended 31 December 2015 is £59m in relation to an impairment of deferred acquisition costs in Hong Kong primarily as a result of a review of expense and reserving assumptions following regulatory change. The key non-economic assumptions used in the impairment testing of Hong Kong deferred acquisition costs were those relating to future persistency and expenses. The remaining impairment charge of £14m related to impairment of deferred acquisition costs in Singapore resulting from the closure of the business.
8. Group financial statements continued 18. Investments in associates and joint ventures Associates are entities where the Group can significantly influence decisions made relating to the financial and operating policies of the entity but does not control the entity. For entities where voting rights exist, significant influence is presumed where the Group holds between 20% and 50% of the voting rights.
Investments in associates and joint ventures accounted for using the equity method 569 292 Investments in associates measured at FVTPL 21 7,376 5,425 Loans to associates and joint ventures 21 3 2 Total investments in associates and joint ventures 7,948 5,719
Share of net assets 148 78 66 54 Carrying value of associate 363 115 111 87
On 8 August 2016, HDFC Life announced that it had agreed terms with Max Life Insurance Company Limited (Max Life), Max Financial Services Limited (Max FS) and Max India Limited (Max India) for the combination of the life insurance businesses of HDFC Life and Max Life. The transaction is intended to be effected through a composite scheme of arrangement and remains subject to regulatory, court and other necessary approvals. The aim is to complete the transaction within the next 12 months.
Under the proposed transaction Max Life will merge into Max FS and HDFC Life will then issue new shares to shareholders of Max FS in exchange and as consideration for the life insurance business of Max Life. Following completion of the transaction, the shares of HDFC Life will list on the Bombay 146 Standard Life 2016
Stock Exchange and the National Stock Exchange of India, subject to the approval of these stock exchanges and the Securities and Exchange Board of India.
HDFC Asset Management Company Limited manages a range of mutual funds and provides portfolio management and advisory services. The Group’s share of post-acquisition movements in reserves of HDFC Asset Management Company Limited which have been recognised directly in equity, have not been reflected in the carrying value of the associate. As a result there is a difference between the carrying value of the associate and the Group’s share of net assets.
8. Group financial statements continued 19. 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 and subsequently measured at fair value. Gains or losses arising from changes in fair value are recognised in the consolidated income statement.
Transferred to owner occupied property 20 (28) Foreign exchange adjustment 44 (8)
The rental income arising from investment property during the year from continuing operations amounted to £555m (2015: £487m). Direct operating expenses (included within other administrative expenses) from continuing operations arising in respect of such rented property during the year amounted to £75m (2015: £70m).
Not later than one year 477 478 Later than one year and no later than five years 1,529 1,563 Later than five years 4,028 4,105 Total operating lease receivables 6,034 6,146
Determination of the fair value of investment property is a key estimate. The methods and assumptions used to determine fair value of investment property are discussed in Note 43.
Owner occupied property is revalued at each reporting date to the fair value as provided by the most recent independent valuation less any subsequent accumulated depreciation. The useful life of owner occupied property is considered as between 30 and 50 years. These properties are depreciated down to their estimated residual values over their useful life and therefore depreciation is only charged if the residual value expected at the end of the property’s useful life is lower than the fair value.
Equipment is subsequently measured at cost less depreciation. Depreciation is charged to the income statement over 2 to 15 years depending on the length of time the Group expects to derive benefit from the asset.
Owner occupied property Equipment Total Notes £m £m £m Cost or valuation At 1 January 2015 138 130 268
If owner occupied property was measured using the cost model, the historical cost before impairment would be £93m (2015: £76m). As the expected residual value of owner occupied property is in line with the current fair value, no depreciation is currently charged.
Receivables and other financial assets 24 10 - - 1,245 1,255
Investments in associates and joint ventures 18 5,425 - - 2 5,427
Equity securities and interests in pooled investment funds 41 71,679 - - - 71,679
Receivables and other financial assets 24 15 - - 1,432 1,447
The amount of debt securities expected to be recovered or settled after more than 12 months is £55,591m (2015: £46,814m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
Loans are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method, less any impairment losses.
Loans with variable rates and fixed interest rates are £52m and £243m respectively (2015: £67m and £744m respectively). Loans that are expected to be recovered after more than 12 months are £88m (2015: £138m).
Management determines the classification of derivatives at initial recognition. All derivative instruments are classified as held for trading except those designated as part of a hedging relationship. Held for trading derivatives are measured at fair value with changes in fair value recognised in the consolidated income statement.
For cash flow hedges, the amount recognised in the cash flow hedge reserve is transferred to the consolidated income statement (recycled) in the same period or periods during which the hedged item affects profit or loss and is transferred immediately if the cash flow is no longer expected to occur. For net investment hedges, the amount recognised in the net investment hedge reserve is transferred to the consolidated income statement on disposal of the investment.
(a) Cash flow hedges Forward foreign exchange contracts with an aggregate notional principal amount of £9m (2015: £10m) and a net fair value asset position of less than £1m (2015: less than £1m) were designated as hedges of future cash flows arising from revenue receivable in foreign currency. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2016 and 2015, the ineffectiveness recognised in the consolidated income statement that arises from these cash flow hedges was less than £1m.
Cash inflows Derivative financial assets 23,319 448 355 172 221 744 25,259
Cash inflows Derivative financial assets 9,288 453 469 86 96 503 10,895
Cash outflows Derivative financial assets (8,831) (3) (15) (32) (490) - (9,371)
Determination of the fair value of over-the-counter derivative financial instruments is a key estimate. The methods and assumptions used to determine fair value of over-the-counter derivative financial instruments are discussed in Note 43.
24. Receivables and other financial assets 2016 2015 Notes £m £m
Amounts receivable on direct insurance business 82 83 Amounts receivable on reinsurance contracts 1 1 Outstanding sales of investment securities 196 58 Accrued income 223 224 Cancellations of units awaiting settlement 317 265 Collateral pledged in respect of derivative contracts 41 30 448 Property related assets 156 169 Contingent consideration asset 43 10 15
The amount of other assets expected to be recovered after more than 12 months is £4m (2015: £26m).
8. Group financial statements continued 26. Assets and liabilities held for sale
Assets and liabilities held for sale are presented separately in the consolidated statement of financial position and consist of operations and individual non-current assets whose carrying amount will be recovered principally through a sale transaction and not through continuing use.
Operations held for sale, being disposal groups, are measured at the lower of their carrying amount and their fair value less disposal costs. No depreciation or amortisation is charged on assets in a disposal group once it has been classified as held for sale.
Investments in associates at FVTPL - 33 Investment and owner occupied property1 236 87 Assets held for sale 263 327 Liabilities of operations held for sale - 83 1 Consists of £228m investment property (2015: £87m) and £8m owner occupied property (2015: £nil).
The assets and liabilities of operations held for sale at 31 December 2015 primarily related to the assets and liabilities of a consolidated infrastructure fund and its subsidiaries. The Group no longer has control of this fund at 31 December 2016. The assets and liabilities were held in the Pensions and Savings segment.
Cash and cash equivalents include cash at bank, money at call and short notice with banks, and any highly liquid investments (including reverse repurchase agreements) with less than three months to maturity from the date of acquisition, and are 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 other financial liabilities on the consolidated statement of financial position.
(a) Issued share capital The movement in the issued ordinary share capital of the Company was: Issued shares fully paid 12 2/9p each £m 10p each 12 2/9p each £m
1,726,815,109 ‘C’ shares were issued for nil consideration with a nominal value of 0.0000001 pence each on 19 March 2015. An amount of £1.73 was credited to the ‘C’ share capital account. On 20 March 2015 a dividend of 73 pence per share became payable at a total cost of £1,261m and this amount has been recorded as a deduction from retained earnings. On the same date, the ‘C’ shares were automatically reclassified as deferred shares. The Company subsequently purchased the deferred shares for an aggregate consideration of one pence.
Issue of ‘B’ shares - (488) Shares issued in respect of share options 6 1 29. Shares held by trusts
In July 2006 Standard Life demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members were yet to claim their shares and the UAT held these on their behalf. There was an off-setting obligation to deliver these shares which was also recognised in the shares held by trust reserve. The shares and the off-setting obligation were both measured at £nil. The claim entitlement period for the UAT expired on 9 July 2016. Shares remaining in the UAT after 9 July 2016 continue to be measured at £nil.
Remeasurement gains on defined benefit pension plans 37 162 148 Share of other comprehensive income/(expense) of associates and joint ventures (10) 2 Aggregate tax items recognised in other comprehensive income 2 5
Reserve arising on Group reconstruction: The value of the shares issued at demutualisation was equal to the fair value of the business at that date. The business’s assets and liabilities were recognised at their book value at the time of demutualisation. The difference between the book value of the business’s net assets and its fair value was recognised in the reserve arising on Group reconstruction. The reserve comprises components attaching to each subsidiary that was transferred to the Company at demutualisation. On disposal of such a subsidiary the related component of the reserve arising on Group reconstruction is released to retained earnings.
Transfer to retained earnings for vested employee share-based payments 30 - - - - (23) - - - (23) Cancellation of capital redemption reserve 28 - - - - - - - (488) (488) Aggregate tax effect of items recognised directly in equity - - - - (3) - - - (3) Total items recognised directly within equity - - - - 4 - - (488) (484)
Statement of financial position: Total assets 540 439 Total liabilities 7 Income statement: Revenue 119 53 Profit after tax 107 47 Total comprehensive income 107 47 Cash flows: Cash flows from operating activities 5 8 Cash flows from investing activities 73 22 Cash flows from financing activities (13) (20) Net increase in cash equivalents 65 10
(b) Third party interest in consolidated funds The movement in third party interest in consolidated funds during the year was: £m £m
(iii) Measurement – insurance and participating investment contract liabilities For insurance contracts and participating investment contracts, IFRS 4 Insurance Contracts permits the continued application, for measurement purposes, of accounting policies that were being used at the date of transition to IFRS, 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. Therefore the Group applies accounting policies determined in accordance with the ABI SORP as described below. As was permitted under the ABI SORP, 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.
(iv) Measurement – participating contract liabilities Participating contract liabilities are analysed into the following components:  Participating insurance contract liabilities  Participating investment contract liabilities  Present value of future profits on non-participating contracts, which is treated as a deduction from gross participating contract liabilities  Unallocated divisible surplus
Under the PRA realistic basis, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on nonparticipating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
As a result of the policies for measuring the HWPF’s assets and all its other recognised liabilities:  The UDS of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future recourse cash flows on non-participating contracts), the value of future additional expenses to be charged on Germany branch business and the effect of any measurement differences between the Realistic Balance Sheet value and IFRS accounting policy value of all assets and all liabilities other than participating contract liabilities recognised in the HWPF
Pensions and Savings The liability for annuity in payment contracts is measured by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from yields on the underlying assets.
The Group applies a liability adequacy test at each reporting date to ensure that the insurance and participating contract liabilities (less related deferred acquisition costs) are adequate in the light of the estimated future cash flows. This test is performed by comparing the carrying value of the liability and the discounted projections of future cash flows.
Reinsurance contracts are measured using valuation techniques and assumptions that are consistent with the valuation techniques and assumptions used in measuring the underlying policy benefits and taking into account the terms of the reinsurance contract.
Reinsurance recoveries due from reinsurers and reinsurance premiums due to reinsurers under reinsurance contracts that are contractually due at the reporting date are separately recognised in receivables and other financial assets and other financial liabilities respectively unless a right of offset exists, in which case the net amount is reported on the consolidated statement of financial position.
Total insurance and participating contracts Reinsurance contracts Net 2016 £m £m £m £m £m £m
Non-economic assumptions net of reinsurance decrease of £30m primarily relates to changes in mortality assumptions for non-participating insurance contract liabilities.
Change in UDS recognised in the consolidated income statement 53 (117) Change in UDS recognised in other comprehensive income 67 3 Foreign exchange adjustment (190) 81
(d) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 41. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
The principal assumptions are shown in the following tables: (i) Non-participating insurance contracts
 For contingent spouses' benefits an assumption is also made with regard to the proportions married, based on SLAL’s historic experience
Ireland The assumptions for business in Ireland are derived in a similar manner to those above.
35. Financial liabilities Management determines the classification of financial liabilities at initial recognition. The majority of the Group’s financial liabilities are designated as fair value through profit or loss (FVTPL). The methods and assumptions used to determine fair value of financial liabilities designated at FVTPL are discussed in Note 43. Financial liabilities which are not derivatives and not FVTPL are financial liabilities measured at amortised cost.
Third party interest in consolidated funds 41 17,196 - - 17,196 166 Standard Life 2016
Subordinated notes 5.5% Sterling fixed rate due 4 December 2042 500 499 500 499
The Group’s liabilities in relation to its defined benefit plans are valued by at least annual actuarial calculations. The Group has funded these liabilities in relation to its principal defined benefit plans by ring-fencing assets in trustee-administered funds. The Group has a further smaller defined benefit plan which is unfunded.
For the UK defined benefit plan, the Group considers that it has an unconditional right to a refund of a surplus, assuming the gradual settlement of the plan liabilities over time until all members have left the plan. The plan trustees can purchase annuities to insure member benefits and can, for the majority of benefits, transfer these annuities to members. The trustees cannot unconditionally wind up the plan or use the surplus to enhance member benefits without employer consent. Our judgement is that these trustee rights do not prevent us from recognising an unconditional right to a refund and therefore a surplus.
Defined benefit Defined contribution UK The Group’s largest defined benefit plan is for employees based in the UK. It closed to new entrants in November 2004 and changed from a final salary basis to a revalued career average salary basis in 2008.
The UK staff defined benefit pension plan was closed to future accrual in April 2016. Since April 2016, all UK employees accrue pension through a defined contribution plan.
The defined benefit plan is governed by a trustee board which comprises both employer and employee nominated trustees and an independent trustee. The plan is subject to the statutory funding objective requirements of the Pensions Act 2004. The objective requires that the plan is funded to at least the level of its technical provisions (an actuarial estimate of the assets needed to provide for benefits already built-up under the plan). The trustees perform regular valuations to check that the statutory funding objective continues to be met.
The trustees set the plan investment strategy to protect the ratio of plan assets to the trustees’ measure of technical provisions. This investment strategy does not aim to protect the IAS 19 surplus or the ratio of plan assets to the IAS 19 measure of liabilities. Falling bond yields over the period, in part due to the result of the EU referendum on 23 June 2016, have led to a significant increase in the IAS 19 surplus. However, the ratio of plan assets to the IAS 19 liabilities has remained relatively stable.
Since April 2016 the Group contributes 12% of pensionable salary to each employee’s plan plus a further employer contribution (matching employee contributions) of up to 4%. Prior to this the Group contributed 9% of pensionable salary to each employee’s plan. Separate arrangements exist for some employees e.g. those in the executive job family.
31 December 2009, with future accrual from that point on a career average revalued earnings (CARE) basis.
At the last actuarial valuation effective 1 January 2016 the plan was 70% funded on an ongoing basis.
The Group contributes 9% of members’ pensionable salaries to a group flexible retirement plan.
(a) Analysis of amounts recognised in the consolidated income statement The amounts recognised in the consolidated income statement for defined contribution and defined benefit plans are as follows: Current service cost (49) (80) Interest income 33 30 Administrative expenses (3) (2) Expense recognised in the consolidated income statement 8 (19) (52)
(b) Analysis of amounts recognised in the consolidated statement of financial position 2016 2015
The UK plan surplus is considered to be recoverable as a right to a refund exists. The surplus has been reduced to reflect an authorised surplus payments charge that would arise on a refund.
Return on plan assets, excluding amounts included in interest income - 1,036 1,036 - 1,036 Gain from change in demographic assumptions - - - - Loss from change in financial assumptions (812) - (812) - (812)
Change in effect of limit on plan surplus - - - (95) (95)
Effect of limit on plan surpluses Total 2015 £m £m £m £m £m
Return on plan assets, excluding amounts included in interest income - (73) (73) - (73) Gain from change in demographic assumptions - - - - Gain from change in financial assumptions 225 - 225 - 225
Investment strategy is directed by the relevant trustee boards who pursue different strategies according to the characteristics and maturity profile of each plan’s liabilities. Assets and liabilities are managed holistically to create a portfolio with the dual objectives of return generation and liability management. This is achieved through a diversified multi-asset absolute return strategy seeking consistent positive returns, and hedging techniques which protect liabilities against movements arising from changes in interest rates and inflation expectations. Derivative financial instruments support both of these objectives and may lead to increased or decreased exposures to the physical asset categories disclosed below.
To provide more information on the approach used to determine and measure the fair value of the plan assets, the fair value hierarchy has been used as defined in Note 43. Those assets which cannot be classified as level 1 have been presented together as level 2 or 3.
The distribution of the fair value of the assets of the Group’s funded defined benefit plans at 31 December 2016 is as follows: UK Other Total £m £m £m £m £m £m
Total assets measured at fair value based on level 2 or 3 inputs 682 769 - (3) 682 766
Investment strategy risks include underperformance of the absolute return strategy and underperformance of the liability hedging strategy. As the trustees set investment strategy to protect their own view of plan strength (not the IAS 19 position), changes in the IAS 19 liabilities (e.g. due to movements in corporate bond prices) may not always result in a similar movement in plan assets. Further information on risks is provided in section (g) of this note. The £3,547m (2015: £2,618m) of debt securities includes £3,357m (2015: £2,068m) government bonds (including conventional and index-linked). Of the remaining £190m (2015: £550m) debt securities, £169m (2015: £532m) are investment grade corporate bonds or certificates of deposit.
Expectation of life from NRA Male age today Female age today 2015 Table Improvements NRA 40 NRA 40
Yields/discount rate Falls in yields would in isolation be expected to increase the defined benefit plan liabilities.
Inflation Rises in inflation expectations would in isolation be expected to increase the defined benefit plan liabilities.
The UK plan uses both bonds and derivatives to hedge out inflation risks on the plan’s funding basis, rather than the IAS 19 basis, which is expected to minimise the plan’s need to rely on support from the Group.
Life expectancy Decrease by 1 year 101 - 55 38. Deferred income Where the Group receives fees in advance (front-end fees) for services it is providing, including investment management services, these fees are initially recognised as a deferred income liability and released to the consolidated income statement on a straight line basis over the period services are provided.
Additions during the year 5 15 25 Amortised to the consolidated income statement as fee income 5 (61) (63) Foreign exchange adjustment 8 (2)
The amount of deferred income expected to be settled after more than 12 months is £148m (2015: £178m).
Amounts payable on direct insurance business 368 340 Amounts payable on reinsurance contracts 6 7 Outstanding purchases of investment securities 300 180
Creation of units awaiting settlement 251 174 Cash collateral held in respect of derivative contracts 41 2,016 1,166
The Group has provided for an estimate of the redress payable to customers, which may comprise both lump sum payments and enhancements to future annuity payments, the costs of conducting the review and other related expenses.
Estimates and assumptions The key assumptions in relation to the provision for annuity sales practices are:  The number of customers entitled to redress  The amount of redress payable per customer  The costs of conducting the review
The number of customers entitled to redress has been estimated based on:  The number of customers in the review population  The estimated percentage of these customers eligible for an enhanced annuity  The estimated percentage of these eligible customers that did not receive sufficient information from Standard Life about enhanced annuities
The assumption of the percentage of eligible customers that did not receive sufficient information from Standard Life about enhanced annuities and suffered loss as a result is based on a sample of Standard Life customers reviewed as part of the FCA thematic review.
The FCA thematic review noted, for the industry as a whole, a plausible range of lost income for customers who were entitled to enhanced annuities but purchased standard annuities to be between £120 and £240 per annum for an average annuity purchase price of £25,000. The provision assumes lost income of £180 per annum for an average annuity purchase price of £25,000. Assumptions relating to future annuity payments are consistent with other annuity reserving assumptions.
(b) Other liabilities The amount of other liabilities expected to be settled after more than 12 months is £nil (2015: £nil).
The Group’s approach to risk management, delivered through the Enterprise Risk Management (ERM) framework, is well embedded in the business. The ERM framework enables a risk-based approach to managing the business and integrates concepts of strategic planning, operational management and internal control, and is set out in more detail in the Strategic Report.
Strategic Risks which threaten the achievement of the strategy through poor strategic decision-making, implementation or response to changing circumstances.
There are a range of sources of risk affecting these risk categories and the principal risks and uncertainties that affect the business model are set out in detail in the Risk management section of the Strategic report.
HWPF = Heritage With Profits Fund PBF = Proprietary Business Fund GWPF = German With Profits Fund GSMWPF = German Smoothed Managed With Profits Fund SHF = Shareholder Fund UKSMWPF = UK Smoothed Managed With Profits Fund 1 As discussed in Note 3 and above, unit linked funds does not include cash flows arising from unit linked fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked fund contracts. Such cash flows and liabilities are included in shareholder or participating business.
The shareholder is exposed to the market risk that the assets of the with profits funds are not sufficient to meet their obligations. If this situation occurred the shareholder would be exposed to the full shortfall in the funds.
The shareholder is exposed to demographic and expense risk arising on components of a unit linked fund contract, but it is not the assets or liabilities of the fund which gives rise to this exposure.
Pension and other post-retirement benefit assets 1,093 897 - - - - - - 1,093 897
Equity securities and interests in pooled investment funds at FVTPL 58 52 8,478 8,187 67,452 56,307 7,319 7,133 83,307 71,679 Debt securities
Non-participating insurance contract liabilities 6,192 5,197 9,796 9,556 7,434 6,453 - - 23,422 21,206 Non-participating investment contract liabilities 4 4 - - 102,059 92,890 - - 102,063 92,894
Third party interest in consolidated funds - - - - - - 16,835 17,196 16,835 17,196
Pension and other post-retirement benefit provisions 55 33 - - - - - - 55 33
Net inter-segment assets/(liabilities) 336 334 (316) (367) (14) 41 (6) (8) - 1 Third party interest in consolidated funds and non-controlling interests.
The key considerations in the asset and liability management of the participating business are:  The economic liability and how this varies with market conditions  The need to invest the assets in a manner consistent with participating policyholders' reasonable expectations and, where appropriate, the
Exposures to equity securities are primarily controlled through the use of investment mandates including constraints based on appropriate equity indices.
(b)(i)(ii) Group exposure to property risk The Group is exposed to the risk of adverse property market movements which could result in losses. This applies to changes in the value and return on holdings in investment property. This risk arises from:  Burnthrough from the with profits funds where adverse movements in the market values and returns on investment property in these funds mean the assets of the with profits funds are not sufficient to meet their obligations
Exposures to property holdings are primarily controlled through the use of portfolio limits which specify the proportion of the value of the total property portfolio represented by:  Any one property or group of properties  Geographic area  Property type  Development property under construction
Shareholder business Under the Group’s ERM framework, Group companies are required to manage their interest rate exposures in line with the Group’s qualitative risk appetite statements and quantitative risk limits. Group companies typically use a combination of cash flow and duration matching techniques to manage their interest rate risk at an entity level. Hedging is used to mitigate the risk that burnthrough may arise from the with profits funds under certain circumstances where adverse interest rate movements could mean the assets of the with profits funds are not sufficient to meet the obligations of the with profits funds.
Participating business Duration matching is used to minimise the interest rate risk that arises from mismatches between participating contract liabilities and the assets backing those liabilities. Cash flow matching is used to minimise the interest rate risk that arises in the participating business from mismatches between non-participating insurance contract liabilities and the assets backing those liabilities. A combination of debt securities and derivative financial instruments are held to assist in the management of interest rate sensitivity arising in respect of the cost of guarantees.
During 2016 the Group reaffirmed its strategy for hedging foreign currency risks in the shareholder business. The purpose of this strategy is to provide a consistent approach to managing foreign exchange risks in the shareholder business. This includes, within certain parameters, minimising currency volatility within the regulatory capital surplus and reducing the currency risk relating to dividend receipts from overseas operations. The Group does not separately hedge translation of reported earnings from overseas operations in the consolidated financial statements.
(b)(ii) Sensitivity to market risk analysis The Group’s profit after tax from continuing operations and equity are sensitive to variations in respect of the Group’s market risk exposures and a sensitivity analysis is presented on the following pages. The analysis has been performed by calculating the sensitivity of profit after tax from continuing operations and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date applied to assets and liabilities other than those classified as held for sale.
GWPF For the GWPF, whilst shareholders are entitled to charges from this fund, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. Profit after tax from continuing operations and equity are sensitive to the extent that the receipt of future charges is not taken into account in the measurement of the non-participating contract liabilities in the shareholder risk segment in economic scenarios where the charges are deemed foregone to support the participating liabilities. This sensitivity is included within the non-participating insurance contract liabilities in the following table.
Earnings over a period may be reduced as a consequence of the impact of market movements on charges levied on unit linked business, and other with profits fund business. For example, if the tests had been applied as at 1 January, the profit during the year would have varied due to the different level of funds under management. In illustrating the impact of equity/property risk, the assumption has been made, where relevant, that expectations of corporate earnings and rents remain unchanged and thus yields change accordingly. The sensitivities take into account the likely impact on individual Group companies of local regulatory standards under such a scenario.
India and China: Deferred acquisition costs - - - - - - - - - (4) Assets backing non-participating insurance contract liabilities - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - Non -participating insurance contract liabilities - - - - - - - - - Non -participating investment contract liabilities - - - - - - - - - -
Participating business Pensions and Savings: Recourse cash flow - - - - - - - - - 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement. 3 The interest rate sensitivity is a parallel shift subject to a floor of -30bps.
Increase/(decrease) in profit after tax from continuing operations £m £m £m £m £m £m £m £m £m £m
Shareholder business Pensions and Savings: Deferred acquisition costs - - - (5) - - - - - Assets backing non-participating liabilities - - - - - - - - (569) 691 Non-participating insurance contract liabilities - - - - - - - - 538 (642) Non-participating investment contract liabilities - - - - - - - - - -
India and China: Deferred acquisition costs 2 (2) 3 (4) - - - - 1 (2) Assets backing non-participating insurance contract liabilities - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - Non -participating insurance contract liabilities - - - - - - - - - Non -participating investment contract liabilities - - - - - - - - - -
Participating business Pensions and Savings: Recourse cash flow - - - - - - - - - 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement. 3 The interest rate sensitivity is a parallel shift subject to a floor of nil.
The Other segment’s equity sensitivity to a 1% increase in interest rates is (£17m) (2015: (£14m)) and to a 1% decrease in interest rates is £17m (2015: £15m). The sensitivity of the Group’s total equity to a 1% increase in interest rates is (£39m) (2015: (£61m)) and a 1% decrease in interest rates is £57m (2015: £80m).
(c) Credit risk As described in the table on page 178, the shareholder is exposed to credit risk from the shareholder and participating businesses and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.
Quantitative credit risk disclosures are not provided in respect of the assets of the unit linked funds since the shareholder is not directly exposed to credit risk from these assets. The unit linked business includes £3,779m (2015: £3,228m) of assets that are held as reinsured external funds links. Under certain circumstances the shareholder may be exposed to losses relating to the default of the reinsured external fund links. These exposures are actively monitored and managed by the Group and the Group considers the circumstances under which losses may arise to be very remote.
Reinsurance assets The Group’s policy is to place reinsurance only with highly rated counterparties, with business units having to assign internal credit ratings to reinsurance counterparties. The Group is restricted from assuming concentrations of risk with few individual reinsurers by specifying certain limits on ceding and the minimum conditions for acceptance and retention of reinsurers.
Shareholder business An analysis of financial assets by credit rating is as follows: Loans to associates and joint ventures
Receivables and other financial assets Cash and cash £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Neither past due nor impaired: AAA - - - - - - - - 481 673 - - 92 32 573 705
An analysis of debt securities by country is as follows: Government, provincial and municipal1 Banks Other financial institutions Other £m £m £m £m £m £m £m £m £m £m £m £m 1 Government, provincial and municipal includes debt securities which are issued by or explicitly guaranteed by the national government. 2 This balance primarily consists of securities held in supranationals.
Neither past due nor impaired: AAA - - - - - - 4,523 4,342 - - 30 64 4,553 4,406
The shareholders’ exposure to credit risk arising from investments held in the HWPF and other with profits funds is similar in principle to that described for market risk exposures in section (b). As at 31 December 2016, the financial assets of the HWPF include £5,093m (2015: £5,134m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been structured in this manner specifically to mitigate credit risks associated with default of the reinsurer. Any credit losses and defaults within the portfolio of assets are borne by the external reinsurer.
An analysis of debt securities by country is as follows: Government, provincial and municipal1 Banks Other financial institutions Other corporate Other2 Total 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m £m £m £m £m £m £m 1 Government, provincial and municipal includes debt securities which are issued by or explicitly guaranteed by the national government. 2 This balance primarily consists of securities held in supranationals.
(c)(ii) Credit spreads As at 31 December 2016, it is expected that an adverse movement in credit spreads of 50 basis points, with no change to default allowance, would result in a reduction to profit for the year from continuing operations of £22m (2015: £23m). A further reduction of £58m (2015: £46m) would arise as a result of a change in assumed default rates of 12.5 basis points per annum (25% of the spread change).
(c)(iii) Collateral accepted and pledged in respect of financial instruments Collateral in respect of bilateral over-the-counter (OTC) derivative financial instruments and bilateral repurchase agreements is accepted from and provided to certain market counterparties to mitigate counterparty risk in the event of default. The use of collateral in respect of these instruments is governed by formal bilateral agreements between the parties. For OTC derivatives the amount of collateral required by either party is determined by the daily bilateral OTC exposure calculations in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Under the terms of these agreements, collateral is posted with the ownership captured under title transfer of the contract. With regard to either collateral pledged or accepted, the Group may request the return of, or be required to return, collateral to the extent it differs from that required under the daily bilateral OTC exposure calculations.
The Group does not offset financial assets and liabilities on the consolidated statement of financial position, as there are no unconditional rights to set off. Consequently, the gross amount of financial instruments presented on the consolidated statement of financial position is the net amount. The Group’s bilateral OTC derivatives are all subject to an International Swaps and Derivative Association (ISDA) master agreement. ISDA master agreements and reverse repurchase agreements entered into by the Group are considered master netting agreements as they provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy.
(c)(v) Credit risk on loans and receivables and financial liabilities designated as at fair value through profit or loss (c)(v)(i) Loans and receivables The Group holds a portfolio of financial instruments which meet the definition of loans and receivables under IAS 39 Financial Instruments: Recognition and Measurement and on initial recognition were designated as at FVTPL. These instruments are included in debt securities on the consolidated statement of financial position. The Group’s exposure to such financial instruments at 31 December 2016 was £835m (2015: £652m) of which £116m related to participating business (2015: £140m) and £719m related to shareholder business (2015: £512m). The fair value of these loans and receivables is calculated using a valuation technique which refers to the current fair value of other similar financial instruments in addition to other unobservable market data. During the year, fair value gains of £27m (2015: £4m losses) in relation to these loans and receivables were recognised in the consolidated income statement. The amount of this movement that is attributable to changes in the credit risk of these instruments was gains of £9m (2015: £2m).
As described in section (b), the Group’s ERM framework defines market risk as the risk that arises from the Group’s exposure to market movements, which could result in the income, or value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. The movement in the fair value of loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions.
(c)(v)(ii) Financial liabilities designated at FVTPL The Group has designated unit linked non-participating investment contract liabilities as at FVTPL. As the fair value of the liability is based on the value of the underlying portfolio of assets, the movement, during the period and cumulatively, in the fair value of the unit linked non-participating investment contract liabilities, is only attributable to market risk.
(d) Demographic and expense risk As described in the table on page 178, the shareholder is directly exposed to demographic and expense risk from shareholder business and participating business and, as a result, quantitative demographic and expense risk disclosures are provided in respect of these categories.
Demographic and expense risk is managed by analysing experience and using statistical data to make certain assumptions on the risks associated with the policy during the period that it is in force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing demographic and expense risk exposures, the Group considers:  Historic experience of relevant demographic and expense risks  The potential for future experience to differ from that expected or observed historically  The financial impact of variances in expectations  Other factors relevant to their specific markets, for example obligations to treat customers fairly
(d)(i)(i) Components of insurance risk as defined by IFRS 4 Insurance Contracts Longevity The Group defines longevity risk as the risk that policyholders live longer than expected which gives rise to losses for the shareholder. This may arise from current experience differing from that expected, or the rate of improvement in mortality being greater than anticipated. This risk is relevant for contracts where payments are made until the death of the policyholder, for example, annuities.
Morbidity The Group defines morbidity risk as the risk that claims dependent on the state of health of a policyholder are incurred at a higher than expected rate or, in the case of income benefits, continue for a longer duration or start earlier than those assumed. This risk will be present on disability income, healthcare and critical illness contracts. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected, for example, due to non-disclosure.
(d)(i)(ii) Other financial risks Persistency – withdrawals and lapse rates The Group defines persistency risk as the risk that clients redeem their investments and policyholders surrender, lapse or pay-up their policies at different rates than assumed resulting in reduced revenue and/or financial losses. This risk may arise if persistency rates are greater or less than assumed or if policyholders selectively lapse when it is beneficial for them. If the benefits payable on lapse or being paid-up are greater than the reserve held then the risk will be of a worsening of persistency and if benefits are paid out that are lower than the reserve then the risk will be that fewer policyholders will lapse or become paid-up.
Expenses The Group defines expense risk as the risk that expense levels will be higher than assumed. This can arise from an increase in the unit costs of the Group or its businesses or an increase in expense inflation, either Group specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can reflect an increase in liabilities or a reduction in expected future profit.
Longevity Expenses Persistency Morbidity/mortality 2016 £m £m £m £m £m £m £m £m
Shareholder business Pensions and Savings: Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (111) 104 (7) 7 1 (1) (1) 1 India and China Deferred acquisition costs - - (5) 3 (1) 1 - Non -participating insurance contract liabilities - - - - - - - Non -participating investment contract liabilities - - - - - - - -
Participating business Pensions and Savings: Recourse cash flows (17) 16 (3) 3 - - (3) 3
When the sensitivities presented in the tables above are applied to other with profits funds, there are no significant impacts on net liabilities after reinsurance, equity or profits for either investment or insurance contracts. Amounts in the tables above are presented net of tax and reinsurance.
The shareholder business of Pensions and Savings currently bears longevity risk both on contracts written in the PBF and on contracts written in the HWPF for which the longevity risk has been transferred to the PBF.
The shareholder is not exposed to the liquidity risk from the assets held by third party interests in consolidated funds and non-controlling interests and therefore these have been excluded from the following quantitative disclosures.
For annuity contracts, assets are held which are specifically chosen with the intention of matching the expected timing of annuity payments. Business units actively manage and monitor the performance of these assets against liability benchmarks and liquidity risk is minimised through the process of planned asset and liability matching. The Group’s assets are analysed in Section (b)(i) and Section (c)(i) of this Note. For Pensions and Savings, the reinsurance treaty between the Group and Canada Life International Re provides for the cash settlement of amounts owed by Canada Life International Re.
Greater than 20 years No defined maturity Total 2016 £m £m £m £m £m £m £m £m
Shareholder business Non-participating insurance contract liabilities 330 1,194 1,351 1,139 881 1,297 - 6,192 Non-participating investment contract liabilities 1 1 1 1 - - - 4
Non-participating insurance contract liabilities 316 1,078 1,165 949 717 972 - 5,197 Non-participating investment contract liabilities 1 1 1 1 - - - 4
Participating business Non-participating insurance contract liabilities 691 2,454 2,387 1,640 1,015 1,369 - 9,556
Shareholder business Non-participating investment contract liabilities 4 4 - - - - - - - - - - 4 4
Unit linked funds Non-participating investment contract liabilities 102,059 92,890 - - - - - - - - - - 102,059 92,890
The Group also had unrecognised commitments in respect of financial instruments as at 31 December 2016 with a contractual maturity of within one year and between one and five years of £453m and £nil respectively (2015: £319m and £nil).
(f) Operational and conduct risk The Group defines operational risk as the risk of loss, or adverse consequences for the Group’s business, resulting from inadequate or failed internal processes, people or systems, or from external events. This includes conduct risk which is defined as the risk that through our behaviours, strategies, decisions and actions the Group, or individuals within the Group, do not do the right thing and/or do not behave in a manner which:  Pays due regard to treating our customers and clients fairly  Is consistent with our disclosures and setting of customer and client expectations  Supports the integrity of financial markets
The types of operational risk to which the Group is exposed are identified using the following operational risk categories:  Fraud or irregularities  Regulatory or legal  Products and practices  Business interruption  Supplier failure  Process execution  People  Security
Activities undertaken to ensure the practical operation of controls over financial risks, that is, market, credit, liquidity and demographic and expense risk, are treated as an operational risk.
Operational risk exposures are controlled using one or a combination of the following: modifying operations to mitigate the exposure to the risk; accepting exposure to the risk; or accepting exposure to the risk and controlling the exposure by risk transfer or risk treatment. The factors on which the level of control and nature of the controls implemented are based include:  The potential cause and impact of the risk  The likelihood of the risk being realised in the absence of any controls  The ease with which the risk could be insured against  The cost of implementing controls to reduce the likelihood of the risk being realised  Operational risk appetite
Control Self Assessment (CSA) is a monitoring activity where business managers assess the operation of the controls for which they are responsible and the adequacy of these controls to manage key operational risks and associated business processes. The assessment completed by business managers is validated and challenged by the risk function in its role of ‘second line of defence’. Independent assurance as to the effectiveness of the CSA process is provided by Group Internal Audit in its role of ‘third line of defence’. The results of CSA are reported through the risk governance structure.
(g) Strategic risk The Group defines strategic risk as those risks which threaten the achievement of the strategy through poor strategic decision-making, implementation or response to changing circumstances. Strategic risks are considered across the Group through the business planning process. The strategic risks to which the Group is exposed are reviewed on a regular basis.
42. Structured entities A structured entity is an entity that is structured in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity. The Group has interests in structured entities through investments in a range of investment vehicles including:  Pooled investment funds managed internally and externally, including OEICs, SICAVs, unit trusts and limited partnerships  Debt securitisation vehicles which issue asset-backed securities
(a) Consolidated structured entities As at 31 December 2016 and 31 December 2015, the Group has not provided any non-contractual financial or other support to any consolidated structured entity and there are no current intentions to do so.
(b)(i) Investments in unconsolidated structured entities The following table shows the carrying value of the Group’s investments in unconsolidated structured entities by line items in the consolidated statement of financial position and by risk segment as defined in Note 41.
The asset value of unconsolidated structured entities which are managed by the Group and in which the Group’s holding is classified as an investment in associate is £41,379m (2015: £28,150m). There are no interests in pooled investment funds managed by the Group other than those classified as investments in associates. The total issuance balance relating to unconsolidated structured debt securitisation vehicles in which the Group has an investment is £57,877m (2015: £54,214m).
 Level 2 – Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
 Corporate bonds listed or quoted in an established over-the-counter market including asset-backed securities These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote, the instruments are categorised as level 3 instruments. For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy.
 Commercial mortgages These instruments are valued using models. The models use a discount rate adjustment technique which is an income approach. The key inputs for the valuation models are contractual future cash flows, which are discounted using a discount rate that is determined by adding a spread to the current base rate. The spread is derived from a pricing matrix which incorporates data on current spreads for similar assets and which may include an internal underwriting rating. These inputs are generally observable with the exception of the spread adjustment arising from the internal underwriting rating. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending on whether the spread is adjusted by an internal underwriting rating.
Total assets at fair value 172,147 156,266 263 137 172,410 156,403 119,315 100,149 41,036 44,414 12,059 11,840
The table that follows presents an analysis of the Group’s assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41.
Participating business Investments in associates at FVTPL 847 531 - - 847 531 702 459 - - 145 72
Equity securities and interests in pooled investment vehicles 8,478 8,187 - - 8,478 8,187 8,159 7,840 - - 319 347
Total liabilities at fair value 119,874 111,340 185 184 118,446 109,849 1,243 1,307
There were no transfers between levels 1 and 2 during the year (2015: none). Refer to 43(d)(iii) for details of movements in level 3.
As recognised in the consolidated statement of financial position line item Level 1 Level 2 Level 3 £m £m £m £m £m £m £m £m
Participating business Derivative financial liabilities 39 88 20 47 19 41 - -
Liabilities in respect of third party interest in consolidated funds £m £m £m £m £m £m £m £m £m £m £m £m
Transfers between investment property and owner occupied property - - (28) - 28 - - - - - - -
(d)(iv) Sensitivity of level 3 instruments measured as at fair value on the statement of financial position to changes in key assumptions Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions For the majority of level 3 investments, other than commercial mortgages and unquoted corporate bonds, the Group does not use internal models to value the investments but rather obtains valuations from external parties. The Group reviews the appropriateness of these valuations on the following basis:  For investment property and owner occupied property (including property that is classified as held for sale), the valuations are obtained from external valuers and are assessed on an individual property basis. The principle assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the following table using knowledge of the investment property market.
 Unquoted corporate bonds are valued using internal models on an individual instrument basis. Sensitivities are determined by adjusting internally estimated credit spreads.
The shareholder is directly exposed to movements in the value of level 3 investments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 investments held by the other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.
Changing unobservable inputs in the measurement of the fair value of level 3 financial assets to reasonably possible alternative assumptions would not have a significant impact on profit for the year or total assets.
Investment property and owner occupied property 9,567 Income capitalisation Equivalent yield
1 A Group level adjustment is made for significant movements in private equity values. 2 Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices. 3 Restated.
Non-participating investment contract liabilities 35 4 4 4 4 - - - - 4 4
Assets held for sale 25 (1,930) Change in operating assets (12,995) (6,607)
Cash and cash equivalents disposed of 12 (500) Cash inflow from disposal of subsidiary 1,600 45. Contingent liabilities and contingent assets Contingent liabilities are possible obligations of the Group of which timing and amount are subject to significant uncertainty. Contingent liabilities are not recognised on the consolidated statement of financial position but are disclosed, unless they are considered remote. If such an obligation becomes probable and the amount can be measured reliably it is no longer considered contingent and is recognised as a liability.
(a) Capital commitments As at 31 December 2016, capital expenditure that was authorised and contracted for, but not provided and incurred, was £286m (2015: £231m) in respect of investment property. Of this amount, £220m (2015: £203m) and £66m (2015: £28m) relates to the contractual obligations to purchase, construct, or develop investment property and repair, maintain or enhance investment property respectively.
Number of instruments granted1 503,931 261,123 Share price at date of grant2 333p 431p Fair value per granted instrument at grant date2 333p 431p 1 Included in the number of instruments granted are 11,814 (2015: 11,433) rights to shares granted to eligible employees in Germany and Austria. 2 Weighted average.
Transactions with related parties carried out by the Group during the year were as follows: £m £m
Sales to and amounts due from other related parties include management fees received/receivable from non-consolidated investment vehicles managed by Standard Life Investments and from the Group’s defined benefit pension plans.
The year end balances arising from transactions carried out by the Group with related parties are as follows: £m £m
(b) Compensation of key management personnel In 2016 key management personnel includes only Directors of Standard Life plc; in 2015 key management personnel also included certain direct reports of the Chief Executive. Detailed disclosures of Directors’ remuneration for the year and transactions in which the Directors are interested are contained within the audited section of the Directors’ remuneration report.
Salaries and other short-term employee benefits 6 8 Post-employment benefits 1 1 Share-based payments 3 5 Termination benefits - 2 Total compensation of key management personnel 10 16 208 Standard Life 2016
49. Capital management (a) Capital management policies and risk management objectives Managing capital is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Board considers our key stakeholders to be the providers of capital (our equity holders, policyholders and holders of our subordinated liabilities) and the Prudential Regulation Authority (PRA).
The formal procedures for identifying and assessing risks that could affect the capital position of the Group are described in the risk management policies set out in Note 41.
The Group’s capital position under SII is determined by aggregating the assets and liabilities of the Group recognised and measured on a SII basis (being Own funds) and comparing this to the Group’s SII solvency capital requirement (SCR) to determine surplus capital.
(b)(ii) Regulatory capital position (unaudited) The table below shows the Group’s own funds and solvency capital requirement: £bn £bn
Own funds 7.2 5.5 Solvency capital requirement (SCR) (4.1) (3.4) Solvency II capital surplus 3.1 2.1 Solvency cover 176% 162% 1 2016 based on draft regulatory returns which are not audited. 2015 based on the position on adoption of the SII regulatory regime at 1 January 2016.
The Group has complied with all externally imposed capital requirements during the year. The Group position can be analysed as follows: Own funds SCR Surplus 31 December 20161 £bn £bn £bn
Restriction on SLAL own funds recognised at Group (0.1) - (0.1)
The Group’s own funds do not take into account capital in subsidiaries that is not deemed to be freely transferable around the Group. The reduction in unrecognised capital in SLAL from £1.1bn at 31 December 2015 to £0.1bn at 31 December 2016 is due to methodology and legislative changes.
Own funds 7.2 5.5 Add unrecognised Solvency II capital (availability restriction) 0.2 1.2 Remove with profits funds and pension scheme contribution to own funds1 (1.2) (0.7) Remove subordinated liabilities contribution to own funds2 (1.6) (1.5) Remove value of fee business future profits3 (2.9) (2.9) Add IFRS pension scheme surplus1 1.1 0.9 Add IFRS DAC, DIR and other intangibles assets and other valuation differences4 1.5 1.5 IFRS equity attributable to equity holders of Standard Life plc 4.3 4.0 1 In determining Group own funds the asset recognised for a surplus in a with profits fund or a defined benefit pension scheme is restricted to their capital requirements. 2 Subordinated liabilities provide capital in SII provided certain conditions are met. 3 The measurement of technical provisions in Group own funds reflects the value of future profits on investment fee business which are not included in the measurement of IFRS liabilities. 4 Certain items that are recognised as assets and liabilities under IFRS are not recognised as assets and liabilities in Group own funds, being the Group’s DAC, DIR and other intangible assets.
Other valuation differences are mainly due to differences in the measurement of technical provisions for insurance business. 5 2016 based on draft regulatory returns which are not audited. 2015 based on the position on adoption of the SII regulatory regime at 1 January 2016.
The ability of subsidiaries to transfer cash or other assets within the Group for example through payment of cash dividends is restricted only by local laws and regulations, and solvency requirements. These are not considered significant restrictions on the Group’s ability to access or use the assets and settle the liabilities of the Group.
The Group also has investments in Qualifying Limited Partnerships which are consolidated in these financial statements. For the Qualifying Limited Partnerships, North American Strategic Partners (Feeder) 2006 Limited Partnership and North American Strategic Partners (Feeder) 2008 Limited Partnership an exemption from filing annual financial statements with Companies House has been taken in accordance with the Partnership Accounting Regulations (2008). The registered head office of all related undertakings is 1 George St, Edinburgh, EH2 2LL unless otherwise stated.
Standard Life (London) Limited3 Ordinary Shares 100% Standard Life (Mauritius Holdings) 2006 Limited6 Ordinary Shares 100% Standard Life Employee Services Limited2 Ordinary Shares 100% Standard Life Finance Limited2 Ordinary Shares 100% Standard Life Foundation2 N/A 100% Standard Life Investments (Holdings) Limited Ordinary Shares 100% Standard Life Oversea Holdings Limited2 Ordinary Shares 100% Threesixty Support LLP7 Limited Liability Partnership 100% Vebnet (Holdings) Limited3 Ordinary Shares 100%
(b) Other subsidiaries, joint ventures, associates and other significant holdings Name of related undertaking Share class1 % interest held 1825 Financial Planning Limited3 Ordinary Shares 100% 28 Ribera del Loira SA8 Ordinary Shares 100% 330 Avenida de Aragon SL8 Ordinary Shares 100% 4th Contact Limited3 Ordinary Shares 100% Andaes S.à r.l.9 Ordinary Shares 60% Aurora Kaasunjakelu Oy10 Ordinary Shares 35% AXA Portfolio Services Limited3 Ordinary Shares
Baigrie Davies & Company Limited3 Ordinary Shares 100% Baigrie Davies Holdings Limited3 Ordinary Shares 100% Bardol Inversiones SL8 Ordinary Shares 60% Bechtel Properties Limited11 Ordinary Shares 100% Castlepoint General Partner Limited12 Ordinary Shares 100% Castlepoint LP12 Ordinary Shares 50% Castlepoint Nominee Limited12 Ordinary Shares 100% City Road (Jersey) Limited13 Ordinary Shares 100% Crawley Unit Trust13 Unit Trust 100% ESP 2006 Conduit LP Limited Partnership 8% ESP 2008 Conduit LP Limited Partnership 4%
Panker Invest S.à r.l.9 Ordinary Shares 60% Parnell Fisher Child & Co. Limited3 Ordinary Shares 100% Parnell Fisher Child Holdings Limited3 Ordinary A Shares
Pearson Jones & Company (Trustees) Limited31 Ordinary Shares 100% Pearson Jones Nominees Limited31 Ordinary Shares 100% Pearson Jones plc3 Ordinary A Shares
The Euro VNAV Liquidity Fund33 OEIC 99% The No.1 Fund33 OEIC 100% The Sterling VNAV Liquidity Fund33 OEIC 97%
Select Japan (GK Holdings UK) Limited Ordinary Shares 60% Select Japan (TK Holdings UK) Limited Ordinary Shares 60% Select Japan G.K. Limited by members 60% Select Malta Holdings Limited34 Ordinary Shares 60% Select Property Holdings (Mauritius) Limited35 Ordinary Shares 60%
Serin Wealth Limited36 Ordinary Shares 50% SL (NEWCO) Limited2 Ordinary Shares 100% SL Capital ESF I LP Limited Partnership 1% SL Capital Infrastructure I LP Limited Partnership 35% SL Capital NASF I A LP Limited Partnership 22% SL Capital NASF I LP30 Limited Partnership 19% SL Capital Partners (US) Limited Ordinary Shares 100% SL Capital Partners LLP Limited Liability Partnership 60% SL Capital SOF I Feeder LP Limited Partnership 0.4% SL Capital SOF I LP Limited Partnership 0.3% SL Capital SOF II Feeder LP Limited Partnership 1% SL Capital SOF II LP Limited Partnership 0.4% SLA Belgium No. 1. SA27 Ordinary Shares 100% SLA Germany No. 1 S.à r.l.9 Ordinary Shares 100% SLA Germany No. 2 S.à r.l. 9 Ordinary Shares 100% SLA Germany No.3 S.à r.l. 9 Ordinary Shares 100% SLA Ireland No.1 S.à r.l. 9 Ordinary Shares 100% SLA Netherlands No.1 B.V. 14 Ordinary Shares 100% SLACOM (No.8) Limited2 Ordinary Shares 100% SLACOM (No.9) Limited2 Ordinary Shares 100% SLACOM (No.10) Limited2 Ordinary Shares 100% SLCP (Founder Partner Ignis Private Equity) Limited Ordinary Shares 60% SLCP (Founder Partner Ignis Strategic Credit) Limited Ordinary Shares 60% SLCP (General Partner 2016 Co-investment) Limited Ordinary Shares 60% SLCP (General Partner CPP) Limited Ordinary Shares 100% SLCP (General Partner EC) Limited Ordinary Shares 100% SLCP (General Partner Edcastle) Limited Ordinary Shares 100% SLCP (General Partner ESF I) Limited Ordinary Shares 100% SLCP (General Partner ESF II) Limited Ordinary Shares 100% SLCP (General Partner ESP 2004) Limited Ordinary Shares 100% SLCP (General Partner ESP 2006) Limited Ordinary Shares 100% SLCP (General Partner ESP 2008 Coinvestment) Limited Ordinary Shares 100% SLCP (General Partner ESP 2008) Limited Ordinary Shares 100% SLCP (General Partner ESP CAL) Limited Ordinary Shares 100% SLCP (General Partner Europe VI) Limited Ordinary Shares 100% SLCP (General Partner Infrastructure I) Limited Ordinary Shares 100% SLCP (General Partner Infrastructure Secondary I) Limited Ordinary Shares 100% SLCP (General Partner NASF I) Limited Ordinary Shares 100% SLCP (General Partner NASP 2006) Limited Ordinary Shares 100% SLCP (General Partner NASP 2008) Limited Ordinary Shares 100% SLCP (General Partner Pearl Private Equity) Limited Ordinary Shares 100% SLCP (General Partner Pearl Strategic Credit) Limited Ordinary Shares 100% SLCP (General Partner SOF I) Limited Ordinary Shares 100% SLCP (General Partner SOF II) Limited Ordinary Shares 100% SLCP (General Partner SOF III) Limited Ordinary Shares 100% SLCP (General Partner Tidal Reach) Limited Ordinary Shares 100% SLCP (General Partner USA) Limited Ordinary Shares 100% SLCP (General Partner) Limited Ordinary Shares 100% SLCP (General Partner II) Limited Ordinary Shares 100% SLCP (Holdings) Limited Ordinary Shares 100% SLCP Infrastructure I (Holdings) S.à r.l9 Ordinary Shares 35% SLCP Infrastructure I-A S.à r.l9 Ordinary Shares 35% SLIF Property Investment GP Limited Ordinary Shares 100% SLTM Limited Ordinary Shares 100% Standard Life Active Plus Bond Trust Unit Trust 100% Standard Life Agency Services Limited2 Ordinary Shares 100%
Standard Life Investment Company II Standard Life Investments Corporate Debt Fund OEIC 100% Standard Life Investments Ethical Corporate Bond Fund OEIC 67% Standard Life Investments European Ethical Equity Fund OEIC 92% Standard Life Investments Global Index Linked Bond Fund OEIC 18% Standard Life Investments Global REIT Fund OEIC 53% Standard Life Investments Short Duration Global Index Linked Bond Fund OEIC 44% Standard Life Investments Short Dated Corporate Bond Fund OEIC 45% Standard Life Investments UK Equity Income Unconstrained Fund OEIC 30% Standard Life Investments UK Equity Unconstrained Fund OEIC 40%
European Equities Fund40 SICAV 73% European Equity Unconstrained Fund40 SICAV 88% European High Yield Bond Fund40 SICAV 35% European Smaller Companies Fund40 SICAV 44% Global Absolute Return Strategies Fund40 SICAV 27% Global Bond Fund40 SICAV 76% Global Corporate Bond Fund40 SICAV 46% Global Emerging Markets Equities Fund40 SICAV 0.03% Global Emerging Markets Equity Unconstrained Fund40 SICAV 89% Global Equities Fund40 SICAV 89% Global Equity Unconstrained Fund40 SICAV 16% Global Focused Strategies Fund40 SICAV 50% Global High Yield Bond Fund40 SICAV 78% Global Inflation-Linked Bond Fund40 SICAV 55% Global REIT Focus Fund40 SICAV 83% Indian Equity Midcap Opportunities Fund40 SICAV 87% Japanese Equities Fund40 SICAV 87% Japanese Equity High Alpha Fund40 SICAV 0.06% Total Return Credit Fund40 SICAV 92%
Liability Aware Absolute Return III Nominal Profile Fund33 ICAV <0.01% Liability Aware Absolute Return III Real Profile Fund33 ICAV <0.01%
Standard Life Investments (Trustee No. 7 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 8 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 9 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 10 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 11 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 12 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (USA) Limited Ordinary Shares 100% Standard Life Investments UK PDF Investment LP Limited Partnership 39% Standard Life Investments UK Property Development Fund L.P.28 Limited Partnership 39% Standard Life Investments UK Real Estate Funds ICVC
Standard Life Investments UK Real Estate Fund OEIC 71% Standard Life Investments UK Real Estate Trust
Standard Life Investments UK Retail Park Trust47 Unit Trust 57% Standard Life Investments UK Shopping Centre Feeder Fund Company Limited13 Ordinary Shares 100% Standard Life Investments UK Shopping Centre Trust47 Unit Trust 47% Standard Life Japan Trust Unit Trust 87% Standard Life Lifetime Mortgages Limited2 Ordinary Shares 100% Standard Life Master Trust Co. Ltd3 Ordinary Shares 100% Standard Life Multi-Asset Trust Unit Trust 100% Standard Life North American Trust Unit Trust 100% Standard Life Pacific Basin Trust Unit Trust 98% Standard Life Pan-European Trust Unit Trust 100% Standard Life Pension Funds Limited2 N/A 100% Standard Life Portfolio Investments Limited Ordinary Shares 100% Standard Life Premises Services Limited2 Ordinary Shares 100% Standard Life Property Company Limited2 Ordinary Shares 100% Standard Life Savings Limited2 Ordinary Shares 100% Standard Life Savings Nominees Limited2 Ordinary Shares 100% Standard Life Short Dated UK Government Bond Trust Unit Trust 100% Standard Life Strategic Investment Allocation Fund Unit Trust <0.01% Standard Life Trustee Company Limited2 Ordinary Shares 100% Standard Life UK Corporate Bond Trust Unit Trust 100% Standard Life UK Equity General Trust Unit Trust 100% Standard Life UK Government Bond Trust Unit Trust 100% Standard Life UK Smaller Companies Trust plc48 Ordinary Shares 6% Standard Life Wealth (CI) Limited49 Ordinary Shares 100% Standard Life Wealth Balanced Bridge Fund Unit Trust <0.01% Standard Life Wealth Bridge Fund Unit Trust <0.01% Standard Life Wealth Falcon Fund Unit Trust <0.01% Standard Life Wealth International Limited49 Ordinary Shares 100% Standard Life Wealth Limited Ordinary Shares 100% Standard Life Wealth Phoenix Fund Unit Trust <0.01% Suomi Gas Distribution Holdings Oy10 Ordinary Shares 35% Suomi Gas Distribution Oy10 Ordinary Shares 35% Telles Holding S.à r.l.9 Ordinary Shares 60% Tenet Group Limited51 Ordinary B Shares 20% The Coaching Platform Limited4 Ordinary Shares 100% The Heritable Securities and Mortgage Investment Association Limited2 Ordinary Shares 100% The Munro Partnership Ltd.50 Ordinary Shares 100% The Standard Life Assurance Company 20062 N/A 100% The Standard Life Assurance Company of Europe (Nederland) BV14 Ordinary Shares 100% Threesixty Partnerships Limited7 Ordinary Shares 100% Threesixty Services LLP7 Limited Liability Partnership 100%
Registered offices 2 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH 3 14th Floor, 30 St Mary Axe, London, EC3A 8BF 4 Cranford House, Kenilworth Road, Blackdown, Leamington Spa, CV32 6RQ 5 133 Cecil Street, #13-03 Keck Seng Tower, Singapore, 069535 6 C/O Cim Fund Services Ltd, 33 Edith Cavell Street, Port Louis, Mauritius 7 2nd Floor, The Royals, Altrincham Road, Sharston, Manchester, M22 4BJ 8 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022
– Madrid, Spain 9 6B, rue Gabriel Lippmann, Parc d’Activité Syrdall 2, L-5365 Münsbach, Luxembourg 10 C/O Dittmar & Indrenius, Pohjoiseplanadi 25 A, 00100, Helsinki 11 100 Barbirolli Square, Manchester, M2 3AB 12 11th Floor, Two Snowhill, Birmingham, West Midlands, B4 6WR 13 44 Esplanade, St Helier, Jersey, JE4 9WG 14 Naritaweg 165, 1043 BW Amsterdam, The Netherlands 15 ul. Skaryszewska 7, 03-802 Warsaw, Poland 16 V celnici 1031/4, Nové Město, 110 00 Praha 1, Czech Republic 17 47 Esplanade, St Helier, Jersey , JE1 0BD 18 HUL House, 2nd floor, H.T. Parekh Marg, 165-166, Backbay Reclamation, Churchgate,
Mumbai – 400011, Maharashtra, India 21 Lodha Excelus, 13th Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalaxmi,
What we have audited The financial statements, included within the Annual report and accounts (the ‘Annual Report’), comprise:  The Company statement of financial position as at 31 December 2016  The Company statement of cash flows for the year then ended  The Company statement of changes in equity for the year then ended  The accounting policies  The notes to the financial statements, which include other explanatory information
ISAs (UK & Ireland) reporting Under International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’) we are required to report to you if, in our opinion, information in the Annual Report is:  Materially inconsistent with the information in the audited financial statements
 Adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us
Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ responsibilities set out on page 103, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
 The reasonableness of significant accounting estimates made by the directors
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
Stephanie Bruce (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 24 February 2017 a) The maintenance and integrity of the Standard Life plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Total retained earnings 1,351 837 Other reserves K 2,393 2,860 Total equity 4,618 4,560
The financial statements on pages 222 to 235 were approved by the Board and signed on its behalf, by the following Directors: Sir Gerry Grimstone Luke Savage Chairman Chief Financial Officer 24 February 2017 24 February 2017
Other reserves Total equity 2015 Notes £m £m £m £m £m £m
Other comprehensive income that may be reclassified subsequently to profit or loss Fair value (losses) on available-for-sale financial assets - - - - (7) (7) Loss on sale of available-for-sale financial assets recycled to profit and loss - - - - (2) (2) Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - 2 2 Total other comprehensive income/(expense) for the year that may be reclassified subsequently to profit or loss - - - - (7) (7) Total comprehensive income for the year - - - 1,090 (7) 1,083 Dividends paid on ordinary shares - - - (343) - (343)
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018 with option to defer for certain insurance entities) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. Details of the Group’s assessment of IFRS 9 are given in the basis of preparation of the Group financial statements. Management are assessing the impact of the standard in relation to the Company financial statements. The impact of the standard is not expected to be significant.
(a)(ii) Investment in subsidiaries, associates and joint ventures The Company has certain subsidiaries which are investment vehicles such as open-ended investment companies , unit trusts and limited partnerships whose primary function is to generate capital or income growth through holding investments. This category of subsidiary is held at FVTPL since they are managed on a fair value basis.
(a)(iv) Pension costs and other post-retirement benefits The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee administered funds. The pension plans are funded by payments from employees and by the Group companies, determined by periodic actuarial calculations.
The sponsoring employer for the UK defined benefit plan is Standard Life Assurance Limited (SLAL), and therefore the net defined benefit cost of the plan is recognised by SLAL. As a result, the Company treats its participation in the defined benefit plan as a defined contribution plan. Consequently the costs of this plan and the UK defined contribution plan represent the contributions payable for the accounting period.
(b) Critical accounting estimates and judgement in applying accounting policies The preparation of financial statements requires management to make estimates and assumptions and exercise judgements in applying the accounting policies that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The area where estimates and assumptions have the most significant effect on the amounts recognised in the financial statements is as follows: Financial statement area Critical accounting estimates or assumptions Related notes
Investments in subsidiaries measured at cost 4,493 4,334 Investments in subsidiaries measured at FVTPL C 276 257 Investments in subsidiaries 4,769 4,591 £m £m
On 30 January 2015 Standard Life Oversea Holdings Limited sold its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife), for a fixed consideration of CAD $4bn (£2.1bn). Following the sale, a dividend of £2,230m was paid to the Company from Standard Life Oversea Holdings Limited which resulted in an impairment in the Company’s investment in this subsidiary in 2015 of £1,345m.
Investment in associate measured at cost 10 13 Investments in associates measured at FVTPL C - 13 Investment in joint venture measured at cost 124 124 Investments in associates and joint ventures 134 150
Loans and receivables Total 2016 Notes £m £m £m £m £m
The amount of loans to subsidiaries expected to be recovered or settled after more than 12 months is £323m (2015: £322m).
Contract amount Fair value assets Fair value liabilities Contract amount Fair value assets
The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows: Within 1 year 2-5 years Total 2016 £m £m £m
Cash inflows Derivative financial assets 18 - 18 Derivative financial liabilities 22 - 22
Due from related parties 52 44 Collateral pledged in respect of derivatives contracts - 2 Other financial assets 2 2 Total receivables and other financial assets 54 48
F. Other assets Other assets of £8m (2015: £19m) comprise amounts due from related parties in respect of Group relief, which are expected to be recovered within 12 months.
Money at call and term deposits with original maturity of less than three months are subject to variable interest rates.
H. Share capital Details of the Company’s share capital are given in Note 28 of the Group financial statements.
Details of the dividends paid on ordinary shares and the 73p per ordinary share returned to the shareholders in 2015 through a ‘B/C’ share scheme by the Company are provided in Notes 15 and 28 of the Group financial statements. Note 15 also includes information regarding the final dividend proposed by the Directors for the year ended 31 December 2016.
On expiry of the claim period on 9 July 2016, the entitlement to the unclaimed shares remaining in the UAT transferred to the Company and they became classified as shares held by trusts. These shares are measured at £nil. Unclaimed shares and unclaimed cash referred to in Note J will be used to fund the charitable activities of the Standard Life Foundation.
Reserves credit for employee share-based payment schemes - 30 - - - 30 Transfer to retained earnings for vested employee share-based payments - (23) - - - (23) Cancellation of capital redemption reserve - - - (488) - (488) Fair value gains on available-for-sale financial assets - - - - 17 17 Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - (3) (3)
Transfer between reserves on disposal of subsidiary (1,028) - - - - (1,028) Loss on sale of AFS financial assets recycled to profit and loss - - - - (2) (2) Fair value losses on available-for-sale financial assets - - - - (7) (7) Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - 2 2
On 17 June 2016 the Company’s capital redemption reserve was cancelled in accordance with section 649 of the Companies Act 2006 resulting in a transfer of £488m to retained earnings.
Financial liabilities measured at amortised cost Total 2016 Notes £m £m £m
Principal amount Carrying value Principal amount Carrying value £m £m £m £m
Subordinated notes: 5.5% Sterling fixed rate due 4 December 2042 500 499 500 499
Subordinated guaranteed bonds: 6.75% Sterling fixed rate perpetual 500 502 500 502
(b) Market risk The most significant element of market risk for the Company arises from its exposure to fluctuations in interest rates and equity markets. The Company is exposed to fluctuations in the fair value of future cash flows of financial instruments caused by changes in market interest rates. Financial assets and liabilities which are subject to the most significant exposure to interest rate risk include corporate bonds and money market instruments. The Company is also exposed to fluctuations in the equity securities markets, and as a result, changes in the value of its holdings and the return on those holdings.
Equity sensitivity to market risk The Company classifies certain debt securities as available-for-sale. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Company's equity to variations in interest rate risk exposures differs from the sensitivity of the Company's profit after tax to variations in interest rate risk exposures.
The Company’s equity sensitivity to a 1% increase in interest rates is (£17m) (2015: (£16m)) and to a 1% decrease in interest rates is £17m (2015: £16m).
At 31 December 2016 and 31 December 2015, all financial assets were neither past due nor impaired.
Liquidity risk is managed through the Group liquidity and capital management policy which is outlined in Note 41 (e) of the Group financial statements. The Company is required to manage risk in accordance with the Group policy and to take mitigating action as appropriate to operate within defined risk appetites.
Liquidity risk is managed by the Company in consultation with the central Group Treasury function. Liquidity risk is primarily managed by placing limits on the value of financial assets held which are neither quoted nor regularly traded on a recognised exchange and by maintaining a portfolio of committed bank facilities. In May 2015, the Company reduced its syndicated revolving credit facility which it held as part of its contingency funding plans, to £400m (from £500m) in line with a lower risk profile following the sale of the Canadian business. In 2016 the maturity date of this facility was extended for a further year to 2021 and it is currently undrawn. The Company is also responsible for the definition and management of the contingency funding plan which operates on a continuous basis and is fully documented.
(d)(i) Maturity analysis A cash flow analysis by remaining contractual maturities for subordinated liabilities (all of which are issued by the Company) is included in the shareholder business section of Note 41(e)(i) of the Group financial statements. Other financial liabilities have a contractual maturity of within 1 year.
(b) Indemnities and guarantees Under the trust deed in respect of the Group’s UK defined benefit pension plan, Standard Life Employee Services Limited (SLESL), the principal employer, must pay contributions to the pension plan as the trustees’ actuary may certify necessary. The Company has guaranteed the obligations of SLESL to the UK defined benefit pension plan for a period of 15 years from 10 July 2006, which gave rise to a liability of £nil at 31 December 2016 (2015: £nil).
Due from related parties: Subsidiaries 60 63 Loans to subsidiaries 323 322
(b) Compensation of key management personnel The Directors and key management personnel of the Company are considered to be the same as for the Group. Information on both Company and Group compensation paid to Directors and key management personnel can be found in Note 48 of the Group financial statements and the audited section of the Directors’ remuneration report. Information on transactions with/from and balances from/to key management personnel and their close family members can also be found in Note 48 of the Group financial statements. Details of the employee share-based payment schemes operated by the Company are given in Note 47 of the Group financial statements.
(b) Fair value hierarchy for financial instruments measured at fair value in the statement of financial position The following table sets out an analysis of financial assets and liabilities measured at fair value by level of the fair value hierarchy.
Investments in subsidiaries at FVTPL 201 200 75 57 - - 276 257 Investment in associate at FVTPL - 13 - - - - - 13
There were no significant transfers between level 1 and level 2 in the year. During the year, there were no disposals (2015: none) of level 3 securities. There is no significant sensitivity of level 3 financial instruments measured at fair value in relation to changes in key assumptions.
(c) Fair value of financial assets and liabilities measured at amortised cost The fair value of subordinated liabilities is set out in Note 43(e) of the Group financial statements.
We have presented below reconciliations from these APMs to the most appropriate measure prepared in accordance with IFRS.
Operating profit Operating profit is a key APM used by our management to evaluate performance.
Operating profit before tax from continuing operations 723 665 Underlying adjustments Operating assumption changes (42) (44) Shareholder support to the German with profits business - 9 Underlying performance from continuing operations 681 630 236 Standard Life 2016
Underlying cash generation This is an APM which presents a shareholder view of underlying cash earnings. Underlying cash generation adjusts underlying performance for certain non-cash items as set out below. It provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to shareholders. The IFRS consolidated statement of cash flows includes policyholder cash flows, and therefore does not present a shareholder view, and does not exclude underlying adjustments and non-operating items.
Operating profit before tax from continuing operations 723 665 Underlying adjustments (42) (35) Underlying performance from continuing operations 681 630 Associates and JVs adjustment (a) (60) (44) Current tax on underlying performance (b) (106) (114) DAC/DIR adjustment (c) (2) 5 Fixed and intangible assets adjustment (d) (11) (18) Underlying cash generation 502 459
Further details on the reconciling items between underlying performance and underlying cash generation are included below.
Total current tax attributable to continuing operations 11 (333) (222) Current tax expense attributable to policyholders’ returns 264 168 Current tax credit relating to non-operating profit items (44) (68) Current tax expense attributable to underlying adjustments 7 8 Current tax on underlying performance (106) (114)
Amortisation of deferred acquisition costs 17 96 124 Acquisition costs deferred during the period 17 (51) (83) Amortisation of deferred income 38 (61) (63) Fee income deferred during the period 38 15 25 Adjustments for HWPF and GWPF DAC/DIR not included in shareholder view (1) 2 DAC/DIR adjustment (2) 5
Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA is an APM reported by Standard Life Investments, which is commonly used by asset management businesses to measure profitability and therefore provides useful information on operating performance. EBITDA for Standard Life Investments adjusts operating profit by removing net interest expense, depreciation and amortisation.
Interest, depreciation and amortisation (12) (10) Operating profit before tax from continuing operations 383 342 Share of associates’ and joint ventures’ tax expense (11) (11) Total non-operating items (50) (53) Total tax expense (63) (53) Profit for the year attributable to equity holders of Standard Life plc 259 225 11.2 Financial ratios We also use a number of financial ratios to help assess our performance and these are also not defined under IFRS. Details of our main financial ratios and how they are calculated are presented below.
Operating return on equity Operating return on equity is a measure that highlights our ability to generate operating profit relative to our shareholder capital. Operating return on equity represents the annualised post-tax operating profit expressed as a percentage of the opening IFRS equity, adjusted for time apportioned dividends paid to equity holders.
Fee revenue yield (bps) The average revenue yield on fee based business is a measure which illustrates the average margin earned on the assets that we administer. It is calculated as a rolling 12 month fee based revenue divided by a rolling 12 month monthly average AUA.
Fee based revenue (£m) 680 624 664 631 Average fee based assets under administration (£bn)1 129.4 119.0 115.2 106.2 Fee revenue yield (bps) 53 52 58 59 1 Excludes AUA from conventional with profits for the UK Pensions and Savings business and HDFC Asset Management for Standard Life Investments.
As an investment company, AUA and net flows are key drivers of shareholder value.
Bond reported within Europe growth fee. 3 Certain products are included in both Pensions and Savings growth AUA and Standard Life Investments growth AUM. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments. Comprises £18.4bn (2015: £17.9bn) related to growth channel business eliminations and £0.6bn (2015: £0.5bn) related to other consolidation/eliminations.
4 Market and other movements includes £0.8bn relating to stake increase in HDFC Life in April 2016. 5 Other comprises Assets that do not generate revenue from products of £8.9bn (2015: £7.7bn) and Other corporate assets of £2.3bn (2015: £2.7bn).
Third party strategic partner life business 43.8 0.2 (5.0) (4.8) 0.6 39.6
Associate and joint venture life businesses 2.1 0.4 (0.2) 0.2 - 2.3 1 Platform AUA (Wrap, Elevate and Fundzone) of £26.5bn comprises £24.4bn reported within UK Retail and £2.1bn relating to Wrap International Bond reported within Europe growth fee. 2 Certain products are included in both Pensions and Savings growth AUA and Standard Life Investments growth AUM. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments. Comprises (£17.9bn) related to growth channel business eliminations and (£0.5bn) related to other consolidation/eliminations.
3 Other comprises Assets that do not generate revenue from products of £7.7bn and Other corporate assets of £2.7bn.
Opening AUM at 1 Jan 2016 Gross flows Redemptions Net flows
Strategic partner life business AUM 122.7 4.7 (9.5) (4.8) 16.1 134.0
Opening AUM at 1 Jan 2015 Gross flows Redemptions Net flows
Closing AUM at 31 Dec 2015 £bn £bn £bn £bn £bn £bn
(£11.1bn), By asset class: Fixed income (£5.3bn), Multi-asset (£0.2bn), Real estate (£1.7bn) and Other (£3.9bn), By channel: Institutional (£9.8bn) and Wholesale (£1.3bn). 2 Comprises absolute return strategies, enhanced diversification strategies, risk-based portfolios and traditional balanced portfolios. 3 Comprises cash, private equity, liquidity funds and Wealth. Net inflows from India cash funds £0.4bn (2015: £0.6bn), net inflows from liquidity funds of £0.3bn (2015: £0.7bn).
India and China Other Eliminations1 Total 31 December 2016 £bn £bn £bn £bn £bn £bn
Assets not generating revenue from products - 8.9 - - - 8.9 Associate and joint venture businesses 10.6 - 4.0 - - 14.6
Assets not generating revenue from products - 7.7 - - - 7.7 Associate and joint venture businesses 7.0 - 2.3 - - 9.3 1 In order to be consistent with the presentation of new business information, certain products are included in both Standard Life Investments AUA and other segments. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
12. Reports from the Committees of Standard Life Assurance Limited and the Standard Life Master Trust Co. Ltd.
12.1 Report from the With Profits Committee of Standard Life Assurance Limited Whilst the management of its with profits business is the direct responsibility of the board of Standard Life Assurance Limited (SLAL), FCA regulations require that a with profits firm’s governance arrangements should make provision for independent judgement and advice. The SLAL board has established a With Profits Committee (WPC) for this purpose.
Clifton Melvin, Chairman, With Profits Committee of Standard Life Assurance Limited
Membership All members of the WPC are independent of Standard Life. Their attendance at WPC meetings was: Member Attendance
Clifton Melvin, Chairman 10/10 Graham Aslet 10/10 Ross Ainslie1 10/10 Finula Cilliers2 9/9 1 Ross Ainslie was appointed for a second term in June 2016. 2 Finula Cilliers was appointed as a member of the WPC in March 2016.
SLAL has had a WPC since demutualisation. Its role is to monitor and advise the SLAL board on the management of with profits business, providing independent judgement on the fair treatment of with profits policyholders, and to take a proactive role in raising any issues that merit further consideration. The committee reviews all proposals that are material to the interests of SLAL’s with profits policyholders. The committee has the authority to engage external advisers and has engaged Nick Dumbreck, an actuary from Milliman LLP, to routinely provide the members with advice. The Chairman has a right of access at all times to the Chairman of the Risk and Capital Committee but saw no requirement during the year to exercise this right.
Service – the WPC regularly reviews with profits customer complaints data and has been pleased to note the continuation of an improving trend. The WPC visited the Customer Hub to understand how pensions freedoms are applied to the customer experience from a digital and telephony perspective. Following SLAL’s decision to close the German With Profits Fund to new business in 2015 and subsequent restructuring to improve efficiency, the WPC has had detailed briefings on the management of the with profits business there, and in 2016, held one of its meetings in the branch office in Germany. The committee has noted that the reduction in numbers of complaints has been especially pronounced in Germany.
Capital and risk management During the year the WPC approved a number of proposals to manage the finances of the with profits funds and to control risks appropriately. These included revision of the scenarios for testing investment risk, adjusting Equity Backing Ratios and other allocations of the assets directly backing with profits policies, reviewing the effectiveness of hedging strategies, and setting distribution rates for the Inherited Estate The HWPF was set up at demutualisation with surplus referred to as an Inherited Estate. Its primary role is to provide a cushion against the possibility that the assets set aside to cover the liabilities of the HWPF prove insufficient and to meet any unforeseen liabilities.
Regulatory and governance Principles and Practices of Financial Management (PPFM) The WPC sought and obtained assurance that the with profits businesses in the UK have been managed in accordance with the published PPFM.
Investments The WPC receives quarterly presentations from Standard Life Investments on the performance of the with profits funds. The committee noted recent slippage in the performance of some asset classes and challenged their performance. The committee also advised SLAL on the actions that are being taken to reverse this and maintain strong long-term performance.
Conclusion Looking back on 2016, the WPC concluded that:  �The management of SLAL’s with profits business has paid due regard to its duty to treat its with profits policyholders fairly and to meet their reasonable benefit expectations
 �The UK Smoothed Managed With Profits Fund and the HWPF PPFMs have been complied with
12. Reports from the Committees of Standard Life Assurance Limited and the Standard Life Master Trust Co. Ltd. continued 12.2 Report from the Independent Governance Committee of Standard Life Assurance Limited During 2016, the Independent Governance Committee (IGC) published their first annual report. The IGC acts solely in the interests of scheme members by providing credible and effective challenge on the value for money of workplace personal pension schemes.
In their first report, the IGC concluded that Standard Life does provide value for money for workplace schemes.
By way of reminder, Independent governance committees have been established as a response to:  �The market review undertaken in 2013 by the Office of Fair Trading which identified that competition was not having the expected impact in improving value for policyholders in workplace pension schemes and that change was required to ensure that they received Value for Money
The IGC intends to meet as often as necessary to fulfil its obligations. During 2016, as the IGC fulfilled the commitments they outlined in their first report, the committee has met 12 times.
Rene Poisson, Chairman 12/12 Richard Butcher 11/12 Ingrid Kirby 12/12 Roger Mattingly 12/12 Michael Craig (non-independent member) 12/12
The Head of Pensions Strategy routinely attends these meetings and the Managing Director for Corporate, Retail and Wholesale has had regular interactions with the committee. The committee’s routine formal interaction with the SLAL board is by the minutes of its meetings. The directors of SLAL and of the Company have an open invitation to attend any of the committee meetings. Minutes of the committee meetings are submitted to the Board. In May 2016, the committee chairman attended a meeting of the Standard Life plc Board to present the findings from the IGC’s first report.
12.3 Report from the Standard Life Master Trust Co. Ltd During 2015, Standard Life Master Trust Co. Ltd (SLMTC) was established as a subsidiary of SLAL. Its role is to act as trustee and to work in the interests of members of the Standard Life Defined Contribution Master Trust and Stanplan A pension schemes, both of which are trust based schemes designed for multiple employers.
Similar to the IGC, SLMTC has a duty to assess whether members of these schemes are receiving good value. Alongside their trustee duties they are following a similar programme to the IGC to carry out this assessment.
The SLMTC board intends to meet at least four times a year and as often as necessary to fulfil its obligations. During its second year the board of SLMTC has met six times.
Richard Butcher, Chairman 6/6 Rene Poisson 6/6 Stella Girvin 6/6 Ruston Smith 6/6 Francois Barker 6/6
Good value In the first chairman’s statement published in July 2016, it was concluded that Standard Life’s Defined Contribution and Stanplan A Master Trusts offer good value.
Looking ahead to 2017 A key focus for the board is the impact of the Pension Schemes Bill and the changes to come in the months ahead.
13. Glossary Annuity A periodic payment made for an agreed period of time (usually up to the death of the recipient) in return for a cash sum. The cash sum can be paid as one amount or as a series of premiums. If the annuity commences immediately after the payment of the sum, it is called an immediate annuity. If it commences at some future date, it is called a deferred annuity.
Assets under administration (AUA) AUA is a measure of the total assets we administer. It includes Standard Life Investments assets under management (AUM), as well as those assets that the Group administers where the customer has made a choice to select an external third party investment manager.
Capital management Capital management is a component of operating profit and relates to the return from the net assets of the shareholder business, net of costs of financing. This includes the net assets in defined benefit staff pension plans and net assets relating to the financing of subordinated liabilities. The measure excludes short-term fluctuations in investment return.
Cost/income ratio This is an efficiency measure that is calculated as operating expenses divided by operating income on a rolling 12 month basis, and includes the share of associates’ and joint ventures’ profit before tax.
Fee based business/revenue Fee based business is a component of operating profit and is made up of products where we generate revenue primarily from asset management charges (AMCs), premium based charges and transactional charges. AMCs are earned on products such as SIPP, corporate pensions and mutual funds, and are calculated as a percentage fee based on the assets held. Investment risk on these products rests principally with the customer, with our major indirect exposure to rising or falling markets coming from higher or lower AMCs.
Fee revenue yield (bps) The average revenue yield on fee based business is a measure that illustrates the average margin being earned on the assets that we administer. It is calculated as a rolling 12 month fee based revenue divided by a rolling 12 month monthly average AUA.
 �Impairment of intangible assets acquired in business combinations  �Profit or loss arising on the disposal of a subsidiary, joint venture or associate  �Amortisation of intangibles acquired in business combinations and fair value movements in contingent consideration  �Items which are one-off in nature and which, due to their size or nature, are not indicative of the long-term operating performance of the business
Spread/risk margin Spread/risk margin is a component of operating profit and reflects the margin earned on spread/risk business. This includes net earned premiums, claims and benefits paid, net investment return using longterm assumptions and reserving changes. Spread/risk margin excludes the impact of economic assumption changes, which are not included in determining operating profit.
Standard Life Investments Wholesale Standard Life Investments Wholesale sell retail products through wholesale distributors including third party fund supermarkets, global financial institutions and private banks.
Strategic executive committee Responsible for the day-to-day running of the business and comprises; Chief Executive, Chief Executive – Life Insurance, Chief Executive – Pensions and Savings, Chief Financial Officer, Chief Investment Officer, Chief Operating Officer, Chief People Officer, Chief Risk Officer, General Counsel and the Global Client Director.
Third party (excluding strategic partner life business) A measure of the assets that Standard Life Investments manages on behalf of individual customers and institutional clients, for which it receives a fee. This measure excludes the assets that are managed on behalf of strategic partners in life assurance books.
14. Shareholder information Registered office Standard Life House 30 Lothian Road Edinburgh EH1 2DH Scotland
Shareholder services We offer a wide range of shareholder services. For more information, please:  ��Contact our registrar, Capita, on 0345 113 0045* if calling from the UK. International numbers can be found on the next page.
 ��Voting instructions for the Annual General Meeting will be sent to you electronically
# These figures include the Company-sponsored nominee – the Standard Life Share Account –
Germany and Austria phone +49 (0)69 97533 030 email fragen@standardlifeshares.de visit www.standardlifeshareportal.com/de mail Standard Life Aktionarsservice Postfach 2705 36243 Niederaula Germany
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