Some participating contracts are issued by a non-participating fund with a with profits investment element then transferred to a with profits fund within SLAL falling within the scope of the PRA’s realistic capital regime. The with profits investment element of such contracts is measured as described above. Any liability for insurance features retained in the non-participating fund is measured using the gross premium method applicable to non-participating contracts (see policy (v)(ii)).
Canada The Group’s policy for measuring liabilities for participating contracts issued by overseas subsidiaries is to apply the valuation technique used in the issuing entity’s local statutory or regulatory reporting. Therefore, for participating contracts issued by The Standard Life Assurance Company of Canada (SLCC), the Canadian regulatory valuation technique is applied, under which for most participating business the value of participating policy liabilities is set equal to the value of the assets set aside in a separate fund for this business, unless this is insufficient to cover guaranteed benefits, in which case a higher liability is recognised.
• The recourse cash flows are recognised as they emerge as an addition to equity holders’ profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German branch business, they are recognised as an addition to equity holders’ profits.
Present value of future profits (PVFP) on non-participating contracts held in a with profits fund For with profits funds falling within the scope of the PRA’s realistic capital regime, an amount is recognised for the PVFP on non-participating contracts where the determination of the realistic value of liabilities for with profits contracts in that with profits fund takes account of this value directly or indirectly. The amount is recognised as a deduction from liabilities. Where this amount can be apportioned between an amount recognised in the realistic value of with profits contract liabilities and an amount recognised in UDS, the apportioned amounts are reflected in the measurement of participating contract liabilities and UDS
(w) Non-participating investment contract liabilities Unit linked non-participating investment contracts are separated into two components being an investment management services component and a financial liability. All fees and related administrative expenses are deemed to be associated with the investment management services component (refer to policies (g)(iv), (k)(iii) and (bb)). The financial liability component is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised in staff costs and other employee-related costs when they are due.
Contingent assets are disclosed if the inflow of economic benefits is probable, but not virtually certain.
(ee) Dividend distribution Final dividends on share capital classified as equity instruments are recognised in equity when they have been approved by equity holders. Interim dividends on these shares are recognised in equity in the period in which they are paid.
The Group has not entered into any material finance lease arrangements as either lessor or lessee.
For cash-settled share-based payment transactions, services received are measured at the fair value of the liability. The fair value of the liability is remeasured at each reporting date and any changes in fair value are recognised in the consolidated income statement.
For equity-settled share-based payment transactions, the fair value of services received is measured by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date, which is the date that the Group and the employees have a shared understanding of the terms and conditions of the award. If that award is subject to an approval process then the grant date is the date when that approval is obtained. Market vesting conditions and non-vesting conditions, such as the requirement of employees to save in a save-as-you-earn scheme, are included in the calculation of the fair value of the instruments at the date of grant. Vesting conditions which are not market conditions are included in assumptions about the number of instruments that are expected to vest.
Cancellations of awards granted arise where non-vesting conditions attached to the award are not met during the vesting period. Cancellations are accounted for as an acceleration of vesting and the remaining unrecognised expense in respect of the fair value of the award is recognised immediately.
(hh) Derecognition and offset of financial assets and liabilities A financial asset (or a part of a group of similar financial assets) is derecognised where: • The rights to receive cash flows from the asset have expired • The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement • The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
(ii) Securities lending agreements The Group undertakes securities lending agreements under which securities are loaned to third parties. Where they do not meet the criteria for derecognition under IAS 39 Financial Instruments: Recognition and Measurement, the loaned securities are not derecognised and continue to be classified in accordance with the Group’s policy. The collateral received from securities borrowers typically consists of debt securities. Non-cash collateral arising from securities lending arrangements is only recognised on the consolidated statement of financial position where the criteria for recognition is met.
Notes to the Group financial statements 1. Group structure (a) Composition The following diagram is an extract of the Group structure at 31 December 2014 and gives an overview of the composition of the Group.
1 Standard Life Financial Inc. (and its subsidiaries) and Standard Life Investments Inc. were sold on 30 January 2015. Refer to Note 51 – Events after the reporting date.
Country of incorporation or residence % of interest held1 Nature of business
Standard Life Assurance Limited Scotland 100 Life assurance Standard Life Investments (Holdings) Limited Scotland 100 Holding company Standard Life Investments Limited Scotland 100 Investment management Standard Life (Mauritius Holdings) 2006 Limited Mauritius 100 Holding company Standard Life Oversea Holdings Limited Scotland 100 Holding company Standard Life Employee Services Limited Scotland 100 Support services Standard Life Pension Funds Limited Scotland 100 Life assurance Standard Life Savings Limited Scotland 100 Investment management Standard Life European Private Equity Trust plc2,3 Scotland 54 Investment trust Standard Life International Limited Ireland 100 Life assurance The Standard Life Assurance Company of Canada4 Canada 100 Life assurance Standard Life Mutual Funds Ltd4 Canada 100 Collective investment products Standard Life Investments (Mutual Funds) Limited Scotland 100 Collective investment products Standard Life Investments (Corporate Funds) Limited Scotland 100 Collective investment products SLTM Limited Scotland 100 Collective investment products Standard Life Client Management Limited Scotland 100 Direct sales Standard Life Wealth Limited Scotland 100 Investment management Ignis Investment Services Limited Scotland 100 Investment management Standard Life (Asia) Limited Hong Kong 100 Life assurance Vebnet (Holdings) Limited England 100 Holding company 1 All issued share capital of the Company’s principal subsidiaries is classified as ordinary. 2 Standard Life European Private Equity Trust plc is a listed entity over which the Group is considered to have control. Due to the nature of this entity it is not included in the structure diagram above. 3 Indicates the entity has had a different reporting date to the Group but has been consolidated consistently at 31 December 2014. 4 Indicates the entity was disposed of as part of the sale of Standard Life Financial Inc. and Standard Life Investments Inc. on 30 January 2015. Refer to Note 51 –
The acquisition of Ignis complements Standard Life Investments’ strong organic growth and strengthens its strategic positioning. It deepens its investment capabilities, broadens Standard Life Investments’ third party client base and reinforces its foundation for building a business in the rapidly developing liability aware market.
A price adjustment mechanism was included in the terms of the sale and purchase agreement. This mechanism applies to withdrawals of certain Phoenix Group assets under management (AUM) acquired through the business combination. If AUM is withdrawn under certain circumstances, and outwith the expected run-off profile of the assets, then the seller will repay part of the purchase consideration to SLIH for a period of up to ten years from acquisition. This mechanism is considered a contingent consideration asset which was recognised at fair value at the acquisition date. The repayments are received quarterly in arrears and no payments have been received from the seller at 31 December 2014. The value of the contingent consideration asset at 31 December 2014 is £20m. The potential amount receivable under this contingent consideration arrangement is between £nil and £205m.
The amount of revenue and profit contributed to the Group’s consolidated income statement for the year ended 31 December 2014 from the acquired business was £73m and £1m respectively. The profit of £1m is after restructuring costs of the acquired business since acquisition and excludes amortisation and impairment of customer-related intangible assets arising on consolidation. Operating profit before tax contributed to the Group’s operating profit from continuing operations for the year ended 31 December 2014 was £36m.
Prior year acquisition On 27 September 2013, Standard Life Wealth Limited (SLW), a wholly owned subsidiary of the Company acquired the private client division of Newton Management Limited. The consideration transferred of £76m included £31m of contingent consideration, of which a liability with a fair value of £15m remained at 31 December 2013. The liability was settled in full in the year to 31 December 2014 by a cash payment of £14m. The movement in fair value of £1m has been included in other income in the consolidated income statement.
Other This primarily includes the group corporate centre and related activities.
Discontinued operations: Canada The operations in Canada provide long-term savings, investment and insurance solutions to individuals, and group benefit and retirement plan members. The Canadian business was sold on 30 January 2015.
Dubai The operations in Dubai provided a range of savings and investment products. The closure of this business was announced in November 2014.
(b) Reportable segments – Group operating profit, revenue and asset information IFRS 8 Operating Segments requires that the information presented in the financial statements is based on information provided to the ‘Chief Operating Decision Maker’. The Chief Operating Decision Maker for the Group is the executive team.
The key performance metrics of the Group include operating profit before tax and assets under administration (AUA), which are analysed below by reportable segment.
A number of changes have been made to the financial information provided to the executive team in the year to 31 December 2014 and as a result to the Group’s segmental reporting as follows: • In November 2013, the Group announced that the results of Standard Life Wealth Limited (SLW) would be managed and reported as part of the Standard Life Investments segment from 1 January 2014. As a consequence, the results of SLW are now presented within the Standard Life Investments segment. Previously this business was managed as part of the UK and Europe segment.
• On 3 September 2014, the Group announced the disposal of its Canadian business. As a consequence, the results of this business have been presented as discontinued operations. Previously the results of Standard Life Financial Inc. were reported and managed as a separate segment (Canada) and the Standard Life Investments Inc. business was reported and managed as part of the Standard Life Investments segment. Withholding tax in relation to dividends received from the Canadian business previously reported as operating tax in the other segment, has also been included in discontinued operations.
• Institutional pension business managed by Standard Life Investments but legally written by the UK business has previously been reported in both the Standard Life Investments and UK and Europe segments with the inter-segment transactions and balances removed through eliminations. In 2014, it was agreed by management that to allow a more meaningful presentation of revenue, expenses and AUA for each segment, institutional pension business would be removed from the UK and Europe results and only presented within Standard Life Investments. The UK and Europe results and the eliminations have therefore been adjusted with no impact on the Group results. This change reduces UK and Europe fee based revenue and maintenance expenses but there is no impact on UK and Europe operating profit.
3. Financial information – Notes to the Group financial statements continued 2. Segmental analysis continued (b) Reportable segments – Group operating profit, revenue and asset information continued Comparative amounts for the year ended 31 December 2013 have been prepared on the same basis as 31 December 2014 to allow more meaningful comparison.
Income statement and asset information is presented by reportable segment in the tables that follow.
As described beneath the pro forma reconciliation of consolidated operating profit to profit for the year, operating profit is considered to present an indication of the long-term operating performance of the Group. Operating profit is the key measure utilised by the Group’s management in their evaluation of segmental performance and is presented by reportable segment.
Operating profit/(loss) before tax 257 390 19 (62) - 604 131 735 Tax on operating profit (51) (43) (1) 13 - (82) (42) (124) Share of associates’ and joint ventures' tax expense
Operating profit/(loss) after tax 199 347 20 (49) - 517 89 606
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes 14 1 29 (2) (13) - 15 73 88 Restructuring and corporate transaction expenses 10 (51) (51) - (7) - (109) (31) (140)
Impairment of intangible assets 16 (43) - - - - (43) (4) (47) Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters 14 - - - - - - - -
Profit for the year 380 127 507 1 Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations.
Each operating segment reports total income as its measure of revenue in its analysis of operating profit. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes.
Operating profit/(loss) before tax 197 375 - (66) - 506 245 751 Tax on operating profit (41) (47) - 11 - (77) (64) (141) Share of associates’ and joint ventures' tax expense
Short-term fluctuations in investment return and economic assumption changes 14 1 (11) (2) (10) - (22) (70) (92) Restructuring and corporate transaction expenses 10 (13) (48) (5) (5) - (71) (2) (73)
Total non-operating items (12) (64) (7) (17) - (100) (87) (187) Tax on non-operating items 2 12 1 4 - 19 32 51 Dubai included in discontinued operations segment1
Profit/(loss) for the year attributable to equity holders of Standard Life plc 139 276 (12) (68) - 335 131 466 Profit attributable to non-controlling interests
Profit for the year 365 131 496 1 Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations. 2 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
3. Financial information – Notes to the Group financial statements continued 2. Segmental analysis continued (b) Reportable segments – Group operating profit, revenue and asset information continued (b)(ii) Total income The following table provides a reconciliation of total income from continuing operations, as presented in the analysis of Group operating profit by segment, to total revenue, as presented in the consolidated income statement: restated1 £m £m Fee based revenue 1,433 1,256 Spread/risk margin 183 162 Total income from continuing operations as presented in the analysis of Group operating profit by segment 1,616 1,418 Dubai included in discontinued operations segment2 4 - Consolidation adjustments 125 228 Tax movement attributable to policyholder returns 250 222 Net insurance benefits and claims 3,856 4,593 Change in reinsurance assets and liabilities (60) 741 Change in insurance and participating contract liabilities 3,834 (1,495) Change in unallocated divisible surplus (71) (40) Change in non-participating investment contract liabilities 5,362 10,047 Expenses under arrangements with reinsurers 639 61 Change in liability for third party interest in consolidated funds 758 829 Non-operating items 1 43 Other 274 169 Total revenue from continuing operations as presented on the consolidated income statement 16,588 16,816 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Consolidation adjustments mainly relate to amounts attributable to third party interest in consolidated funds which are included in total revenue in the consolidated income statement but excluded from total income. Non-operating items are the adjustments that relate to total income which reconcile operating profit to profit for the year as shown in the analysis of Group operating profit by segment in Note 2(b)(i). (b)(iii) Total expenses The following table provides a reconciliation of total operating expenses, as presented in the analysis of Group operating profit by segment, to total expenses, as presented in the consolidated income statement: 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period and the classification in the current year of the Group’s Canadian business as discontinued operations. Refer to Group accounting policies – (a) Basis of preparation and Note 12 – Discontinued operations.
Discontinued operations Total 31 December 2014 £bn £bn £bn £bn £bn £bn £bn £bn
Other 1 Total assets per consolidated statement of financial position 204 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.
3. Financial information – Notes to the Group financial statements continued 2. Segmental analysis continued (b) Reportable segments – Group operating profit, revenue and asset information continued (b)(iv) Analysis of assets under administration by segment continued
UK 12,740 14,535 Rest of the world 3,848 2,281 Total 16,588 16,816 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
SLAL – Insurance and investment contracts issued before demutualisation The liabilities and associated supporting assets for contracts, both participating and non-participating, issued prior to demutualisation are mostly held in the HWPF except for (i) the assets and corresponding liabilities for unit linked investment elements of such contracts, and (ii) the supporting assets and associated liabilities for longevity risk and investment risk on certain annuity contracts. The assets and associated liabilities for these two contract components are held in the PBF. Asset management charges arising on unit linked investment elements are transferred from the PBF to HWPF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit linked investment element or a with profits investment element are held in the HWPF. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element or a with profits investment element are also held in the HWPF.
Standard Life International Limited The UK and Europe reportable segment also contains the International Bond issued by Standard Life International Limited (SLIL) to UK residents. Note (b)(i) contains a description of the fund structure operated by SLIL.
(a)(ii) Asia and Emerging Markets The entities in the Asia and Emerging Markets reportable segment that issue insurance and investment contracts, other than joint ventures, are SLIL and Standard Life (Asia) Limited (SLA). These entities operate 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 nonunit linked fund.
(b)(i) UK and Europe – Insurance and investment contracts issued since demutualisation UK annuity-in-payment contracts (spread/risk business) This class of business consists of single premium contracts that provide guaranteed annuity payments. The payments depend on the survival of a life or lives with or without a guaranteed period and may reduce on a specified death or increase each year at a predefined rate or based on the movement in UK RPI. These contracts are classified as non-participating insurance contracts.
The total liability at 31 December 2014 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £373m (2013: £320m) and this represents approximately 9% (2013: 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 42(b), then the impact on shareholder equity from these RPI linked annuities and corresponding assets is not significant.
The International Bond is issued by SLIL to UK residents. It is a single premium whole of life investment bond. The customer has the option to invest in unit linked funds offered by SLIL 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 last life assured an additional benefit of 0.1% of the surrender value is paid unless the death is accidental when an additional benefit of 10% of the surrender value is paid subject to a £1m cap. These contracts are 144 Standard Life
(b)(ii) UK and Europe – Insurance and investment contracts issued before demutualisation and related reinsurance contracts
When setting payout levels, the Group seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain.
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) UK and Europe – Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued 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.
All conventional with profits contracts are classified as participating insurance contracts.
The significant options and guarantees under these contracts are the following: • Contracts where, subject to specified conditions, it is guaranteed on death and maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity • For bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits.
SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF with Canada Life International Re (the reinsurer). In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 42(c) on credit exposure and Note 6 – Expenses under arrangements with reinsurers for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.
For those annuities in payment which increase at a predefined rate the total liability at 31 December 2014 is £3,127m (2013: £2,977m) and this represents approximately 33% (2013: 32%) of the total liability for UK annuity in payments contracts held within the HWPF.
For those annuities which increase at a predefined rate, the total liability at 31 December 2014 is £595m (2013: £652m) and these represent approximately 15% (2013: 16%) of the total liability for Canadian annuity-in-payment contracts. The liability for annuities
For CPI-linked annuities, a 1% increase in the CPI would increase liabilities by £29m (2013: £65m). However, inflation risk on these annuities is mitigated by investments in assets linked to inflation.
In addition, on all Perspecta policies the value of the investment account may increase on guaranteed terms at specified policy anniversaries. The level of increase depends upon various conditions, including when the contract was effected.
Dividend income 1,840 1,660 Gains/(losses) on financial instruments at fair value through profit or loss
Associates (other than dividend income) 100 226 Equity securities (other than dividend income) 1,522 10,844 Debt securities 6,086 (195) Derivative financial instruments 2,243 1 9,951 10,876
Impairment losses recognised on loans - (1) Foreign exchange gains/(losses) on instruments other than as at fair value through profit or loss 26 (18) Income from investment property
Investment return from continuing operations 13,179 13,334 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Interest payable on deposits from reinsurers 32 33 Premium Adjustments 607 28 Expenses under arrangements with reinsurers from continuing operations 639 61
Standard Life Assurance Limited (SLAL), a wholly owned subsidiary of the Company, has reinsured a portfolio of annuity contracts held within its Heritage With Profits Fund (HWPF) with Canada Life International Re (the reinsurer), a reinsurer not related to the Company. The reinsurance treaty contains the requirement for the payment or receipt of Premium Adjustments, a term defined in the treaty, to ensure that the investment risk on the ring fenced pool of assets falls on the reinsurer. They are calculated periodically under the treaty as the difference between the value of the ring fenced assets and the deposit amount. If the Premium Adjustment is payable to the reinsurer, the reinsurer is required to deposit a corresponding amount into the deposit. If the Premium Adjustment is payable to SLAL, a corresponding amount is repaid from the deposit. Accrued interest and accrued Premium Adjustments are presented in deposits received from reinsurers on the consolidated statement of financial position.
Defined benefit plans 24 15 39 25 16 41 Defined contribution plans 15 3 18 11 4 15
Total average number of staff employed 8,335 8,224 1 Includes staff employed by Standard Life Investments Inc. which is a discontinued operation. 2 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 71 to 102.
Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated financial statements 0.3 - 0.3 0.3 - 0.3
Fees payable to the Company’s auditors for other services The audit of the Company’s consolidated subsidiaries pursuant to legislation 3.3 1.1 4.4 2.8 1.5 4.3 The audit of funds not consolidated in the Group’s financial statements 0.6 0.3 0.9 0.6 0.2 0.8
The increase in Other assurance services for continuing operations is due to 2014 including Solvency 2 related assurance services. For more information on non-audit services, refer to the Report from the Chairman of the Audit Committee in the Corporate governance report.
During the year, the Group incurred audit fees in respect of the UK staff defined benefit plan of £48,500 (2013: £44,400).
In December 2014 the Group announced that the UK staff defined benefit pension plan would be closed to future accrual effective April 2016. All employees in the closing plan will be transferred to the UK defined contribution plan and employer contributions into the defined contribution plan will be amended. Following this restructuring of the pension plans, operating profit from continuing operations for the year ended 31 December 2014 has been increased by £15m so that operating profit reflects the expected long term annual pension expense and is therefore more indicative of the long term operating performance of the Group. As a result £15m of pension costs that are included in staff costs in the consolidated income statement for the year ended 31 December 2014, are included in restructuring and corporate transaction expenses in determining operating profit from continuing operations.
3. Financial information – Notes to the Group financial statements continued 10. Restructuring and corporate transaction expenses continued The table below reconciles restructuring and corporate transaction expenses incurred from continuing operations with restructuring and corporate transaction expenses used to determine operating profit from continuing operations.
Tax expense from continuing operations 292 280 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
The standard rate of corporation tax in the UK changed from 23% to 21% with effect from 1 April 2014. Accordingly, the Group’s UK profits for this accounting period are subject to tax at a rate of 21.5%. The Finance Act 2013 further reduced the UK corporation tax rate to 20% with effect from 1 April 2015. This has been applied in calculating the UK deferred tax position at 31 December 2014.
Attributable to equity holders’ profits 42 58 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
In 2014 and 2013, no unrecognised tax losses from previous years were used to reduce current tax expense. Unrecognised losses and timing differences of £10m were used to reduce the deferred tax expense (2013: £4m).
(b) Tax relating to components of other comprehensive income Tax relating to components of other comprehensive income from continuing operations is as follows: £m £m
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss - 2
Tax relating to each component of other comprehensive income from continuing operations 6 (1) 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
(c) Tax relating to items taken directly to equity 2014 2013
Expenses Claims and benefits paid 1,121 1,141 Claim recoveries from reinsurers (29) (39) Net insurance benefits and claims 1,092 1,102 Change in reinsurance assets and liabilities (36) (58) Change in insurance and participating contract liabilities 1,548 175 Change in non-participating investment contract liabilities 1,403 1,845 Administrative expenses
Total tax expense 61 32 Less: Tax attributable to policyholders’ returns - - Tax expense attributable to equity holders’ profits 61 32 Profit for the year from discontinued operations 127 131
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 5 (11)
Total items that may be reclassified subsequently to profit or loss (1) (55)
(c) Cash flows from discontinued operations Net cash flows attributable to operating, investing and financing activities of discontinued operations are as follows: Net cash flows from operating activities 117 257
Profit attributable to equity holders of Standard Life plc (£m) 503 466
The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 12 million (2013: 16 million).
(c) Alternative earnings per share Earnings per share is also calculated based on operating profit before tax as well as on the profit attributable to equity holders of Standard Life plc. The Directors believe that earnings per share based on operating profit provides a more useful indication of the long-term operating business performance of the Group.
Share of associates’ and joint ventures’ tax expense (5) (0.2) - -
Short-term fluctuations in investment return and economic assumption changes (22) (1.0) (70) (3.0) Restructuring and corporate transaction expenses (71) (3.0) (2) (0.1) Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters - - (15) (0.6) Other (7) (0.3) - -
Total non-operating items (100) (4.3) (87) (3.7) Tax on non-operating items 19 0.9 32 1.3 Dubai included in discontinued operations segment1 (6) (0.3) 6 0.3 Profit attributable to equity holders of Standard Life plc 335 14.2 131 5.5 1 Dubai business, the closure of which was announced in November 2014, is included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Dubai was previously included in Asia and Emerging Markets. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations.
Discontinued operations 2014 £m p per share £m p per share
3. Financial information – Notes to the Group financial statements continued 13. Earnings per share continued (c) Alternative earnings per share continued (c)(ii) Diluted alternative earnings per share continued
Discontinued operations 2013 £m p per share £m p per share
Adjusted for the following items Short-term fluctuations in investment return and economic assumption changes (22) (0.9) (70) (3.0)
Operating profit is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. As a result, the components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected investment returns, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from operating profit and disclosed separately within the heading of short-term fluctuations in investment return and economic assumption changes.
Short-term fluctuations in investment return and economic assumptions changes The expected rates of return for debt securities, equity securities and property are determined separately for each of the Group’s operations and are consistent with the expected rates of return as determined under the Group’s published European Embedded Value (EEV) methodology. The expected rates of return for equity securities and property, with the exception of the Canadian operations, are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium or property risk premium, respectively. The expected rates of return on equity securities and property for Canadian operations are determined by the Appointed Actuary in Canada.
The principal assumptions, as set at the start of the year, in respect of gross investment returns underlying the calculation of the expected investment return for equity securities and property are as follows: 2014 2013 UK Canada UK Canada % % % %
For the year ended 31 December 2014, short-term fluctuations in investment return and economic assumption changes resulted in gains of £15m (2013: £22m losses) from continuing operations and gains of £73m (2013: £70m losses) from discontinued operations. Short-term fluctuations in investment return relate principally to the investment volatility in Canada non-segregated funds and UK annuities, and in respect of the Group’s subordinated liabilities and assets backing those liabilities.
Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters As set out in accounting policy (v)(ii) the Group’s Canada insurance contract liabilities are measured according to CALM. That valuation includes an allowance for the difference between the undiscounted deferred taxes recognised under IAS 12 Income Taxes relating directly to the insurance contract liabilities and the discounted value of those deferred taxes.
Subsequent to 31 December 2014, the Directors have proposed a final dividend for the year ended 31 December 2014 of 11.43p per ordinary share, an estimated £224m in total. The dividend will be paid on 19 May 2015 to shareholders on the Company’s register as at 10 April 2015, subject to approval at the Annual General Meeting on 12 May 2015. The dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2015.
Refer to Note 51 – Events after the reporting date for details of the proposed return of value to shareholders in 2015.
3. Financial information – Notes to the Group financial statements continued 16. Intangible assets
During 2014, subsequent to the acquisition of Ignis, there was a significant change in the management structure of the Absolute Return Government Bond Fund, which makes up the majority of the institutional client contracts cash-generating unit carrying value at 31 December 2014. This has resulted in outflows of assets under management and reduced projections of inflows and revenue, with a consequential fall in the recoverable amount of this cash-generating unit. The recoverable amount of the institutional client contracts cash-generating unit at 31 December 2014 is £44m which is its value in use. The discount rate used to calculate value in use at 31 December 2014 was 14%. The most significant judgements used in determining the recoverable amount are estimated net flow projections for the next five years and forecasted operating profit margins. The useful economic lives of the intangible assets is between 10 and 15 years and therefore the projected cash flows used to determine value in use cover a period of longer than five years. The impairment loss of £43m recognised during the year to 31 December 2014 relates to this decrease in recoverable amount.
As a result of the impairment testing carried out, no goodwill was considered to be impaired at 31 December 2014 or 31 December 2013.
At 31 December 771 905 1 Additions during the year ended 31 December 2013 includes £19m in respect of discontinued operations. 2 The amortisation charge for the year ended 31 December 2013 includes £10m in respect of discontinued operations. 3 The impairment charge for the year ended 31 December 2013 includes £nil in respect of discontinued operations.
The amount of deferred acquisition costs expected to be recovered after more than 12 months is £676m (2013: £772m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £460m (2013: £607m).
18. Investments in associates and joint ventures 2014 2013 Notes £m £m
Investments in associates and joint ventures accounted for using the equity method 242 267
Country of incorporation and registration India 2014 2013 31 December £m £m
The reporting date for HDFC Asset Management Company Limited is 31 March as this is its year end date. This is different from the Group’s year end date of 31 December. There is no quoted market price for the investment in HDFC Asset Management Company Limited.
Share of post-tax profit from continuing operations 100 226 Share of post-tax profit from discontinued operations - (7) Share of other comprehensive income - - Share of total comprehensive income 100 219
Insurance Company Country of incorporation and registration India China 2014 2013 2014 2013 £m £m £m £m
The Group’s interest in the HDFC Standard Life Insurance Company Limited has been built up over time to its current level of 26%. The difference between the carrying value of this joint venture and the Group’s current share of net assets is due to additional investments being made at fair value rather than book value.
At 1 January 8,606 8,626 Reclassified as held for sale during the year (1,297) (92) Additions – acquisitions 823 539 Additions – subsequent expenditure 210 134 Net fair value gains2 4 825 323 Disposals (128) (806) Foreign exchange adjustment (14) (109) Other 16 (9) At 31 December 9,041 8,606
The fair value of investment property can be analysed as: Freehold 6,421 6,257 Long leasehold 2,558 2,285 Short leasehold 62 64 9,041 8,606 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation. 2 Net fair value gains for the year ended 31 December 2013 includes £46m in respect of discontinued operations.
The rental income arising from investment property during the year from continuing operations amounted to £450m (2013: £446m), which is included in investment return as set out in Note 4 – Investment return. Direct operating expenses (included within other administrative expenses) from continuing operations arising in respect of such rented property during the year amounted to £73m (2013: £88m).
The methods and assumptions used to determine fair value for investment property and property under development are discussed in Note 44 – Fair value of assets and liabilities.
The Group has reclassified all investment property in Canada as held for sale at 31 December 2014. In Canada, property with a value higher than CA$50m is externally appraised every quarter, property with a value between CA$10m and CA$50m is externally appraised twice a year while property with a value lower than CA$10m are externally appraised once a year, with valuations evenly distributed throughout the year. Property not subject to an external appraisal at a quarter end is reviewed in light of the market information provided by the other external appraisals and an internal adjustment is estimated.
Later than one year and no later than five years 1,344 1,400
Total operating lease receivables 5,310 4,637 1 Total operating lease receivables at 31 December 2013 includes receivables in respect of the Canadian business which have been reclassified as held for sale during the year ended 31 December 2014. Refer to Note 27 – Assets and liabilities held for sale.
3. Financial information – Notes to the Group financial statements continued 20. Property, plant and equipment Owner occupied property Equipment Total Notes £m £m £m
IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Movements in net deferred tax liabilities comprise: Reclassified as held for sale (74) -
Amounts credited directly to equity in respect of employee share-based payment schemes 5 8
Transfer to current tax for vested employee share-based payment schemes (6) (9)
At 31 December (181) (57) 1 Included in amounts charged to the consolidated income statement for the year ended 31 December 2013 is a credit of £4m in respect of discontinued operations. 2 Included in amounts (charged)/credited to components of other comprehensive income for the year ended 31 December 2013 is £11m in respect of discontinued operations.
Deferred tax assets and liabilities are netted off to the extent that legal offset is available under local tax law. A deferred tax asset of £10m (2013: £49m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investments. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against anticipated taxable profits and gains based on business plans. The losses do not have an expiry date.
Derivative financial assets 24 - 4,012 - - 8 1 4,021 Equity securities and interests in pooled investment funds 42 71,327 - - - - - 71,327
Debt securities 42 64,085 - 356 - - - 64,441 Receivables and other financial assets 25 20 - - 1,228 - - 1,248
Total 154,695 1,937 683 14,355 54 - 171,724 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Loans with variable rates and fixed interest rates are £84m and £316m respectively (2013: £170m and £2,754m respectively). Loans that are expected to be recovered after more than 12 months are £169m (2013: £2,468m).
(b) Net investment hedges The Group hedges part of the currency translation risk of net investments in foreign operations using forward foreign exchange contracts. Forward foreign exchange contracts with a notional principal amount of £1,107m (2013: £883m) and a net liability position of £4m (2013: £54m net asset) were designated as net investment hedges and gave rise to gains for the year of £15m (2013: £63m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2014, the losses recognised in the consolidated income statement were £6m (2013: £5m). No amounts were withdrawn from equity during the year (2013: £nil), as there were no disposals of foreign operations.
(c) Held for trading Derivative financial instruments classified as held for trading include those that the Group holds as economic hedges of financial instruments that are measured at fair value. Held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.
3. Financial information – Notes to the Group financial statements continued 24. Derivative financial instruments continued (d) Maturity profile continued Within years 11-15 years
Greater than 20 years Total 2013 (restated)1 £m £m £m £m £m £m £m
Other assets 307 272 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Amounts seeded into funds classified as held for sale relate to seed capital provided to newly established funds which the Group is actively seeking to divest from and it is highly probable that the capital provided will be returned within 12 months. These are included in the Group’s Standard Life Investments reportable segment. The underlying assets of seeded funds consist primarily of equity securities and interests in pooled investment funds. There are no significant liabilities in seeded funds. All movements in the fair value of seeded funds are recognised in investment return in the consolidated income statement.
Derivative financial assets - 44 - - - 44 Equity securities and interests in pooled investment funds
Insurance contracts Other Total 2014 Notes £m £m £m £m £m £m Liabilities of operations held for sale
Deposits received from reinsurers - - - - - - Third party interest in consolidated funds 953 - -
Money at call and short notice 2,201 887 Demand, term deposits and debt instruments with less than three months to maturity from acquisition 7,666 8,684
Cash and cash equivalents classified as held for sale 27 709 -
Total cash and cash equivalents for consolidated statement of cash flows 11,243 10,253 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
29. Share capital and share premium (a) Share capital The movement in the issued ordinary share capital of the Company during the year was: 2014 2014 2013 2013 Issued shares of 10p each fully paid Number £m Number £m
Shares issued in respect of share options 17,469,894 1 18,354,952 2
(b) Share premium The premium arising on shares issued during the year was £5m (2013: £nil) and relates to share options exercised in respect of the Sharesave scheme.
30. Shares held by trusts Shares held by trusts at 31 December 2014 of (£1m) (2013: £6m) comprises £3m (2013: £10m) in relation to the Employee Share Trust (EST) offset by a £4m (2013: £4m) credit in relation to the Unclaimed Asset Trust (UAT).
Shares held by trusts also include shares held by the UAT. The shares held by the UAT are those not yet claimed by the eligible members of The Standard Life Assurance Company (SLAC) following its demutualisation on 10 July 2006. The corresponding obligation to deliver these shares to eligible members of SLAC is also included in the shares held by trusts reserve. During 2010, the UAT gifted 2,304,345 shares to charity which resulted in a decrease in the number of shares held by the trust with no corresponding decrease in the obligation to deliver these shares. As a result there is a net credit balance in the shares held by trust reserve in respect of the UAT. The number of shares held by the UAT at 31 December 2014 was 21,143,650 (2013: 24,859,996).
3. Financial information – Notes to the Group financial statements continued 31. Retained earnings The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.
Transfer from equity compensation reserve for vested employee share-based payments 32 27 33
Transfer to retained earnings on sale of owner occupied property 32 4 -
32. Movements in other reserves The following table shows the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.
At 1 January 25 - 153 39 (25) 3,108 53 241 (2,100) 1,494 Recognised in other comprehensive income Fair value gains on cash flow hedges - 3 - - - - - - - 3
Net investment hedge - - - 15 - - - - - 15 Fair value gains on availablefor -sale financial assets - - - - 49 - - - - 49 Revaluation of owner occupied property 3 - - - - - - - - 3 Exchange differences on translating foreign operations - - (49) - - - - - - (49)
With profits funds: associated UDS movement recognised in equity (4) - 6 - - - - - - 2
Merger Reserve: On demutualisation of The Standard Life Assurance Company (SLAC), the demutualisation shares issued by the Company qualified for merger relief under section 131 of the Companies Act 1985 (which has now been superseded by section 612 of the Companies Act 2006). The difference between the issue value and nominal value of the demutualisation shares was transferred to the merger reserve. Following the dividend in specie, £1,872m of merger reserves attached to the demutualisation shares was replaced with merger relief on the ordinary shares of the operating subsidiaries acquired by the Company. On disposal of Standard Life Healthcare Limited during 2010, £86m of the merger relief was realised and transferred from the merger reserve to retained earnings.
3. Financial information – Notes to the Group financial statements continued 32. Movements in other reserves continued Reserve arising on Group reconstruction: On demutualisation of SLAC, the value of the demutualisation shares issued was equal to the fair value of the assets and liabilities of the Group. Merger accounting principles were applied to the demutualisation transaction and therefore all assets and liabilities were transferred at their book value at the time of demutualisation in the consolidated financial statements. The reserve arising on Group reconstruction represents the difference between the fair value and book value of the assets and liabilities of the Group at the time of demutualisation of SLAC on 10 July 2006 adjusted for amounts that have been released to retained earnings on the disposal of entities since that date.
Special reserve: On 21 July 2006 the Court of Session confirmed a £500m reduction in the share premium account of the Company. Following the reduction, a special reserve was created for the same amount. The special reserve forms part of the Company’s distributable profits for the purpose of section 830 of the Companies Act 2006. The total amount of dividends paid during the year was £386m (2013: £656m), of which £nil (2013: £20m) has been treated as a deduction from the special reserve.
Fair value losses on available-for-sale financial assets - - - - (32) - - - - (32) Revaluation of owner occupied property 68 - - - - - - - - 68 Exchange differences on translating foreign operations - - (120) - - - - - - (120)
With profits funds: associated UDS movement recognised in equity (48) - 4 - - - - - - (44)
Dividends and distributions - - - - - - - (20) - (20) Aggregate tax effect of items recognised directly in equity - - - - - - (1) - - (1)
Included in non-controlling interests of £278m (2013: £333m) is £190m (2013: £201m) of non-controlling interests of Standard Life European Private Equity Trust plc (SLEPET) which is considered material to the Group. Non-controlling interests own 46% (2013: 48%) of the voting rights of SLEPET. The profit allocated to non-controlling interests of SLEPET for the year ended 31 December 2014 is £2m (2013: £16m). Dividends paid to non-controlling interests of SLEPET during the year ended 31 December 2014 were £4m (2013: £2m).
Statement of financial position: Income statement: Profit after tax 28 34
Non-participating contract liabilities 135,325 125,971 Less: Non-participating contract liabilities classified as held for sale (25,277) - 110,048 125,971
Participating contract liabilities 31,980 30,447 Less: Participating contract liabilities classified as held for sale 27 (704) - 31,276 30,447
Non-economic assumptions of £73m net of reinsurance includes decreases of £30m in respect of changes to mortality assumptions and £35m in respect of changes to expense assumptions.
3. Financial information – Notes to the Group financial statements continued 34. Insurance contracts, investment contracts and reinsurance contracts continued
Life 2.69% 3.75% Pensions 2.69% 3.75% Linked to RPI (0.72%) (0.15%)
Life 2.20% 3.35% Pensions: reinsured externally 2.15% 3.05% Pensions: not reinsured externally 2.55% 3.60% Deferred annuities 2.55% 3.60%
Linked to RPI Linked to RPI: reinsured externally (0.80%) (0.30%) Linked to RPI: not reinsured externally (0.90%) (0.50%) Deferred annuities linked to RPI (1.95%) (0.50%)
Group after vesting (business written after 10 July 2006) Males: 111.1% RMV00 Males: 111.3% RMV00
The SLAL parameterisation of the CMI_2013 model makes the following changes relative to the ‘core’ model: • Blends period improvements between ages 60 to 80 to the long-term improvement rate over a 15 year period (compared with a 20 year period in the core CMI model) • Assumes that cohort improvements dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model).
Expenses The assumptions for future policy expense levels are determined from the Group’s recent expense analyses. No allowance has been made for potential expense improvement and the costs of projects to improve expense efficiency have been ignored. The assumed future expense levels incorporate an annual inflation rate allowance of 3.61% (2013: 4.00%) for UK business derived from the expected RPI implied by current investment yields and an additional allowance for earnings inflation.
In calculating the liabilities for unitised regular premium non-participating insurance contracts, the administration expenses are assumed to be identical to the expense charges made against each policy. Similar assumptions are made, where applicable, in respect of mortality, morbidity and the risk benefit charges made to meet such costs. Withdrawals For non-participating insurance business appropriate allowances are made for withdrawals on certain term assurance contracts.
Mortality tables used 2014 2013 1. Assurances Perspecta Universal Life and Term Life 65%-121% of base table (where base table is 67-72% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2015)
Participating and non-participating life, closed to new business 66%-94% of CIA 97-04 72%-99% of CIA 97-04 internally developed projection scale CAN1921-2004 M/F (2015)
(d) Movement in components of unallocated divisible surplus (UDS) The movement in UDS was as follows: 2014 2013 £m £m
Financial liabilities measured at amortised cost Total 2014 Notes £m £m £m £m £m Non-participating investment contract liabilities 42 88,203 - - 4 88,207
Financial liabilities measured at amortised cost Total 2013 (restated)1 Notes £m £m £m £m £m Non-participating investment contract liabilities 42 95,267 - - 2,392 97,659
Third party interest in consolidated funds 42 16,058 - - - 16,058
The amount of borrowings expected to be settled after more than 12 months is £8m (2013: £23m). Included within bank overdrafts of £33m (2013: £69m) is £nil (2013: £26m) relating to unpresented cheques.
Subordinated guaranteed bonds 6.75% Sterling fixed rate perpetual £500,000,000 502 £500,000,000 502
Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. On 6 January 2015 the Company redeemed in full the 5.314% Euro fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000. Accrued interest of £15m relating to these securities was also settled. The principal amount of all other subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on the remaining subordinated liabilities, which are not classified as held for sale, of £37m (2013: £56m) is expected to be settled within 12 months.
The bonds are perpetual securities and as such have no fixed redemption date. However, the bonds are redeemable at par at the option of the Company on 12 July 2027 and on every fifth anniversary thereafter. If the bonds are not redeemed on 12 July 2027, the interest rate payable will be reset to 2.85% over the gross redemption yield on the appropriate five year benchmark gilt on the reset date. The Company can elect to defer the payment of interest on the bonds. Interest will accrue on any interest deferred at the then current rate of interest on the bonds. Any interest deferred becomes immediately due and payable on: the date of declaration or payment of dividends, interest or other payment in respect of any pari passu ranking securities or securities that rank junior to the bonds; the date any of the securities are purchased by the Company, SLAL or a subsidiary of the Company; the date fixed for any payment under a guarantee that ranks junior to the bonds; the date of any redemption or purchase of bonds; or the commencement of winding up of the Company or SLAL.
3. Financial information – Notes to the Group financial statements continued 37. Subordinated liabilities continued claims of all senior creditors of SLAL including policyholders. The MACS are perpetual securities and as such have no fixed redemption date. The Sterling denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 6.546% per annum payable annually in arrears on 6 January each year, commencing on 6 January 2006. The Euro denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 5.314% per annum payable annually in arrears on 6 January, commencing on 6 January 2006.
38. Pension and other post-retirement benefit provisions The Group operates post-retirement defined benefit and defined contribution plans for staff employed by the Group.
As a result of the agreement announced by the Group on 3 September 2014 to sell its Canadian business, the Group will no longer operate a defined benefit and defined contribution plan for employees in Canada. All assets and liabilities relating to the defined benefit plan have been included in the sale and reclassified as held for sale for the year ended 31 December 2014.
In December 2014, following a consultation with employees, the Group announced that the UK staff defined benefit pension plan would be closed to future accrual effective April 2016. From April 2016, all UK employees will accrue a pension through an enhanced defined contribution plan.
The Trustees of the UK defined benefit plan set the investment strategy to protect the funding ratio of the Trustees’ funding position. The funding position is a Trustee measure that reflects the amount of assets required to pay future benefits and it is this position that determines contributions that the Group pays into the plan. Whilst the IAS 19 surplus of the UK scheme has increased significantly over 2014 the funding ratio has remained comparatively stable.
The 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, after consulting with the employer, prepare statements of funding and investment principles and, based on the funding valuation, set out future contributions in a schedule of contributions including a recovery plan, if needed, to restore funding to the level of the technical provisions. No recovery plan is currently required.
At the 31 December 2010 triennial actuarial valuation the plan was 102% funded on the Trustees’ technical provisions basis. The 31 December 2013 triennial valuation is ongoing and is expected to conclude in early 2015.
In December 2014 the Group announced that the contribution rate will be increased in April 2016 to 12% plus a further employer contribution (matching employee contributions) of up to 4%. Separate arrangements exist for some employees e.g. those in the executive job family.
The defined benefit pension plan for employees in Canada closed to new entrants on 31 December 2013 but remains open to future accrual, providing a pension based on final average earnings and years of service.
Additional unfunded pension and post-retirement medical benefits are also provided to senior employees.
Expected contributions to the plans in 2015 are as follows: Defined benefit Defined
(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: Notes £m £m
3. Financial information – Notes to the Group financial statements continued 38. Pension and other post-retirement benefit provisions continued (b) Analysis of amounts recognised in the consolidated statement of financial position
UK Other Total Canada1 UK Other Canada Total £m £m £m £m £m £m £m £m
Fair value of plan assets 3,990 62 4,052 214 2,992 60 192 3,244
Effect of limit on plan surplus (414) - (414) - (233) - - (233)
The UK plan surplus is considered to be recoverable as a right to a refund exists. The surplus has been reduced by 35% to reflect an authorised surplus payments charge that would arise on a refund and an additional small deferred tax adjustment.
Gain from change in demographic assumptions (56) - (56) - (56)
Total assets measured at fair value based on level 1 inputs 2,497 1,850 49 51 146 134 2,692 2,035
Equity securities and interests in pooled investment funds 92 54 - - - - 92 54
(f) Risk (f)(i) Risks and mitigating actions The Group’s consolidated statement of financial position is exposed to movements in the defined benefit plans’ net asset. In particular, the consolidated statement of financial position could be materially sensitive to reasonably likely movements in the principal assumptions for the UK. By offering post-retirement defined benefit pension plans the Group is exposed to a number of risks. An explanation of the key risks and mitigating actions in place is given below.
Yields/discount rate Falls in yields would in isolation be expected to increase the defined benefit plan liabilities and the cost of defined benefit accrual.
Inflation Rises in inflation expectations would in isolation be expected to increase the defined benefit plan liabilities and the cost of defined benefit accrual.
The UK plan (the Group’s dominant post-retirement defined benefit 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.
(f)(ii) Sensitivity to principal assumptions The sensitivity of the UK defined benefit plan’s net assets to the principal assumptions is disclosed below. 2014 2013
Amortised to the consolidated income statement as fee income 2 5 (66) (73)
3. Financial information – Notes to the Group financial statements continued 40. Other financial liabilities 2014
Cash collateral held in respect of derivative contracts 42 1,847 778
Other financial liabilities 3,690 2,510 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
At 31 December 1 18 19 1 Charged/(credited) to the consolidated income statement for the year ended 31 December 2013 includes £nil of additional provisions and £nil of release of unused provisions in respect of discontinued operations.
The Group’s risk management activities support the creation of long-term value by ensuring well-informed risk-reward decisions are taken in pursuit of the Group’s business plan objectives and by ensuring capital is delivered to areas where most value can be created for the risks taken.
Market The risk that arises from the Group’s exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.
Credit The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.
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 Section 1.5 of the Strategic report.
Risk segments The assets and liabilities on the Group’s consolidated statement of financial position can be split into four categories (risk segments) which give the shareholder different exposures to the risks listed previously. These categories are: Shareholder business Shareholder business refers to the assets and liabilities to which the shareholder is directly exposed. For the purposes of this Note, the shareholder refers to the equity holders of the Company.
SLAL = Standard Life Assurance Limited SLIH = Standard Life Investments (Holdings) Limited SLCC = The Standard Life Assurance Company of Canada SLIL = Standard Life International Limited SLA = Standard Life (Asia) Limited SLI Inc. = Standard Life Investments Inc. SLS = Standard Life Savings Limited SLCM = Standard Life Client Management Limited
2 Related to SLIL’s International Bond business. 3 Related to SLIL’s business excluding International Bond business. 4 For the purposes of this table, Dubai business is included in Asia and Emerging Markets and not Discontinued operations as it does not meet the definition of a discontinued operation under IFRS 5 nor are its assets and liabilities classified as held for sale at 31 December 2014.
The table below sets out how the shareholder is exposed to market, credit, demographic, expense and liquidity risk at the reporting date, arising from the assets and liabilities of the four risk segments: Risk Shareholder business Participating business Unit linked and segregated funds
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are borne by the policyholder. The shareholder’s exposure arises from the changes in the value of future fee based revenue earned on unit linked and segregated funds due to market movements. Further information on this exposure is provided in the EEV financial statements.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are expected to be borne by the policyholder. The shareholder’s exposure is limited to changes in the value of future fee based revenue earned on unit linked and segregated funds due to market movements. Further information on this exposure is provided in the EEV financial statements.
The shareholder is exposed to longevity and mortality risk on annuity contracts held by UK and Europe, and mortality risk on contracts held in non-participating funds by UK and Europe and Asia and Emerging Markets including those containing insurance features that are invested in unit linked or segregated funds or in the GWPF or GSMWPF. The shareholder is also exposed to expenses and persistency being different from expectation on these contracts.
The shareholder is exposed to demographic and expense risk arising on components of a unit linked or segregated fund contract, but it is not the assets or liabilities of the fund which gives rise to this exposure.
Third party interest in consolidated funds and non-controlling interests Total restated £m £m £m £m £m £m £m £m £m £m
Investments in associates and joint ventures 260 288 535 354 3,568 1,089 145 53 4,508 1,784
Pension and other post-retirement benefit assets 760 432 - - - - - - 760 432
Total assets 21,080 18,944 50,863 48,470 113,876 104,838 17,780 16,888 203,599 189,140 Non-participating insurance contract liabilities 5,276 9,172 10,753 11,124 5,812 8,016 - - 21,841 28,312
Non-participating investment contract liabilities 4 2,392 - - 88,203 95,267 - - 88,207 97,659
Pension and other post-retirement benefit provisions 44 104 - - - - - - 44 104
Liabilities of operations held for sale 8,725 - 858 - 17,492 - 958 - 28,033 -
(b)(i) Elements of market risk The main elements of market risk to which the Group is exposed are equity and property risk, interest rate risk and foreign currency risk, which are discussed on the following pages. As a result of the diversity of the products offered by the Group and the different regulatory environments in which it operates, the Group employs a range of methods of asset and liability management across its business units.
In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £19m (2013: £nil) and investments in associates at FVTPL of £16m (2013: £19m). The participating business has interests in pooled investment funds of £92m (2013: £5m), and investments in associates at FVTPL of £535m (2013: £354m).
(b)(i)(ii) Group exposure to property risk The Group is subject to property price risk due to changes in the value and return on holdings in investment property. This risk arises from: • Direct property holdings in the shareholder business and the Group defined benefit pension funds • 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 • The indirect impact from changes in the value of property held in funds from which management charges are taken.
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.
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (b) Market risk continued (b)(i) Elements of market risk continued The tables below show the shareholder and participating businesses’ direct exposure to investment property analysed by country and sector.
Shareholder business Office Industrial Retail Other Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m
The shareholder and participating business exposure to investment property in Canada has been significantly reduced by the sale of the Group’s Canadian business on 30 January 2015. Information on the shareholder and participating business’ exposure to property markets due to the assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f).
Shareholder business Under the Group’s risk management 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.
(b)(i)(iv) Foreign currency risk The Group’s financial assets are generally held in the local currency of its operational geographic locations, principally to assist with the matching of liabilities. However, foreign currency risk arises where financial assets are held in other currencies, for example to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The Group manages this risk through the use of limits on the amount of foreign currency risk that is permitted.
The shareholder’s exposure arising from cash flow hedges of Canadian dollars relates to foreign exchange forward contracts transacted to hedge Canadian dollars due to be received from the sale of the Canadian business.
During 2014 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 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.
Standard Life Investments 3 (3) 7 (7) - - - - - - Asia and Emerging Markets: Deferred acquisition costs - - - (1) - - - - - - Assets backing non-participating insurance contract liabilities - - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - - - Non-participating investment contract liabilities - - - - - - - - - -
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (b) Market risk continued (b)(ii) Sensitivity to market risk analysis continued
Equity markets Property markets Interest rates 2013 +10% -10% +20% -20% +10% -10% +20% -20% +1% -1% Increase/(decrease) in profit after tax of continuing operations £m £m £m £m £m £m £m £m £m £m Shareholder business UK and Europe: Assets backing non-participating liabilities - - - - - - - - (436) 530 Non-participating insurance contract liabilities - - - - - - - - 420 (510) Non-participating investment contract liabilities - - - - - - - - - -
Participating business UK and Europe: Total 6 (6) 10 (14) - - - - (40) 48 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement.
Other’s equity sensitivity to a 1% increase in interest rates is (£15m) (2013: (£16m)) and to a 1% decrease in interest rates is £15m (2013: £16m). The sensitivity of the Group’s total equity from continuing operations to a 1% increase in interest rates is (£53m) (2013: (£58m)) and a 1% decrease in interest rates is £45m (2013: £66m).
(c) Credit risk As described in the table on pages 195 to 196, 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.
Portfolio limits are set by individual business units. These limits specify the proportion of the value of the total portfolio of mortgage loans and mortgage bonds that are represented by a single, or group of related counterparties, geographic area, employment status or economic sector, risk rating and loan to value percentage.
At 31 December 2014, receivables and other financial assets of £17m (2013: £16m) were past due by less than three months and £3m (2013: £nil) were past due by three to six months.
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 2014, the financial assets of the HWPF include £5,642m (2013: £5,589m) 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.
Municipal1 Banks Other financial institutions Other corporate Other2 Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m £m £m UK 11,030 11,725 926 938 2,050 2,252 1,966 1,644 - 1 15,972 16,560 Canada 35 322 77 80 10 50 1 58 - - 123 510 Australia - - 199 160 39 62 42 19 - - 280 241 Austria 240 212 8 27 - - - - - - 248 239 Belgium 381 590 16 15 - - 16 21 - - 413 626 Denmark 5 6 10 17 - - 32 30 - - 47 53 Finland 83 77 57 102 - 25 5 6 - - 145 210 France 1,641 1,645 473 260 19 150 375 314 - - 2,508 2,369 Germany 2,996 2,244 440 298 114 153 214 202 - - 3,764 2,897 Greece - - - - - - - - - - - - Ireland 1 1 6 10 10 11 13 15 - - 30 37 Italy 3 6 31 17 13 69 138 128 - - 185 220 Japan 20 22 295 210 - - 10 11 - - 325 243 Mexico - - - - - - 64 56 - - 64 56 Netherlands 358 255 228 212 46 40 31 29 - - 663 536 Norway 18 66 16 67 - 12 72 58 - - 106 203 Portugal - - - - - - 3 - - - 3 - Russia - - - - - - 7 8 - - 7 8 Spain 8 4 8 24 - - 62 82 - - 78 110 Sweden 1 4 261 125 8 16 20 18 - - 290 163 Switzerland - - 182 10 35 47 56 52 - - 273 109 US 434 2 383 327 254 283 408 355 - - 1,479 967 Other 92 27 161 75 92 171 146 66 291 243 782 582 Total 17,346 17,208 3,777 2,974 2,690 3,341 3,681 3,172 291 244 27,785 26,939 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada. 2 This balance primarily consists of securities held in supranationals.
(c)(ii) Credit spreads As at 31 December 2014, 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 on continuing operations of £24m (2013: £16m). A further reduction of £39m (2013: £35m) 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 derivative financial instruments 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 derivative financial instruments is governed by formal bilateral agreements between the parties. The amount of collateral required by either party is calculated daily, based on the value of derivative transactions in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Any collateral moved under the terms of these agreements is transferred outright. 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 margin calculations. Furthermore, alternative collateral such as securities may be provided if acceptable to both parties.
Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 31 December 2014, the Group had pledged £202m (2013: £29m) of cash and £58m (2013: £26m) of securities as collateral for derivative financial liabilities. At 31 December 2014, the Group had accepted £1,847m (2013: £778m) of cash and £16m (2013: £191m) of securities as collateral. None of the securities were sold or repledged at the year end.
As noted in section (g), the Canadian business also enters into securities lending arrangements. These arrangements are governed by an enforceable Securities Lending Agency Agreement which is considered to be a similar arrangement to a master netting agreement.
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (d) Demographic and expense risk As described in the table on pages 195 to 196, 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.
(d)(i)(ii) Other financial risks Persistency – withdrawals and lapse rates The Group defines persistency risk as the risk that business lapses or becomes paid-up at a different rate than assumed. 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 paidup.
+5% -5% +10% -10% +10% -10% +5% -5% 2014 £m £m £m £m £m £m £m £m Shareholder business UK and Europe Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (117) 110 (7) 6 1 (1) (1) 1 Asia and Emerging Markets Deferred acquisition costs - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - Non-participating investment contract liabilities - - - - - - - - Total shareholder business (117) 110 (7) 6 1 (1) - -
+5% -5% +10% -10% +10% -10% +5% -5% 2013 £m £m £m £m £m £m £m £m Shareholder business UK and Europe Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (99) 93 (7) 8 - - (1) 1 Asia and Emerging Markets Deferred acquisitions costs - - - - (3) 3 - - Non-participating insurance contract liabilities - - - - - - - - Non-participating investment contract liabilities - - - - - - - - Total shareholder business (99) 93 (7) 8 (3) 3 - -
Participating business UK and Europe Recourse cash flows (16) 15 (5) 4 1 (1) (4) 4 Total participating business (16) 15 (5) 4 1 (1) (4) 4
Limitations The financial impact of certain risks is non-linear and consequently the sensitivity of other events may differ from expectations based on those presented in the table. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously. The analysis has been assessed as at the reporting date. The results of the sensitivity analysis may vary as a consequence of the passage of time or as a consequence of changes in underlying market or financial conditions. The sensitivity analysis in respect of longevity risk has been performed on the relevant annuity business and presents, for a +5% longevity test, the impact of a 5% reduction in the underlying mortality rates (and vice versa). It has also been based on instantaneous change in the mortality assumption at all ages, rather than considering gradual changes in mortality rate.
(e) Liquidity risk As described in the table on pages 195 to 196, the shareholder is exposed to liquidity risk from shareholder business, participating business and unit linked and segregated funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.
The shareholder is not exposed to the liquidity risk from the assets held by third parties 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 UK and Europe, the reinsurance treaty between the Group and Canada Life International Re provides for the cash settlement of amounts owed by Canada Life International Re.
For with profits contracts, a portfolio of assets is maintained in the relevant funds appropriate to the nature and term of the expected pattern of payments of liabilities. Within that portfolio, liquidity is provided by substantial holdings of cash and highly liquid assets (principally government bonds).
For non-participating unit linked contracts, a core portfolio of assets is maintained and invested in accordance with the mandates of the relevant unit linked funds. Policyholder behaviour and the trading position of asset classes are actively monitored. The unit price and value of any associated contracts would reflect the proceeds of any sales of assets. If considered necessary, deferral terms within the policy conditions applying to the majority of the Group’s contracts are invoked. As at 31 December 2014 and 31 December 2013, none of the funds under management were subject to deferral.
All business units are required to monitor, assess, manage and control liquidity risk in accordance with the relevant principles within the Group’s policy framework. Oversight is provided both at a Group level and within the business unit. In addition, all business units benefit from membership of a larger Group to the extent that, centrally, the Group: • Coordinates strategic planning and funding requirements • Monitors, assesses and oversees the investment of assets within the Group • Monitors and manages risk, capital requirements and available capital on a group-wide basis • Maintains a portfolio of committed bank facilities • Maintains a Euro Medium Term Note Programme.
Each business unit is responsible for the definition and management of its contingency funding plan.
Total unit linked and segregated funds 12,688 27,423 23,412 14,236 8,309 7,947 - 94,015
Non-participating investment contract liabilities 696 1,185 283 74 52 102 - 2,392
Non-participating insurance contract liabilities 811 2,852 2,754 1,908 1,197 1,602 - 11,124
Non-participating investment contract liabilities 7,958 26,518 23,871 15,638 9,500 11,782 - 95,267
Total participating business 1,462 639 12 7 19 7 11 7 11 7 242 121 1,757 788 Unit linked and segregated funds Non-participating investment contract liabilities 88,203 95,267 - - - - - - - - - - 88,203 95,267
Other financial liabilities 839 621 7 13 7 17 7 6 7 6 99 74 966 737 Total unit linked and segregated funds 89,063 95,904 14 22 9 20 7 6 7 6 99 74 89,199 96,032
Deposits received from reinsurers reflect the liability to repay the deposit received from an external reinsurer under the reinsurance transaction referred to in Section (c). The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty, under which there is no defined contractual maturity date to repay the deposit as at 31 December 2014 or 31 December 2013.
Refer to Note 24 – Derivative financial instruments, for the maturity profile of undiscounted cash flows of derivative financial instruments.
Assets of operations held for sale 27 9,777 858 17,661 958 29,254
Liabilities of operations held for sale 27 8,725 858 17,492 958 28,033
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (h) 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 culture, strategies, decision-making and behaviours we do not deliver fair outcomes for our customers.
Operational risk exposures are controlled using one or a combination of the following: modifying operations such that there is no exposure to the risk; accepting exposure to the risk and choosing not to control 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.
The operational risks faced by each business unit and its exposure to these risks forms its operational risk profile. Each business unit is required to understand and review its profile based on a combination of the estimated impact and likelihood of risk events occurring in the future, the results of CSA and a review of risk exposures relative to approved limits.
The impact of a new product, a significant change, or any one-off transaction on the operational risk profile of each business unit is assessed and managed in accordance with established guidelines or standards.
(a) Consolidated structured entities The Group consolidates structured entities which it controls. As at 31 December 2014, the Group has not provided any noncontractual financial or other support to any consolidated structured entity and there are no current intentions to do so.
(b)(ii) Other interests in unconsolidated structured entities The Group also has interests in structured entities through asset management fees and other fees received. For those structured entities which the Group receives asset management or other fees from but has no direct investment, the maximum exposure to loss is loss of future fees.
Total assets under management of structured entities in which the Group has no direct investments but has other interests in are £13,153m at 31 December 2014. The fees received in respect of these assets under management during the year to 31 December 2014 were £65m.
(b) Financial investments and financial liabilities An analysis of the Group’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes 22 and 35 and includes those financial assets and liabilities held at fair value.
(c) Non-financial investments An analysis of the Group’s investment property and owner occupied property within property, plant and equipment in accordance with IAS 40 – Investment property and IAS 16 – Property, plant and equipment is presented in Notes 19 and 20 respectively and includes those assets held at fair value.
Investments in associates at FVTPL are valued in the same manner as the Group’s equity securities and interests in pooled investment funds.
Where pooled investment funds have been seeded and the investments in the fund have been classified as held for sale, the costs to sell are assumed to be negligible. The fair value of pooled investment funds held for sale is calculated as equal to the observable unit price.
In UK and Europe valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RICS) valuation standards and predominantly an income capitalisation method is used. In Canada all valuations are completed in accordance with International Valuation Standards (IVS) and predominantly a discounted cash flow method is used. Both valuation techniques are income approaches as they consider the income that an asset will generate over its useful life and estimate fair value through a capitalisation process. Capitalisation involves the conversion of income into a capital sum through the application of an appropriate discount rate.
Debt securities For debt securities, the Group has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Group has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows: • Government, including provincial and municipal, and supranational institution bonds These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are categorised as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.
Contingent consideration asset and contingent consideration liability A contingent consideration asset was recognised during the year in respect of a purchase price adjustment mechanism relating to the acquisition of Ignis as discussed in Note 1 – Group structure (b) Acquisitions. The fair value of the asset has been calculated using a binominal tree model. The main inputs are management fee income and expected probabilities of payouts. These are considered unobservable and as a result the asset is classified as level 3 in the fair value hierarchy. A contingent consideration liability was also recognised as a result of business combinations in the year to 31 December 2013, and was valued using a valuation model. The inputs into the model included unobservable inputs due to assumptions made regarding expected movements in assets under management and therefore the liability was classified as level 3 in the fair value hierarchy.
3. Financial information – Notes to the Group financial statements continued 44. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued Non-participating investment contract liabilities The fair value of the non-participating investment contract liabilities is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets and liabilities in which these funds are invested. The underlying assets and liabilities are predominately categorised as level 1 or 2 and as such, the inputs into the valuation of the liabilities are observable. Therefore, the liabilities are categorised within level 2 of the fair value hierarchy.
There were no transfers between levels 1 and 2 during the year (2013: none). Refer to 44(d)(iii) for details of movements in level 3.
The table that follows presents an analysis of the Group’s assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 42 – Risk management.
Derivative financial assets 18 111 44 - 62 111 - 1 62 110 - - Equity securities and interests in pooled investment vehicles 31 172 250 19 281 191 254 183 - - 27 8
Total participating business 41,852 41,027 736 - 42,588 41,027 27,346 27,253 12,308 10,807 2,934 2,967 Unit linked and segregated funds Investments in associates at FVTPL 3,568 1,089 19 - 3,587 1,089 3,587 1,089 - - - -
Derivative financial assets 1,711 832 - - 1,711 832 458 276 1,253 556 - - Equity securities and interests in pooled investment vehicles 55,471 66,475 11,909 - 67,380 66,475 67,200 66,421 1 - 179 54
Debt securities 23,597 24,775 4,420 - 28,017 24,775 5,536 4,634 22,273 19,976 208 165 Total unit linked and segregated funds 89,570 98,001 17,164 59 106,734 98,060 76,781 72,420 23,527 20,532 6,426 5,108
Third party interest in consolidated funds and non-controlling interests Investments in associates at FVTPL 145 53 - - 145 53 145 53 - - - -
Debt securities 5,824 5,679 287 - 6,111 5,679 227 256 5,861 5,396 23 27 Third party interest in consolidated funds and non-controlling interests 14,507 14,464 936 33 15,443 14,497 7,094 7,165 6,323 5,649 2,026 1,683
3. Financial information – Notes to the Group financial statements continued 44. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(ii) Fair value hierarchy for liabilities measured at fair value in the statement of financial position The table below presents the Group's liabilities measured at fair value by level of the fair value hierarchy.
Liabilities in respect of third party interest in consolidated funds 15,805 16,058 953 -
Total participating business 80 134 - - 80 134 26 53 54 81 - - Unit linked and segregated funds Non-participating investment contract liabilities 88,203 95,267 13,734 - 101,937 95,267 - -
Third party interest in consolidated funds and noncontrolling interests Liabilities in respect of third party interest in consolidated funds 15,805 16,058 953 -
The Group recognised a contingent consideration asset during the year of £20m, in respect of the acquisition of Ignis. The fair value remained at £20m at 31 December 2014. There were no settlements during the year.
As at 31 December 2014, £625m of total gains from continuing operations (2013: £149m) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £749m gains (2013: £194m) were recognised in investment return from continuing operations and £124m losses (2013: £45m) were recognised in change in liability for liabilities in respect of third party interest in consolidated funds from continuing operations in the consolidated income statement.
• Corporate bonds are predominantly valued using single broker indicative quotes obtained from third party pricing. Sensitivities are determined by flexing the single quoted prices provided using a sensitivity to yield movements.
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 securities
3. Financial information – Notes to the Group financial statements continued 44. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(iv) Sensitivity of level 3 instruments measured as at fair value on the statement of financial position to changes in key assumptions continued 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.
Investment property and owner occupied property 1,337 Discounted cash flow Internal rate of return
923 Adjusted net asset value Adjustment to net asset value1 N/A
1,066 Adjusted net asset value Adjustment to net asset value1 N/A
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.
It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in Note 34 – Insurance contracts, investment contracts and reinsurance contracts. The carrying value of participating investment contract liabilities at 31 December 2014 was £15,193m including those classified as held for sale (31 December 2013: £14,707m).
The table below presents the instruments as detailed above measured at fair value by level of the fair value hierarchy.
(c) Non-cash items relating to investing and financing activities restated1 £m £m
46. Contingent liabilities, indemnities and guarantees (a) Legal proceedings and regulations The Group, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigation) will have a material effect on the results and financial position of the Group.
The Group is subject to insurance solvency regulations in all of the territories in which it issues insurance and investment contracts, and it has complied in all material respects with local solvency and other regulations. Therefore, there are no contingencies in respect of these regulations.
47. Commitments (a) Capital commitments As at 31 December 2014, capital expenditure that was authorised and contracted for, but not provided and incurred, was £332m (2013: £383m) in respect of investment property. Of this amount, £287m (2013: £332m) and £36m (2013: £51m) relates to the contractual obligations to purchase, construct, or develop investment property and repair, maintain or enhance investment property respectively.
Commitments to extend credit with an original term to maturity of one year or less 1 66
The future aggregate minimum lease payments under non-cancellable operating leases from continuing operations are as follows: restated1 £m £m
3. Financial information – Notes to the Group financial statements continued 48. Employee share-based payments The Group has established a number of share-based payment schemes for employees. Details of these arrangements are as follows: Share options (i) Long-term incentive plans The Group operates the following long-term incentive plans.
Expense from discontinued operations 2 3 27 32 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
The year end balances arising from transactions carried out by the Group with related parties are as follows: 2014 2013 £m £m Due from related parties
The summary of compensation of key management personnel is as follows: restated1 £m £m Salaries and other short-term employee benefits 9 8 Post-employment benefits 1 1 Share-based payments 4 5 Termination benefits - 1 Total compensation of key management personnel 14 15 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
During the year to 31 December 2014, key management personnel and their close family members contributed £1m (2013: £3m) to products sold by the Group.
3. Financial information – Notes to the Group financial statements continued 50. Capital statement Capital management policies and risk management objectives Capital can be measured on a number of different bases, which are set out in the Strategic report Section 1.3 – Chief Financial Officer’s overview. The capital statement shows capital based on definitions used for regulatory reporting purposes.
The Group’s capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities mainly comprise investment management and group corporate centre. The Group’s capital position, based on draft regulatory returns, is set out in the following table. This includes the capital position and contract liabilities of the Canadian business classified as held for sale in the consolidated statement of financial position.
3. Financial information – Notes to the Group financial statements continued 50. Capital statement continued UK regulated life business
Group total 2014 £m £m £m £m £m £m £m £m Available capital resources
Analysed as follows: Capital not subject to constraints - - 1,132 1,132 538 1,670 1,039 2,709 Capital subject to constraints 4,500 214 16 4,730 917 5,647 185 5,832 Total available capital resources 4,500 214 1,148 5,862 1,455 7,317 1,224 8,541 Restricted assets within the long-term business fund (1,172) Regulatory capital resources 7,369 Regulatory capital resources requirement 3,637 747 4,384 73 4,457 Regulatory capital surplus 2,912
Held outside life assurance funds - - 883 883 1,457 2,340 777 3,117 Held within life assurance funds - 1,110 - 1,110 - 1,110 - 1,110 Equity attributable to ordinary equity holders of Standard Life plc - 1,110 883 1,993 1,457 3,450 777 4,227
Other sources of capital Subordinated liabilities - - - - 229 229 1,632 1,861 Internal subordinated liabilities - - 1,133 1,133 - 1,133 (1,133) -
Adjustments onto regulatory basis Changes to the valuation of contract liabilities 4,159 (39) - 4,120 - 4,120 - 4,120 Exclusion of deferred acquisition costs and other inadmissible assets (58) (576) (72) (706) (243) (949) (228) (1,177) Exclusion of deferred income 72 233 - 305 1 306 - 306 Changes to the valuation of other assets and liabilities (38) (524) (181) (743) 94 (649) 251 (398) 4,135 (906) (253) 2,976 (148) 2,828 23 2,851
Total available capital resources to meet regulatory requirement 4,815 204 1,763 6,782 1,538 8,320 1,299 9,619
UK regulated life business SLAL’s regulatory solvency position is determined using the PRA’s ‘twin peaks’ approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak increases the amount of the CRR.
Capital subject to constraints for the UK regulated life business of £4,730m at 31 December 2014 (2013: £5,032m) represents capital resources held within long-term business funds, or in relation to other regulated entities, the amount of the CRR.
Intra-group transactions The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Canada, Hong Kong, India and China. The Group also provides such services in Ireland, Germany and Singapore. With the exception of the requirements of the Scheme and the intra-group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.
On an IGD basis, the estimated regulatory capital position at 31 December 2014 is a surplus of £2,912m (2013: £3,802m). The decrease in the estimated regulatory capital surplus is as a result of the acquisition of Ignis Asset Management Limited and the call of the Euro denominated 5.314% fixed/floating rate perpetual MACS.
51. Events after the reporting date 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 for a fixed consideration of CA$4bn (£2.1bn). A further £0.1bn was received from the settlement of related hedging derivative contracts.
Following the sale the Group proposes to return to shareholders 73 pence per Ordinary Share (approximately £1.75bn). This will be through an issue of B Shares and/or C Shares which is intended to enable the majority of shareholders to receive their cash proceeds as capital, income or a combination of the two. In conjunction with the return of value, the Company will undertake a share consolidation.
3. Financial information – independent Auditors’ Report on EEV financial information
Our opinion In our opinion, the EEV financial information, defined below, for the year ended 31 December 2014 has been properly prepared, in all material respects, in accordance with the EEV basis set out in Notes 1 and 12 to the EEV financial information.
The financial reporting framework that has been applied in its preparation is the EEV basis set out in Notes 1 and 12 to the EEV financial information.
Our responsibilities and those of the Directors The Directors are responsible for the preparation of the EEV financial information in accordance with the EEV basis set out in Notes 1 and 12 to the EEV financial information.
Long-term investment return and tax variances 182 - 182 212 - 212
EEV non-operating profit/(loss) after tax 165 (118) 47 336 (31) 305
EEV profit/(loss) after tax from discontinued operations 409 (17) 392 224 (20) 204
Total EEV profit/(loss) after tax 973 (39) 934 1,020 (32) 988 1 Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 – Basis of preparation. 2 Standard Life Investments non-covered EEV operating profit after tax of £115m (2013: £70m) represents operating profit after tax of £199m (2013: £149m) after excluding post-tax profits of £84m (2013: £79m) which have been generated by life and pensions covered business. Standard Life Investments operating profit after tax relating to third party business was £179m (2013: £128m).
EEV operating earnings per share (EPS1) For the year ended 31 December 2014 restated2
Weighted average number of ordinary shares outstanding for diluted earnings per share (millions) 2,396 2,378 1 Calculated using EEV operating profit after tax. 2 Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 – Basis of preparation.
Fair value gains/(losses) on non-covered business available-for-sale financial assets2 27 (18)
Total EEV comprehensive income for the year 1,163 906 1 Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 – Basis of preparation. 2 Consistent with the IFRS consolidated statement of comprehensive income. 3 Exchange differences for the year ended 31 December 2014 primarily relate to Europe (loss £42m).
Time value of options and guarantees (TVOG) (325) - (325) (100) - (100)
Approved on behalf of the Board of Directors on 20 February 2015 by the following Directors: Sir Gerry Grimstone, Chairman Luke Savage, Chief Financial Officer 242 Standard Life
1. Basis of preparation The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued by the CFO Forum of European Insurance Companies. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS) but the timing of recognition of profits is different. EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc (the Company) plus the present value of future profits expected to arise from inforce long-term insurance policies (PVIF) where these future profits are attributable to equity holders.
A detailed description of EEV methodology is provided in Note 12 – EEV methodology. There have been no significant changes to EEV methodology from that adopted in the previous reporting period, except as noted below. The sensitivities specified by the EEV Principles and Guidance are included in Note 11 - Sensitivity analysis – economic and non-economic assumptions. No sensitivities have been provided for discontinued operations.
EEV operating profit and EEV profit Until 31 December 2013, EEV operating profit and EEV profit were disclosed on both a before and after tax basis. EEV profit before tax was derived by grossing up profit after tax at the long-term rate of corporation tax appropriate for each territory. From 2014, EEV profit and related metrics (including new business contribution and EEV operating profit) are only disclosed on an after tax basis and comparative amounts have been restated. Where EEV operating profit before tax has been included within the company’s incentive arrangements, targets have been restated to an after tax basis.
Pensions Act 2014 The Pensions Act 2014 contains powers to allow the UK government to restrict charges in defined contribution workplace pensions, including a cap on management charges in default funds and the cessation of active member discounts for qualifying workplace pension schemes. The EEV results for the year to 31 December 2014 include a provision of £160m (post-tax loss) within EEV non-operating profit, representing our best estimate of the reduction in EEV that will result from these changes.
Markets Total noncovered Discontinued operations Total Pence per share 2013 £m £m £m £m £m p Opening EEV 4,103 297 1,419 2,323 8,142 343 New business contribution 198 33 - 27 258 Contribution from in-force business 170 19 - 121 310 Operating experience variances and assumption changes 24 (17) - 153 160 Development costs (19) (13) - (12) (44) Non-covered business - - 19 (20) (1) EEV operating profit after tax 373 22 19 269 683 29 EEV non-operating profit/(loss) after tax 396 5 (31) (65) 305 13 EEV profit/(loss) after tax 769 27 (12) 204 988
Non-trading adjustments (334) 5 45 (423) (707) Closing EEV 4,538 329 1,452 2,104 8,423 353
The contribution from in-force business has increased due to higher opening in-force and higher expected rates of return.
Operating variances and assumption changes of £253m, an increase of £93m from 2013, consists of a profit of £169m from continuing business and a profit of £84m from discontinued business. The profit of £169m from continuing business includes profits in UK and Europe of £116m from updated expense assumptions and £35m of favourable experience variances for persistency, mortality and expenses. The profit of £84m from discontinued business includes a profit of £93m from changes to assumptions on future income for group pensions business.
Non-trading adjustments of (£194m) include distributions to equity holders of £386m and the loss arising from exchange differences of £78m, partly offset by actuarial gains on pension schemes for staff across the Group of £272m.
EEV operating capital and cash generation 472 19 79 570 509 74 (1) 582
Total EEV capital and cash generation 468 56 (39) 485 487 (21) (32) 434
Foreign exchange differences (7) (26) - (33) (31) (84) (6) (121) Remeasurement (losses)/gains on defined benefit pension plans (41) - 313 272 24 - 77 101
PVIF generated from new business: 376 73 62 511 372 90 62 524
Total discounted 4,575 2,035 1,167 647 350 376 461 219 114 62 34 32 1 PVIF excludes TVOG and cost of required capital.
7. Reconciliation of operating profit to EEV operating capital and cash generation
EEV operating profit after tax – PVIF 165 - 22 - 130 317 EEV operating profit/(loss) after tax 569 115 34 (49) 218 887 1 Group operating profit after tax consists of: Group operating profit before tax of £735m, tax charge on operating profit of (£124m) and share of joint ventures’ and associates’ tax expense of (£5m).
DAC and DIR1, intangibles, tax and other 33 - (24) - 7 16
Present value of in-force life and pensions business net of cost of capital (5,211) (4,879)
Valuation movement in available-for-sale assets backing investment contract liabilities 5 (10)
IGD regulatory capital resources1 7,369 8,394 1 31 December 2014 based on estimated regulatory returns, 31 December 2013 based on actual regulatory returns.
UK and Europe TVOG reflects the value of shareholder exposure to the with profits policyholder guarantees. The total comprises £185m for guarantees in the HWPF and £38m for guarantees in the GWPF. The value of this exposure has increased by £168m during 2014, comprising a post-tax operating loss of £34m and post-tax non-operating loss of £134m. The operating loss includes a loss of £26m from operating assumption changes, mainly from German mortality. The non-operating loss of £134m reflects a loss of £189m from economic assumption changes, mainly due to lower yields, partly offset by a profit of £55m due to favourable market movements over the year.
TVOG in Discontinued operations and Asia and Emerging Markets, where material, is calculated using an economic scenario generator similar to that used for the UK and Europe TVOG calculation, although market observed data is not always available at all durations.
Parameters used in the economic scenario generator for UK and Europe The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. The ESG simulates future economic environments in a market consistent manner and allows option-pricing techniques to be used to value TVOG.
Dividend and rental yields Dividend yields are derived from current market observable yields (FTSE All Stocks for UK and Euro Stoxx 50 for Europe). Rental yields are derived from rental income on our actual portfolio of property (with a three month lag).
Equity-implied and Swaption-implied volatilities The implied volatility is that required in order that the price of the option calculated via the Black Scholes Formula equals the market price of that option. The model implied volatilities are set out in the following tables: Volatilities 31 December 2014 31 December 2013 UK Sterling Euro UK Sterling Euro Option term
Corporate bond returns, excluding Canada2: UK 2.65 3.76 3.76 2.34 Hong Kong 2.77 2.73 2.73 1.66
Total investment returns (annuities) : UK non index-linked annuities 3.15 * 4.26 * UK index-linked annuities 2.85 * 3.69 *
Risk discount rate: UK HWPF 5.66 5.51 7.11 4.44 UK PBF 4.46 6.31 5.41 4.84 Europe HWPF 2.44 4.64 4.74 3.82 Europe PBF 2.04 3.94 3.44 2.92 SLIL 4.66 5.81 5.21 4.04 Canada 6.53 6.16 6.56 5.02 Hong Kong 4.89 4.82 4.82 3.81
For UK, Europe and SLIL, the change in the in-force business risk margins are mainly due to a change in the allowance for nonmarket risk. The changes in the new business risk margins are primarily due to changes in business mix and asset allocations. The impact of the changes in risk discount rates has been included in non-operating assumption changes in the EEV income statement. The amounts within these totals that relate to the changes in risk discount rate are for UK and Europe: profit £432m, for Asia and Emerging Markets: loss £7m, and for Discontinued operations: profit £89m.
11. Sensitivity analysis – economic and non-economic assumptions The following table shows the sensitivity of the covered business embedded value and new business contribution to different scenarios. No sensitivities are provided for Canada since the proceeds from the sale of the Group’s Canadian operations are fixed.
The interest returns 1% higher and lower than base case scenarios include consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties. Sensitivities to lower interest rates assume minimum interest rates of zero.
Under the 10% decrease in lapse rates scenario, a 10% sensitivity on a base lapse assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.
Covered business A distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS.
3. Financial information – Notes to the EEV financial information continued 12. EEV Methodology continued Asia and Emerging Markets covered business consists of: • The Group’s business in Hong Kong (Standard Life (Asia) Limited) • International savings and investment business in Singapore and Dubai sold by SLIL • The Group’s share of results in the JVs in India (HDFC Standard Life Insurance Company Limited) and China (Heng An
Non-covered business The Group’s non-covered business predominantly consists of: • Within UK and Europe, the Group’s UK pension plan, other UK subsidiaries and until 31 December 2013, the non-covered results of Standard Life Savings Limited • Within Standard Life Investments – Standard Life Wealth Limited, the non-covered third party business of Standard Life
We have set required capital to be the higher of regulatory capital and our own internally assessed risk based capital requirement. In determining the required capital for the purposes of assessing EEV, the Group excludes any capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders’ funds. As part of the annual assessment, projections of the expected surplus in the HWPF, on best estimate assumptions, are carried out to assess whether this is sufficient to cover the level of required capital in respect of the HWPF. Required capital used in the EEV is also net of any capital that is assumed to be available from subordinated liabilities.
3. Financial information – Notes to the EEV financial information continued 12. EEV Methodology continued The level of TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: • The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market-consistent assumptions • The total cost includes an allowance for non-market risk • Changes in policyholder behaviour are allowed for according to the particular economic scenario • Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)
Canada The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts. TVOG has reduced both NBC and closing PVIF for Canada.
The Group’s international savings and investment business, which is sold via branches in Singapore and Dubai, is included within Asia and Emerging Markets results but has the same other economic assumptions as the SLIL International bond business.
Non-economic assumption changes Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed in full on an annual basis. Other non-economic assumption changes, not relating to the full annual review of non-economic assumptions, may be reflected in the Half year results, for example non-economic assumption changes resulting from management action or modelling changes.
Expenses – pension plans Pension plans have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits and IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements.
Other non-economic experience assumptions Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect our best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.
For Germany, new business comprises new contracts written into the PBF with the exception of vesting annuities for tax layer 1 deferred annuities sold before September 2009. The NBC assumes a specific level of future premium indexation and also assumes that premiums on ‘low start’ policies increase at the end of the low start period.
For Canada, expected renewal premiums on new group pension and savings contracts are included at inception. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, these deposits are treated as new business when received.
Tax Tax assumptions used are based upon the best estimate of the actual tax expected to arise.
Where AFS assets are held by an EEV covered business entity and these assets are used to back investment contract liabilities accounted for under local solvency regulations at amortised cost, then the assets are also included within EEV on an amortised cost basis and EEV operating profit after tax reflects the long-term investment return on the assets calculated at acquisition.
3. Financial information – Notes to the EEV financial information continued 12. EEV Methodology continued Where AFS assets are held by an EEV covered business entity and these assets are used to back subordinated liabilities which are accounted for in EEV at market value, then the assets are also included within EEV on a market value basis. EEV operating profit after tax reflects the long-term investment return on the assets and unrealised gains and losses are included within EEV nonoperating profit.
For non-covered business, no adjustment is made to the IFRS valuation of debt.
European Union • Have been prepared in accordance with the requirements of the Companies Act 2006.
What we have audited The financial statements, which are prepared by Standard Life plc, comprise: • The Company statement of financial position as at 31 December 2014 • The Company statement of comprehensive income for the year then ended • 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.
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 information.
3. Financial information – Independent auditors’ report on Company financial statements continued
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made, and under the Listing Rules we are required to review certain elements of the report to shareholders by the Board on directors’ remuneration. We have no exceptions to report arising from these responsibilities.
As explained more fully in the Directors’ responsibility statement set out on page 47, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdiction.
Net changes in financial assets designated as available-for-sale R 28 (18)
Tax effect relating to items that may be reclassified subsequently to profit or loss F (6) 4
Total other comprehensive income for the year that may be reclassified subsequently to profit or loss 22 (14)
The Notes on pages 270 to 284 are an integral part of these financial statements.
Total equity and liabilities 7,217 7,088 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
The financial statements on pages 259 to 284 were approved by the Board of Directors on 20 February 2015 and signed on its behalf, by the following Directors: Sir Gerry Grimstone, Chairman Luke Savage, Chief Financial Officer
Other comprehensive income for the year - - - - 22 22
Issue of share capital O 1 - 5 - - 6 Reserves credit for employee share-based payment schemes R - - - - 27 27 Transfer to retained earnings for vested employee share-
Issue of share capital O 2 - - - - 2 Reserves credit for employee share-based payment schemes R - - - - 32 32 Transfer to retained earnings for vested employee share-
Shares acquired by employee trusts - (11) - - - (11)
Cash and cash equivalents at the end of the year N 34 40
The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these financial statements.
The Company has adopted the following new IFRSs, International Accounting Standards (IASs), interpretations and amendments to existing standards which are effective by EU endorsement for annual periods beginning on or after 1 January 2014 unless otherwise stated: IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements The amendment to IAS 27 requires companies to adopt a new definition of control as set out in IFRS 10. IFRS 10 defines control, determines how to identify if an investor controls an investee and requires an investor to consolidate entities it controls under the new standard. IFRS 10 identifies three elements, all of which must be present for an investor to control an investee, which are as follows: • Power over the investee • Exposure, or rights, to variable returns from its involvement with the investee • The ability to use that power over the investee to affect the amount of the returns.
IAS 28 Investments in Associates and Joint Ventures (2011) IAS 28 (2011) is revised to include joint ventures as well as associates. Additionally, the scope exception within IAS 28 for investments in associates held by venture capital organisations, or mutual funds, unit trusts and similar entities, including investment linked insurance funds, has been removed and as a result the scope of the standard has been widened to include all investments in any entity over which the Company has significant influence. The standard has been revised to allow an entity to elect to measure an investment in associate at fair value through profit or loss (FVTPL) where that investment is held by, or indirectly through, venture capital organisations, or mutual funds, unit trusts and similar entities, including investment linked insurance funds.
Company continued Additionally, the Company has adopted the following amendments to existing standards which are effective by EU endorsement from 1 January 2014 and the implementation the implementation of these amendments has had no significant impact on the Company’s financial statements: • IFRS 11 Joint Arrangements • IFRS 12 Disclosure of Interests on Other Entities • Amendments to IAS 39 Financial Instruments: Recognition and Measurement and amendments to IAS 32 Financial Instruments: Presentation and IAS 36 Impairment of Assets.
The adoption of IFRS 9 is expected to have an impact on the measurement and presentation of financial instruments and related balances in the consolidated financial statements of the Company.
• IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2017) • IFRIC 21 Levies (effective for annual periods beginning on or after 17 June 2014) • Amendments to IAS 19 Defined Benefit Plans: Employee Contributions (effective for annual periods beginning on or after 1 July 2014) • Annual improvements 2010-2012 cycle and annual improvements 2011-2013 cycle (effective for annual periods beginning on or after 1 July 2014) • Amendment to IAS 16 Property, Plant & Equipment and IAS 38 Intangible Assets: Depreciation and Amortisation (effective for annual periods beginning on or after 1 January 2016) • Amendments to IAS 27 Separate Financial Statements: Equity Method in Separate Financial Statements (effective for annual periods beginning on or after 1 January 2016) • Amendment to IFRS 11 Joint arrangements: Accounting for Acquisitions of Interests in Joint Operations (effective for annual periods beginning on or after 1 January 2016) • Annual improvements 2012-2014 cycle (effective for annual periods beginning on or after 1 January 2016) • Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, IAS 28
(b) Subsidiaries, associates and joint arrangements Subsidiaries are all entities, including structured entities, over which the Company has control.
Associates are entities over which the Company has significant influence but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee either directly or through another Group company acting as a defacto agent.
Joint arrangements are classified as joint ventures when the Company and other parties have joint control of the rights to the net assets of the joint arrangement.
Investments in subsidiaries (other than those measured at FVTPL), associates (other than those measured at FVTPL) and joint ventures are initially recognised at cost and subsequently held at cost less any impairment charge. An impairment charge is recognised when the carrying amount of the investment exceeds its recoverable amount. Any gain or loss on disposal of a subsidiary, associate or joint venture is recognised in the statement of comprehensive income.
(c) Foreign currency translation These financial statements are presented in millions pound Sterling, which is the Company’s functional currency.
Unrealised gains and losses on AFS financial assets are recognised in other comprehensive income unless an impairment loss is recognised. On disposal any accumulated gain or loss previously recognised in other comprehensive income is recycled to the income statement.
For loans measured at amortised cost, interest income recognised in the statement of comprehensive income is calculated using the EIR method.
Loans classified as loans and receivables are initially measured at fair value plus directly attributable transaction costs. Subsequently, they are measured at amortised cost, using the EIR method, less any impairment losses. Revenue from financial assets classified as loans are recognised in the consolidated income statement on an EIR basis.
Loans which are subject to collective impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans after the minimum number of payments under the renegotiated terms have been collected. Individually significant loans whose terms have been renegotiated are subject to on-going review to determine whether they remain impaired or past due.
Debt securities and derivatives are recognised at fair value on the trade date of the transaction. In the case of derivatives, where no initial premium is paid or received, the initial measurement value is nil. For instruments classified as HFT or designated as at FVTPL, directly attributable transaction costs are not included in the initial measurement value but are recognised in the consolidated income statement. AFS debt securities are initially recognised at fair value plus directly related transaction costs.
Instruments classified as HFT or as at FVTPL are measured at fair value with changes in fair value recognised in the statement of comprehensive income.
(j) Cash and cash equivalents Cash and cash equivalents include demand and term deposits and other short-term investments with less than three months to maturity from the date of acquisition. Cash and cash equivalents are categorised for measurement purposes as loans and receivables and are therefore measured at amortised cost.
Company accounting policies continued (m) 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 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.
(n) Provisions and contingent liabilities Provisions for restructuring costs and legal claims are recognised when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.
(p) Employee share-based payments The Company operates share incentive plans for all employees, share-based long-term incentive plans for senior employees and may award annual performance shares to all eligible employees when the Group’s profit targets are met. Further details of the plans are set out in Note 48 of the Group financial statements. For share-based payment employee transactions, services received are measured at fair value.
(q) Derecognition and offset of financial assets and liabilities A financial asset (or a part of a group of similar financial assets) is derecognised where: • The rights to receive cash flows from the asset have expired • The Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement • The Company has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Investment return 697 714 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
The aggregate remuneration payable in respect of employees was: Wages and salaries 35 41
Information in respect of compensation of key management personnel is provided in Note 49 of the Group financial statements and the audited section of the Directors’ remuneration report. Details of the employee share-based payment schemes operated by the Company are given in Note 48 of the Group financial statements.
D. Pension and other post-retirement benefit provisions The staff who manage the affairs of the Company are members of a defined benefit pension plan and/or a defined contribution pension scheme operated by the Group for its employees in the UK. There is no contractual agreement or policy for charging the net defined benefit cost of the defined benefit plan across the participating UK companies. The sponsoring employer for the defined benefit plan is 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. Contributions to defined contribution plans are expensed when employees have rendered services in exchange for such contributions, generally in the year of contribution. The contributions to the defined contribution and the defined benefit plans recognised as an expense for the year ended 31 December 2014 were £4m (2013: £4m).
E. Auditors’ remuneration In 2014 auditors’ remuneration amounted to £0.3m (2013: £0.3m) in respect of the audit of the Company’s individual and Group financial statements. Auditors’ remuneration for services other than the statutory audit of the Company is disclosed in Note 9 of the Group financial statements.
The standard rate of corporation tax in the UK changed from 23% to 21% with effect from 1 April 2014. Accordingly, the Company’s UK profits for this accounting period are subject to tax at a rate of 21.5%.
The amount of deferred tax liabilities expected to be settled after more than 12 months is £1m (2013: £1m).
Movements in deferred tax liabilities comprise: Amounts credited to net profit - -
Receivables and other financial assets L - - - 55 55
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 2014 £m £m £m
Receivables and other financial assets are expected to be recovered within 12 months.
Demand and term deposits with original maturity of less than three months 34 40
P. Shares held by trusts Shares held by trusts represents the Company’s funding of the Employee Share Trust (EST) in relation to the acquisition of shares of the Company for delivery to employees under various employee share schemes.
Details of the dividends paid during the year by the Company are provided in Note 15 of the Group financial statements. Note 15 also includes information regarding the final dividend proposed by the Directors for the year ended 31 December 2014.
Available-forsale financial assets Total 2014 £m £m £m £m £m At 1 January 3,108 48 241 (14) 3,383 Reserves credit for employee share-based payment schemes - 27 - - 27 Vested employee share-based payments - (27) - - (27) Fair value gains on available-for-sale financial assets - - - 28 28 Tax effect relating to items that may be reclassified subsequently to profit or loss - - - (6) (6) At 31 December 3,108 48 241 8 3,405 2013
Further information on the merger reserve and special reserve is given in Note 32 of the Group financial statements.
3. Financial information – Notes to the Company financial statements continued
Further information on the terms and conditions of the subordinated liabilities is given in Note 37 of the Group financial statements.
The amount of other financial liabilities expected to be settled after more than 12 months is £6m (2013: £6m).
V. Risk management (a) Overview An overview of the Group risk management framework and policies is provided in Note 42 of the Group financial statements.
The Company’s investments and liabilities are generally held in its functional currency. However, for strategic and capital reasons the Company may hold investments and liabilities in other currencies. In these cases, derivative financial instruments may be employed to manage currency exposure so that the Company has no remaining significant exposure to foreign exchange fluctuations.
The geographic classification for loans and cash and cash equivalents is determined by the currency of the underlying financial instruments. Geography UK Europe Other Total restated1 £m £m £m £m £m £m £m £m
Investments in subsidiaries at FVTPL 131 142 - - - - 131 142
Financial investments 1,368 1,671 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
The Company’s equity sensitivity to a 1% increase in interest rates is (£17m) (2013: (£17m)) and to a 1% decrease in interest rates is £17m (2013: £17m).
Limitations The sensitivity analysis is non-linear and larger or smaller impacts should not be derived from these results. The sensitivity analysis represents the impact on profit at the year end that the changes in assumptions can have. The sensitivity will vary with time, both due to changes in market conditions and changes in the actual asset mix, and this mix is being actively managed. The results of the sensitivity analysis may also have been different from those illustrated had the tests been applied at a date other than the reporting date.
For cash and cash equivalents, the Company maintains exposures within limits that are set with reference to internal credit assessments. For derivative financial instruments, maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. No credit limits are set in respect of loans to subsidiaries, where the main exposure is to SLAL, a wholly owned subsidiary undertaking, with long-term ratings of A+ from Standard & Poor’s and A1 from Moody’s. Any loans to subsidiaries require approval from the Group Enterprise Risk Management Committee prior to being transacted.
Total 131 142 13 12 634 644 24 54 492 724 40 55 34 40 1,368 1,671 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
IFRSs adopted during the year. Refer to Company accounting policies – (a) Basis of preparation.
Investments in subsidiaries at FVTPL includes £131m (2013: £142m) relating to a holding in a money market fund managed by a subsidiary company. This fund was previously internally rated as AAA, as it followed the guidelines prescribed by external rating agencies for money market funds seeking to achieve a AAA rating. The fund ceased to follow these guidelines in 2012 and, as a result, it is no longer considered appropriate to designate a AAA rating for this fund. However, the fund continues to invest in a range of counterparties that are externally rated, and uses concentration limits and maturity limits in managing its exposures.
Assets are deemed to be past due when a counterparty has failed to make a payment when contractually due. An allowance account is not used by the Company to record separately the impairment of assets by credit losses. Instead, the carrying amount of an asset subject to any impairment charge is directly reduced by the amount of the impairment. At 31 December 2014 and 31 December 2013, all financial assets were neither past due nor impaired.
V. Risk management continued (c) Credit risk continued (c)(iii) Offsetting financial assets and liabilities continued
Related amounts not offset in the Company statement of financial position
Derivatives1 (25) - (25) - 16 (9) Total financial liabilities (25) - (25) - 16 (9) 1 Only derivatives subject to master netting agreements have been included above. 2 Only loans to/from subsidiaries that are offset are included above.
Net amounts of financial instruments as presented in the Company statement of financial position
Financial assets Derivatives1 54 - 54 - (47) 7 Loans to subsidiaries2 72 (72) - - - - Total financial assets 126 (72) 54 - (47) 7 Financial liabilities Derivatives1 (53) - (53) - - (53) Loans from subsidiaries2 (72) 72 - - - - Total financial liabilities (125) 72 (53) - - (53) 1 Only derivatives subject to master netting agreements have been included above. 2 Only loans to/from subsidiaries that are offset are included above.
The Company ensures that it can meet its financial obligations as they fall due by maintaining suitable levels of liquid assets. The obligations arising from subordinated liabilities are offset by receipts arising from loans to subsidiaries and investments in subsidiaries. Refer to Note K – Derivative financial instruments, for the maturity profile of undiscounted cash flows of derivative financial instruments.
W. Contingent liabilities, indemnities and guarantees (a) Legal proceedings and regulations The Company, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigation) will have a material effect on the results and financial position of the Company.
(c) Indemnities and guarantees During 2009, the Company provided an indemnity to the Standard Life Unclaimed Asset Trust (UAT) to cover any expenses, damages, losses and costs that cannot be recovered from the assets held within the UAT. The indemnity is for a maximum of £30m and gave rise to a liability of £nil at 31 December 2014 (2013: £nil).
X. Related party transactions (a) Transactions with and balances from/(to) related parties In the normal course of business, the Company enters into transactions with related parties. The year end balances arising from such transactions are as follows: £m £m Due from related parties: Subsidiaries 49 77 Loans to subsidiaries 634 644 683 721
Transactions with related parties carried out by the Company during the year were as follows: Revenues from related parties: Subsidiaries 684 701 Associates 1 1 685 702
Y. Fair value of assets and liabilities (a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used: Level 1 Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
(c) Methods and assumptions used to determine fair value of assets and liabilities Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given in the following note: 282 Standard Life
Derivative financial assets – 2014: £24m (2013: £54m) and derivative financial liabilities – 2014: £25m (2013: £53m)
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2014 the residual credit risk is considered immaterial and no credit risk adjustment has been made.
Debt securities – 2014: £492m (2013: £724m) For debt securities, the Company has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Company has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows: • Government, including provincial and municipal, and supranational institution bonds
• 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 treated 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 treated 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 Company 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 treated as level 3 instruments within the fair value hierarchy.
Investment in subsidiaries at FVTPL - - 131 142 - - 131 142 Investment in associates at FVTPL 13 12 - - - - 13 12 Derivative financial assets - - 24 54 - - 24 54 Debt securities 78 71 413 652 1 1 492 724 Total 91 83 568 848 1 1 660 932
Y. Fair value of assets and liabilities continued (c) Methods and assumptions used to determine fair value of assets and liabilities continued (c)(ii) Reconciliation of movements in level 3 instruments During the year, there were no disposals (2013: £4m) of level 3 equity securities.
(c)(iii) Sensitivity of level 3 financial instruments measured at fair value to changes in key assumptions There is no significant sensitivity of level 3 financial instruments measured at fair value in relation to changes in key assumptions.
Assets Loans to subsidiaries - - 643 674 23 13 666 687 Liabilities Subordinated notes - - 561 557 - - 561 557 Subordinated guaranteed bonds - - 580 571 - - 580 571 Mutual Assurance Capital Securities - - 643 674 - - 643 674
The Company proposes to return to shareholders 73 pence per Ordinary Share (approximately £1.75bn). This will be through an issue of B Shares and/or C Shares which is intended to enable the majority of shareholders to receive their cash proceeds as capital, income or a combination of the two. In conjunction with the return of value, the Company will undertake a share consolidation.
On 6 January 2015 the Company redeemed in full the Euro denominated 5.314% fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000.
Discontinued operations AUA1 29.5 4.5 (4.1) 0.4 1.9 31.8 Group assets under administration 244.2 38.5 (37.1) 1.4 82.8 328.4
Group assets under administration – total 12 months ended 31 December 2014
Closing AUA at 31 Dec 2014 £bn £bn £bn £bn £bn £bn Group AUA – continuing operations1 214.7 34.0 (33.0) 1.0 80.9 296.6 Discontinued operations AUA1: Canada fee F 17.3 2.9 (2.4) 0.5 1.4 19.2 Canada spread/risk S/R 8.4 1.0 (1.2) (0.2) 0.5 8.7 SLI Canada - third party F 12.6 2.4 (1.9) 0.5 0.4 13.5 Canada other 1.7 - - - - 1.7 Consolidation/eliminations F (10.5) (1.8) 1.4 (0.4) (0.4) (11.3) Total Canada 29.5 4.5 (4.1) 0.4 1.9 31.8 Group assets under administration 244.2 38.5 (37.1) 1.4 82.8 328.4 1 Continuing operations excludes our Canadian business which was sold on 30 January 2015. Comparatives have been restated. 2 From 1 January 2014, Standard Life Wealth is reported as part of Standard Life Investments, previously it was reported in UK and Europe. Comparatives have been restated. 3 Institutional pensions assets previously included in both life and pensions AUA and investment operations have now been excluded from UK and Europe and are only included in Standard Life Investments third party. Eliminations have been adjusted and there is a nil impact on Group AUA. Comparatives have been restated. 4 In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations.
Fee business: Standard Life Investments third party (excl. strategic partner life business)2 72.6 20.6 (11.0) 9.6 7.6 89.8 Standard Life Investments third party strategic partner life business - - - - - - Standard Life Investments total third party 72.6 20.6 (11.0) 9.6 7.6 89.8 UK retail new2 27.6 5.5 (2.7) 2.8 3.4 33.8 UK retail old 31.7 0.6 (3.2) (2.6) 4.4 33.5 Corporate 24.5 4.3 (2.3) 2.0 2.7 29.2 UK retail and corporate 83.8 10.4 (8.2) 2.2 10.5 96.5 Conventional with profits 4.1 0.1 (1.6) (1.5) 0.3 2.9 UK3 87.9 10.5 (9.8) 0.7 10.8 99.4 Europe2,3 13.0 2.2 (1.1) 1.1 0.8 14.9 Asia and Emerging Markets (wholly owned) 0.2 0.1 (0.1) - 0.1 0.3 Consolidation/eliminations2,3,4 (10.9) (3.3) 1.2 (2.1) (0.7) (13.7) Total fee business 162.8 30.1 (20.8) 9.3 18.6 190.7 Spread/risk business: UK 15.3 0.6 (1.3) (0.7) - 14.6 Europe 0.5 - - - - 0.5 Total spread/risk business 15.8 0.6 (1.3) (0.7) - 15.1 Other (incl. joint ventures) 9.7 0.4 (0.2) 0.2 (1.0) 8.9 Group AUA – continuing operations1 188.3 31.1 (22.3) 8.8 17.6 214.7
Closing AUA at 31 Dec 2013 £bn £bn £bn £bn £bn £bn Group AUA – continuing operations1 188.3 31.1 (22.3) 8.8 17.6 214.7 Discontinued operations AUA1: Canada fee F 15.9 2.8 (2.2) 0.6 0.8 17.3 Canada spread/risk S/R 9.9 1.0 (1.2) (0.2) (1.3) 8.4 SLI Canada - third party F 12.2 2.6 (1.8) 0.8 (0.4) 12.6 Canada other 2.0 - - - (0.3) 1.7 Consolidation/eliminations F (10.2) (1.8) 1.4 (0.4) 0.1 (10.5) Total Canada 29.8 4.6 (3.8) 0.8 (1.1) 29.5 Group assets under administration 218.1 35.7 (26.1) 9.6 16.5 244.2 1 Continuing operations excludes our Canadian business which was sold on 30 January 2015. Comparatives have been restated. 2 From 1 January 2014, Standard Life Wealth is reported as part of Standard Life Investments, previously it was reported in UK and Europe. Comparatives have been restated. 3 Institutional pensions assets previously included in both life and pensions AUA and investment operations have now been excluded from UK and Europe and are only included in Standard Life Investments third party. Eliminations have been adjusted and there is a nil impact on Group AUA. Comparatives have been restated. 4 In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations.
Standard Life Investments Third party (excl. strategic partner life business) from continuing operations1 89.8 23.8 (22.1) 1.7 26.0 117.5
UK retail new fee business2 F 33.8 5.9 (3.0) 2.9 0.6 37.3
UK retail old fee business F 33.5 0.6 (2.8) (2.2) 2.2 33.5
UK retail and corporate fee business 96.5 10.5 (7.6) 2.9 3.4 102.8
3. Financial information - Supplementary information continued 2. Standard Life Investments assets under management and net flows 12 months ended 31 December 2014
C on tin ui ng o pe ra tio ns 1.8 1.0 (0.6) 0.4 (0.2) 2.0 India Wholesale2 4.1 0.9 - 0.9 1.1 6.1 Ignis - 1.9 (6.2) (4.3) 18.8 14.5 Total Wholesale2 28.9 11.8 (6.6) 5.2 1.4 35.5
Strategic partner life business AUM 80.3 3.8 (7.8) (4.0) 52.1 128.4
Total assets under management 189.1 30.9 (32.9) (2.0) 79.2 266.3 1 Continuing operations excludes our Canadian business which was sold on 30 January 2015. Comparatives have been restated. 2 In the year to 31 December 2014, India cash funds have been reclassified as Wholesale. Comparatives have been restated. 3 Comprises suite of global absolute return strategies and balanced funds. 4 Comprises cash, private equity and Wealth. Net inflows from India cash funds £0.3bn. 5 Net outflows from Ignis liquidity funds £1.0bn.
Strategic partner life business AUM 77.2 4.6 (7.8) (3.2) 6.3 80.3 AUM - continuing operations1 149.8 25.2 (18.8) 6.4 13.9 170.1
Total assets under management 169.5 28.7 (21.6) 7.1 12.5 189.1 1 Continuing operations excludes our Canadian business which was sold on 30 January 2015. Comparatives have been restated. 2 In the year to 31 December 2014, India cash funds have been reclassified as Wholesale. Comparatives have been restated. 3 Comprises suite of global absolute return strategies and balanced funds. 4 Comprises cash, private equity and Wealth. Net inflows from India cash funds £0.1bn.
3. Financial information - Supplementary information continued 3. Additional analysis - 15 months net flows Group assets under administration net flows 15 months ended 31 December 2014 3 months to £bn £bn £bn £bn £bn
Spread/risk business: Group net flows - continuing operations1 (3.3) - 2.1 2.2 1.4
Ignis (4.5) 0.2 - - - Third party net flows (excl. strategic partner life business) (2.9) 0.6 2.1 1.9 1.3
Asset management net flows - continuing operations1 (4.3) (0.9) 1.4 1.5 0.6
12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec
Discontinued operations long-term savings3 1,998 1,849 82 68 3,107 2,928 6% 19%
Total continuing operations1 Discontinued operations1 Total 31 December 2014 £m £m £m £m £m £m £m
Exclude share of associates and JVs’ PBT (21) - (18) - (39) - (39)
Total continuing operations1 Discontinued operations1 Total 31 December 2013 £m £m £m £m £m £m £m
Exclude current tax on underlying performance (41) (2) - 1 (42) (23) (65)
Exclude share of associates and JVs’ PBT (18) - (8) - (26) - (26)
Group underlying cash generation 95 272 (20) (43) 304 66 370 1 Continuing operations exclude our Canadian business which was sold on 30 January 2015 and our Dubai business, the closure of which was announced in
Shareholder services We offer a wide range of shareholder services, some details of which are included on the following pages. If you need any further information about any of these services, please: • contact our registrar, Capita, on 0845 113 0045* if calling from the UK. International (and non-0845) numbers for Capita can be found on the last page of this report • visit our share portal at www.standardlifeshareportal.com
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Dividends You can choose to receive your dividends as cash – paid directly into your bank account or by cheque – or you can sign up for the dividend reinvestment plan (DRIP) where your dividends will be reinvested in additional ordinary shares.
You can receive cash dividends in a number of ways. This includes automatic local currency payments for shareholders who live in certain countries outside the UK, and a choice of some major currencies for transfers to banks outside the UK. You can find out more about these shareholder services at www.standardlife.com/shareholders * Calls may be monitored and/or recorded to protect both you and us and help with our training. Call charges will vary.
Preventing unsolicited mail By law, the Company has to make certain details from its share register publicly available. Because of this, it is possible that some registered shareholders could receive unsolicited mail. You may also receive telephone calls with offers to buy shares at a discount or sell your shares at a premium or be asked to complete confidentiality agreements. Remember, if it sounds too good to be true, it probably is. You can find more information about this at the Financial Conduct Authority’s website www.fca.org.uk/consumers/scams
Dividend payment date (2014 final dividend) 19 May 2015 Half year results 4 August
Last date for DRIP elections for 2015 interim dividend 30 September 2015 Interim dividend payment date 20 October 2015 Q3 interim management statement 28 October
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 termed an immediate annuity. If it commences at some future date, it is termed a deferred annuity.
Business unit underlying performance Business unit underlying performance is operating profit before tax after excluding the impact of spread/risk operating actuarial assumption changes, specific management actions, group centre costs and group centre capital management in the reporting period.
CFO Forum A high-level discussion group formed and attended by the Chief Financial Officers of major European insurance companies.
Dividend cover This is a measure of how easily a company can pay its dividend from profit. It is calculated as profit for the year attributable to equity holders of Standard Life plc divided by the total dividend for that financial period.
Non-covered business EEV operating profit after tax represents operating profit after tax.
Executive team The executive team is responsible for the day-to-day running of the Group and comprises: the Chief Executive, Chief Executive – UK and Europe, President and Chief Executive Officer – Canada (until 30 January 2015), Chief Executive – Standard Life Investments, the Group Operations Officer, Chief Financial Officer and the Chief Risk Officer.
Expected return on EEV Anticipated results based on applying opening assumptions to the opening EEV.
Group capital surplus This is a regulatory measure of our financial strength and compares the Group's capital resources to its capital resources requirements in accordance with the Insurance Groups Directive.
Group underlying cash generation This is a measure of the underlying shareholder cash flow of the Group.
Group underlying cash generation adjusts Group underlying performance for non-cash items. Adjustments are made for deferred acquisition costs/deferred income reserve, fixed/intangible assets and the Asian joint ventures and associates. Depreciation/ amortisation that would normally be included in operating profit is replaced with the cash movement in the period. The measure is stated net of current (cash) tax on Group underlying performance.
Individual Capital Assessment (ICA) The process by which the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) requires insurance companies to make an assessment of the regulated company’s own capital requirements, which is then reviewed and agreed by the FCA and PRA.
Liability aware Liability Aware is a framework for proactively managing the various liability risks and requirements that are faced by defined benefit pension schemes and insurance companies.
Look through EEV covered business profit includes profit or loss arising in Group companies providing investment management and other services, where these relate to covered business. This is referred to as the ‘look through’ into service companies.
Mutual fund A collective investment vehicle enabling investors to pool their money, which is then invested in a diverse portfolio of stocks or bonds, enabling investors to achieve a more diversified portfolio than they otherwise might have done by making an individual investment.
Operating profit The Group’s chosen supplementary measure of performance is operating profit. This is a non-Generally Accepted Accounting Principles (GAAP) measure. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
Personal pension plan An individual pension arrangement with particular tax advantages whereby individuals who are self-employed or those who are not members of employer-sponsored pension scheme arrangements can make provision for retirement or provide benefits for their dependents in a tax efficient manner.
Proprietary Business Fund The Proprietary Business Fund in Standard Life Assurance Limited (SLAL) contains, amongst other things, most new insurance business written after demutualisation in the UK, Ireland and Germany and certain classes of business – pension contribution insurance policies, income protection plan policies and a number of SIPP policies written before demutualisation.
PVNBP margin PVNBP margin is NBC expressed as a percentage of PVNBP.
Single premium A single premium contract (as opposed to a regular premium contract), involves the payment of one premium at inception with no obligation for the policyholder to make subsequent additional payments.
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 they receive a fee. This measure excludes the assets that are managed on behalf of strategic partners in life assurance books.
Time value of options and guarantees (TVOG) Represents the potential additional cost to equity holders where a financial option or guarantee exists which affects policyholder benefits and is exercisable at the option of the policyholder.
Total shareholder return This is a measure of the overall return to shareholders and includes the movement in the share price and any dividends paid and reinvested.
Undiscounted payback period A measure of capital efficiency that measures the time at which the value of expected undiscounted post-tax cash flows (after tax) is sufficient to recover the capital invested to support the writing of new business.
Address: Standard Life Shareholder Services 34 Beckenham Road Beckenham Kent BR3 4TU
Secretary, registered office and head office Kenneth A Gilmour Standard Life plc Standard Life House 30 Lothian Road Edinburgh EH1 2DH Scotland 302 Standard Life
This document has been published by Standard Life plc for information only. It is based on our understanding as at February 2015 and does not provide financial or legal advice.