Who we are Aberdeen Asset Management is a global asset management group investing across the main investment strategies of equities, fixed income and property, complemented by our solutions business, which provides multi asset and fund of alternatives services. We are present in 24 countries with some 31 offices and over 1,900 staff.
What we do Our business is the active management of financial assets for third parties. We deliver that expertise in the form of segregated and pooled products across borders. Key clients include leading national and corporate pension funds, central banks and other investment institutions. We have a broad shareholder base and are free from the ownership ties of a larger parent company structure.
Business review 20 Key performance indicators 22 Business review 31 Principal risks
Corporate governance 34 Chairman’s introduction 36 Board of directors 40 Group management board 41 Corporate governance report 48 Corporate responsibility 50 Remuneration report 63 Directors’ report 65 Directors' responsibilities
Financial statements 66 Independent auditor's report 67 Accounting policies 73 Financial statements 79 Notes to financial statements 126 Five year summary
Assets under management £187.2 billion 1 Underlying figures are stated before amortisation and impairment of intangibles. See page 27.
Operating expenses increased by 9%, with some controlled addition to headcount in distribution and additional resource committed to the promotion of the Aberdeen brand and positioning of our product range to satisfy existing and expected investor trends.
Dividend The Board is recommending a final dividend of 7.1p per share, making a total payment for the year of 11.5p per share, an increase of 28% on the total payment for 2011. The Board remains committed to a progressive dividend policy.
New business New business totalling £36.0 billion was added during the year, with two-thirds of those flows being into pooled funds. By contrast, over 50% of outflows, also £36.0 billion, were from lower margin segregated mandates. As a result, 45% of our year-end assets under management (AuM) is invested in pooled funds (2011: 40%). Gross inflows were sourced from investors in Continental Europe (36%), the UK (23%), the Americas (25%), Asia Pacific (15%) and the Middle East (1%).
Consistent with recent years, the major inflows were into our global emerging market (GEM), Asia Pacific and global equity products. We continue to work to moderate the scale of inflows to GEM, as we are committed to avoiding any dilution to the quality of the portfolios. We also saw healthy interest in our emerging market debt (EMD) and Asian fixed income capabilities, both higher margin products. Indeed, our flagship EMD fund passed the $2 billion milestone during the year. However, overall fixed income flows remained negative, primarily due to outflows from the more traditional developed market strategies. We also experienced net outflows from the solutions business. Although our property funds reported a small net outflow, we have strengthened our global property platform with expanded multi manager teams in Asia and the US, and have added specialist distribution capabilities in both regions.
Business development Our distribution efforts included the launch of a number of funds in various jurisdictions, led by multi asset, FoHF and EMD capabilities. Among these was a diversified growth fund in the UK, a multi strategy fund in Luxembourg and an emerging markets bond fund in the US.
In early October, we announced the opening of a new office in New York to support our expansion in North America. The office will serve as a business development and marketing centre and complements our existing North American headquarters in Philadelphia. In addition, we added business development staff in Chicago, Dallas, Los Angeles, Miami, San Francisco and Toronto.
In preparation for the Retail Distribution Review, the Group launched unbundled share classes in our UK and Luxembourg fund ranges ahead of the 31 December deadline.
The Board On behalf of the Board as a whole, I would like to thank all our staff for their continued hard work and dedication which is at the heart of these results.
Outlook It is perhaps unwise to anticipate an end to the uncertainty engendered by the global economic and political backdrop, but I do believe that our clients and shareholders will be well served by the long term investment philosophy and rigorous process of our teams. While equity based products continue to generate healthy sales, we are confident that our sustained efforts in connection with other asset classes will make an increasingly important contribution to the Group’s performance in the coming months.
We have a significant presence across Continental Europe with 13 offices in 12 countries. Europe, excluding UK, accounts for over 33% of Group AuM. Luxembourg is the domicile for the Aberdeen Global fund range.
Other full service offices are in Bangkok, Hong Kong, Kuala Lumpur, Sydney and Tokyo. Our Taiwan sales office services the retail market.
Asian clients account for around 12% of our AuM and our investments in Asian securities, of which equities, fixed income and property are core competencies for the Group.
Americas Philadelphia is our hub for North America and includes fixed income, US equity and property teams. Our wholesale distribution team now has presence in the largest metropolitan centres across the US. We have opened an office in New York, which is intended as a clear statement to existing and potential clients about our growing presence and commitment to the US market.
The Toronto office services our burgeoning Canadian client base, while São Paulo is a research office for our emerging markets equity and debt teams. Our Americas team also cover Latin American clients investing in our Luxembourg fund range.
We have the scale to provide global coverage of financial markets, yet we are flexible enough to focus on each and every portfolio decision.
Emerging markets have grown faster than mature ones in 2011 partly due to stronger flows
Market background As the global economy continues to struggle in the wake of the financial crisis, the investment industry has faced several broad challenges. These include ultra-low interest rates, increased market volatility, risk aversion, and tighter regulation.
Europe has been the main economic drag. The failure of politicians to agree a strategy for growth amid gathering austerity has sapped investor confidence. In the US, the prolonged election battle has distracted leaders. The experiment in quantitative easing – and the price distortions that result – continues against a background of partisanship exemplified by the stand-off over the ‘fiscal cliff’.
However, we have missed out on some trends. Chief among these has been the search for income amid record low interest rates. High yield bonds have been clear beneficiaries; equity income stocks have also been in demand. However, fixed income funds are now pushing further along the credit spectrum as yields compress. This has led to a boom in demand for sub-investment grade bonds. Although spreads currently remain above historical lows, a bubble could be forming.
One prevailing trend is increasingly concentrated fund flows. In what others have called a ‘winner takes all’ environment, top quartile funds in Europe captured around 60% of the flows. Thus the big funds have got bigger. We have been a beneficiary of this trend in our equities products; and we are extending our reach with EMD.
Their job has been made easier by the stumbles among banks, some of which have stepped back from frontline retail because of regulatory reforms on giving advice (as in the UK) or because of the need to shore up capital by gathering deposits (Europe). Amid this change, much of the distribution industry is also trying to re-brand itself as ‘wealth management’. The private banks market to high net worth individuals but banks, financial advisers and advisory platforms offer sometimes indistinguishable services. All of them are trying to attract investors back.
Scepticism is widespread however. The erosion of trust that followed the financial crisis has affected asset management as much as banks and the emerging world as much as the developed one. Financial assets managed by asset managers have been dwindling in Asia (according to McKinsey), as people turn to property and alternative ‘hard’ assets. In Latin America the situation is similar; in fact the market base is much lower in part because pension systems, with one or two obvious exceptions, are less developed.
This decline in interest in the west is amplified by the retirement of the baby boomers (albeit median working ages are climbing fast in some Asian countries too). Doom-mongers warn colourfully of the ‘death of equities’. The situation need not be permanent. Equities may have struggled to perform consistently during the current deleveraging; nonetheless they are real assets. The collapse in the finances of so-many western countries has underscored that bonds, even sovereign ones, pose a credit risk – as must any 'IOU'.
There has been no let-up in the rich world’s transfer of money to developing markets, almost all of which goes into active strategies. Last, it is direct retail investors who have led the buyers’ strike. Institutions have been less reactive; indeed, underlying flows into pensions and the like may even have helped them compensate for the retail shortfall. All of these developments have played to our strengths. The growth in ETFs and passive strategies creates more market inefficiency for active managers such as Aberdeen to exploit, in the form of added value (or alpha). It also helps us to contrast our high conviction approach not only with passives, but with those actives whose portfolios are large and unfocused and whose performance can never be better than middling.
Our institutional client focus is well established. We were successful in gathering new assets because we have stuck to running money well. Our strategy now is to target prospects better and seek more frequent and thoughtful engagement. This is on our marketing agenda, as we seek to raise profile through conferences and sponsorship.
How long the current sweet spot lasts depends on various factors: our performance, of course, as well as market behaviour. Provided developing markets can sustain higher growth, and this growth translates into investment profits, we believe allocation re-balancing from the developed to the developing world will prove an enduring trend.
The most dramatic illustration of these concerns is the UK’s Retail Distribution Review (RDR), which will ban wholesale retrocession (or commission payments) from January 2013. In effect this will create a pure advisory industry. It has radically redrawn the distribution industry in the UK by severing the conflict of interest that commissions present. This may lead to consolidation amongst independent financial advisors.
The dual growth model of flows and market performance has stopped at a global level
Mis-selling, or rather guarding consumers from unnecessary risks, has been an overarching concern of regulators since the crisis. The associated drive for transparency has largely been good. We have instilled an internal risk management culture that spans all areas of the business.
We are especially wary of growing market pressures to tempt income funds explicitly to target or promise a high level of yield, potentially at the expense of capital. Investors may be happy when promises are met; they will not be when these are not. Desisting from promises should be a point of agreement for the industry and regulators.
We have the advantages of comparative stability, low staff turnover and the positive regard in which clients hold us. Our culture (or brand) ought to be appealing as we are seen to be independent of the largest banking groups, as well as more grounded and approachable.
Progress is encouraging so far. Recognition of the Aberdeen name has risen among European industry professionals, even compared with a couple of years ago. In the US and Canada we have gained a similar profile among the closed end fund community. Our standing among institutional consultants is already strong. Getting ourselves better known elsewhere is our number one priority; we are on the map among institutions in Japan, and across channels in Australia and mainland Asia. But the US still represents the world’s deepest pool of savings and hence its mass market remains our biggest challenge.
Our strategic objective To deliver a high quality service to existing and new customers, across a diverse asset base, resulting in strong organic growth in management fee income.
Our goal is to deliver superior levels of riskadjusted investment performance consistently and to secure client loyalty by providing a high quality service.
We seek consistent long-term investment performance across all investment strategies. We aim to develop each of the investment areas, ensuring that each team has a disciplined investment process, based on team based decision making and original research.
Equities 54% Fixed income 19% Aberdeen Solutions 13% Property 10% Money market 4%
Read more on our AuM and asset classes in the business review on pages 22 to 24.
Where possible our client relationship teams are located close to their markets. We will continue to expand and deepen our distribution footprint to enhance client service and create new business opportunities.
Pooled funds Segregated mandates -20bn -15bn -10bn -5bn 0 5bn 10bn £
We aim to generate long-term returns for our shareholders by building a highly regarded global asset management group founded on providing the highest levels of investment management performance and client service.
– Strengthen the global investment process in areas such as credit and sovereign research.
As a truly active manager, it is key that our teams are based in the major locations where we invest.
Our global distribution network allows us to service the largest private banks and wealth managers and build on our strategic distributor relationships.
– Prioritise marketing support on our top tier capabilities and channels.
Whilst brand initiatives are tailored to the relevant country or region, they follow the common theme of Aberdeen’s global capability and consistent processes, complemented by our local presence.
– Consolidate software development to leverage global platforms whilst reducing costs and risks.
– Use of strategic third party service providers to outsource volume and reduce risk.
The Group’s in-house systems cover strategic operations such as centralised dealing, as well as decision support, data, and compliance. Most of our back office functions, such as investment administration, are outsourced to well established third parties who pass our stringent operational requirements. Quality and continuity of service is of paramount importance.
Principal risks The principal risks associated with executing the strategy are explained on pages 31 to 33, along with how we manage risks. These include: Investment process – Movements in AuM due to markets and investment decisions
£10bn net inflows in equities, where we are among the market leaders.
Our global equities team has now been together for 10 years demonstrating our commitment to team approach and continuity.
Targeted growth of distribution teams with particular emphasis on the US and Europe. Significant net flows in these markets.
Brand Our series of conferences toured Singapore, New York and Aberdeen. The audience comprised our institutional clients and fund selectors.
The Scottish Open golf and Cowes Week sponsorship in the UK highlighted our commitment to the UK market
Balance sheet and capital strength The Group has strengthened its balance sheet and capital position, with net cash of £266.4 million at 30 September 2012.
We remain on track to meet regulatory capital requirements without reliance on the consolidation waiver by the end of 2012 (page 29).
Cross-coverage of securities locally ensures objectivity. Diversification at the stock level is our main control of risk. We aim to add value by capitalising on original research and in avoiding fashions. We see equity risk in terms of investing in a poor quality company, or overpaying for a good one.
Active management We aim to add value by identifying good quality stocks, defined chiefly in terms of management and business model, which are attractively priced. Good stock picking is the key to our performance. We downplay benchmarks in portfolio construction since these provide little clue to future performance. Our asset managers avoid businesses that we do not understand or those with discriminatory shareholder structures.
Asia Pacific 27% Money market 18% UK 16% US 12% Emerging markets 12% Europe 6% Global 5% High yield 2% Currency overlay 1% Convertibles 1%
Key strengths • Active management, operating globally, in a transparent and accountable structure, within a risk framework
• Local presence in London, Philadelphia, São Paulo, Singapore, Sydney, Bangkok, Tokyo and Budapest
• Strong derivatives capability to assist implementation of both active and liability matching strategies
Team approach We employ over 120 investment professionals across our teams. They invest within clearly delineated parameters, with defined reporting lines. Our team structure is based on transparency and accountability.
Diverse solutions Many clients are moving to higher performance or core plus mandates. Another trend is the move away from market based indices and the use of liability driven benchmarks. We aim to deliver performance across the full range of our fixed income capabilities. We also use derivatives, such as interest rate and credit default swaps, to add value and also to match liability exposures.
Active management, top-class research, local presence and a rigorous investment process are the means by which we add value to property investment. We offer a wide range of wellstructured vehicles that provide strong risk-adjusted returns as well as a choice of geographic and sector allocations.
Risk management Our risk management controls are both specific to asset classes and characterised by our institutional clients’ own risk appetites, their agreed risk budgets and any other mandate constraints. While the strength of our investment decisionmaking process is predominantly qualitative, in our fund of hedge funds and multi manager businesses we also draw on a number of quantitative inputs to help guide our investment decision making.
Proprietary research First-hand analysis is a central tenet to Aberdeen as an investment manager. Despite the differences of our alternative asset capabilities, our stock and manager selection processes share the key values of our mainstream investment processes, namely due diligence, repeated investment meetings to verify our decisions and a disciplined attention to risk control.
We have further developed our graduate rotation programme within the business over the last three years and increased the number of hires significantly. We have engaged with the business and the graduates to ensure both the business needs and the graduate development needs are being met. There are graduates in all UK offices, Philadelphia, Singapore and Sydney with additional rotations in Luxembourg, Germany, France, Finland, and Switzerland.
We have recruited 134 graduates globally from 1994 to 2012 and, of those hired, 107 are still employed by the Group.
Competitive compensation Rewarding employees for their contribution is key to recruiting and retaining a talented workforce. More information on how we set compensation packages is given in the Remuneration report starting on page 50.
Apprenticeship programme In March 2012, we launched a pilot apprenticeship scheme in our Aberdeen office for local school leavers seeking to pursue a career in our operations division. This scheme stems from the recognition that there are many school leavers who want to move straight into the workplace from the classroom, as an alternative to higher education. If successful, we will open the scheme to a wider community across the Group.
We strive to be an employer of choice in the 24 countries in which we operate and to provide an environment in which everyone is treated equally. By having a workforce that reflects the communities where we work, we gain an important competitive advantage. We do not tolerate harassment or bullying.
The Group gives full and fair consideration to applications for employment from disabled persons. If employees become disabled, we provide continuing employment wherever possible and subject to local laws and regulations. For the purposes of training and career development, all employees are treated equally.
Aberdeen Asset Management has a sponsorship deal with Scottish Hockey. Our support also aims to encourage grass root development of the sport and encouragement of players to continue beyond school and participate in club hockey.
• Net revenue increased by 11% from £784.0 million in 2011 to £869.2 million.
• Net management fees increased from £739.2 million to £813.5 million (+10%).
• Key profitability metric as we expect revenues to grow by more than costs through effective cost management.
• Margin increased through good revenue growth, coupled with continued cost discipline.
• Conversion of profits to cash to allow for operational growth, as well as strengthening the balance sheet and capital position.
• Includes all components of the Group's performance, based on profitability and capital structure.
• Investors typically value the Group's shares as a multiple of underlying EPS.
• AuM forms the basis on which recurring management fee revenue is earned.
• Changes in AuM reflect both net new business flows and market performance.
• There were £10 billion of net flows into equities. This was offset by net losses of £10 billion from fixed income and solutions.
• £16.5 billion appreciation due to markets, performance and exchange fluctuations.
• Regulatory capital target will be achieved by December 2012 2012 has been another successful year for Aberdeen. We have delivered on our objectives and this is reflected in our KPIs. Strong growth in revenues and operating profits was driven by good flows into our higher margin products. Cashflow was strong, bringing us close to our regulatory capital target. AuM increased to £187.2 billion and with robust investment performance, we will enter 2013 in excellent shape. Objectives Our objective remains to deliver long-term shareholder value by pursuing a strategy that involves organic growth supplemented, at appropriate times in the business cycle, by selective acquisitions. A fundamental element is to maintain complete focus on attaining the highest levels of investment management performance and client service.
We aim to deliver shareholder value by growing the recurring revenues generated from AuM, adding profitable new business and maintaining an efficient cost base - thus generating sustainable profits and cash flows.
The major element of these inflows was into our equity products, particularly global emerging market (GEM), global and Asia Pacific equities. We have also seen healthy interest in emerging market debt (EMD) and Asian fixed income, both higher margin fixed income strategies.
The growth of AuM in equities has been offset by continued losses in fixed income and solutions such that equities now account for over 50% of the Group's AuM. Whilst the strong demand is clearly an endorsement of the integrity of the franchise built over the years, we are not prepared to compromise the quality of the portfolios by diversifying into stocks of lesser quality. We have therefore taken action to moderate inflows to GEM and global equities. To do otherwise would not be in the best interests of existing clients. We believe that there is continued scope for AuM growth from these products, but not as significant as we have seen in recent years.
We have a number of other capabilities where we have a strong track record and good performance. Our focus is now to support these and, with increasing distribution effort and marketing promotion, to broaden the range of growth products. These include European equities, regional emerging market equities, EMD, Asian fixed income, property multi manager, multi asset and fund of hedge funds. The asset class review section explains some of the steps that we have taken in the year.
Equities Our core equities teams have continued to perform robustly. Overall, we had £10.2 billion of net inflows, mainly from GEM, global and Asia Pacific equities. As of September 2012, total funds managed by the equities teams stood at £100.7 billion. We have a leading franchise in these equity products.
Fixed income We continued to see a disappointing level of fixed income outflows over the course of the year, with net outflows of £5.7 billion (2011: £4.8 billion). The largest portion of these outflows came from our UK and global products, where we lost £5.0 billion.
EMD is a key source of AuM growth, with net inflows of £0.9 billion. We also saw smaller net inflows into areas such as our high yield product suite (European, US and Global). Consistent with our distribution strategy, we view global product opportunities in emerging markets, high yield, Asia and convertibles to be among our most compelling, enabling us to grow both AuM and management fees in the years to come.
Notwithstanding, our performance has been strong in many of the products. Both European and US teams have seen a sharp improvement to their performance numbers, bringing them back alongside Australia in delivering a strong longterm track record. Our Asian fixed income team is one of the strongest among our peers.
Complementing this, we have undertaken a review of the multi asset fund range that we offer globally and have restructured some existing vehicles to align the type of fund that is available across different geographical jurisdictions. These can be broadly categorised as income oriented or focused on controlling portfolio volatility. Where there have been gaps, for example in Europe, we have launched additional products. Performance continues to be the key focus of our multi asset team. The team won an award at the Investment Week Fund Manager of the Year Awards in July, for their flagship product the Aberdeen multi asset fund.
We have made strides in a number of these markets and focused spend on brand is paying off. These markets include the US, Benelux, Germany, the Nordics and Taiwan, where we are making progress through the wholesale distribution channel, building on our existing strength with institutional clients to strengthen our business model.
There were net outflows of £3.8 billion in the region. This was largely due to the loss of a small number of large global and UK fixed income mandates, as well as outflows from multi manager and fund of hedge fund products. We discussed the background to this in the asset class review.
There have been major successes in the growth of our wholesale business in continental Europe and the Nordics - where we raised £2.8 billion of net assets. Whilst retail markets across the region have generally been contracting, the investment in our brand in targeted markets, along with focus on our relationships with the key players at the wealth managers and private banks in the 'wholesale' market is paying off. Success has not just been in our equities offerings - we have had very strong demand for EMD from Dutch pension clients and German intermediaries.
We held our second successful year as the main sponsor of Cowes Week, and increased our visibility via sponsorship of ITv weather and hosting some of the Team GB Olympics sailing team. We also announced our sponsorship of the Scottish Open for an initial three years, as we continue efforts to broaden our brand recognition.
Asia Pacific We won significant new institutional accounts this year, as well as a number of new closed end mandates managed in the region, such as the Greater China Fund Inc. and The India Fund, Inc.. On the other hand, retail distribution in the region has been difficult with Taiwan the bright spot.
In Japan we continued to attract funds through our relationship with Mitsubishi, albeit at a slower rate than before, but we are hopeful now of gaining pension fund support for our Japan equity product, which is performing exceptionally well. However, the retail side saw a steady exodus as investors flocked to high income products provided by competitors.
Americas The past year has followed through on several initiatives established during the 2011 financial year, resulting in a broadened distribution presence as well as enhancements to our local fund management capability.
We have growing AuM from Latin American clients investing in our flagship Luxembourg fund range and have targeted relationships with private banks that we believe will lead to further growth.
These expanded product sales and support teams have helped to grow investments from North and South American clients investing globally to £31 billion, up from £27 billion last year. A significant portion of these asset increases have come from the continued performance of our global equities and emerging market strategies, through interest in EMD, while our Asian bond and equity strategies were encouraging as well. In addition, we have reorganised the multi asset product range to focus on broad client objectives and align offering to our global multi asset business. Furthermore, feeder vehicles were created to provide access to two of our fund of hedge funds for U.S. clients.
These developments were augmented by an ongoing marketing effort to increase brand awareness both through sponsorships of local and regional events, and hosting high quality investment conferences for our client base.
Currently the largest such event remains the Aberdeen Dad vail Regatta in Philadelphia, the largest inter-collegiate rowing regatta in North America, now entering its fourth year of Aberdeen sponsorship and 75th year of existence. These events in conjunction with digital and print marketing campaigns were aimed to ensure that the Aberdeen brand continues to grow in the Americas in 2013.
Underlying diluted EPS 22.6p 18.7p +21% Statutory diluted EPS 17.6p 14.1p +25% Dividend per share 11.5p 9.0p +28%
Core operating cash flow £419.8m £399.3m +5% Net cash £266.4m £127.5m +109%
The Group income statement discloses gross revenue, less commissions payable to arrive at net revenue. Commissions are paid to intermediaries such as banks, platforms and advisors who distribute our products. Management reviews financial information net of such commissions as it gives a fairer basis to compare revenues, regardless of the channel in which products are sold.
The major element of the growth in net revenue was from recurring management fees which, at 94% of net revenues (2011: 94%), continue to provide a high quality base on which to build.
Performance fees grew by £11.2 million to £47.5 million. However they still account for only around 5% of total net revenues.
Revenue margins Revenue margins have benefited from growth in AuM of equities, our highest margin asset class, and the trends in product mix discussed above.
We show money market as a separate component from fixed income as flows can be highly sensitive to investor risk appetite and movements can distort the margins earned on the wider fixed income assets.
As expected, we increased spend in marketing, where we continue to build market awareness of our brand across our global markets, and added to our distribution team, where we have recruited product specialists as well as expanded our wholesale team in key markets. This is important to ensure that we are able to continue revenue growth across our range of capabilities.
Net finance costs The main elements of net finance costs are interest paid on debt issued by the Group and on bank borrowings drawn from time to time, less interest earned on cash balances. Net finance costs have decreased from £7.7 million in 2011 to £5.1 million this year, reflecting the repayment of the subordinated debt in July 2011, and the build up of cash balances.
Cashflow The year to 30 September 2012 has seen strong cashflow, with operating profit of £352.7 million converted into £419.8 million of core operating cash flow, a conversion rate of 119% (2011: 129%). The 2011 conversion rate was higher than normal due to some higher non cash expenses in the year, but we expect cash conversion to be between 110% and 115% going forward.
The Group’s cashflow performance over the last two years is set out in the following table.
An element of free cashflow has been used mainly to purchase shares for the employee benefit trust (EBT) to satisfy future share awards. The Group has the ability to issue new shares, but chooses to purchase shares to avoid shareholder dilution.
Capital and liquidity The Group aims to have a strong balance sheet with low gearing. Net cash has increased from £127.5 million to £266.4 million. We spent £83.1 million buying shares in the market to satisfy outstanding deferred share awards. This negates potential EPS dilution from the vesting of deferred awards.
Subsequent to the year end we announced our intention to redeem all of the 3.5% convertible bonds 2014 which remain outstanding on 3 January 2013. However, bondholders are still able to exercise their conversion rights until December 2012, and many have already done so. Our net cash, balance sheet and regulatory capital, have strengthened further as a result.
Financial position Total equity increased by £66.0 million to £1,300.5 million at 30 September 2012. The main components of this increase were as follows: Changes in equity £m
Coupon on 7.9% perpetual subordinated capital securities The coupon payable on these equity securities, which were issued in 2007 to introduce additional flexibility to the capital structure, is fully deductible for UK tax purposes, so that the post-tax cost is approximately 5.9% pa. This is considerably less than the cost of ordinary share capital, currently estimated at around 10.2% pa.
Pension deficits The net deficit on the Group’s legacy defined benefit pension schemes has decreased to £15.4 million at 30 September 2012, compared to a net deficit of £24.3 million at the previous year end. Assets held by the schemes have increased by £10.3 million from a combination of improvements in markets and increased employer contributions.
In estimating the liabilities, we are required by IAS 19 to use a discount rate calculated by reference to the yield on AA-rated corporate bonds. The discount rate used this year is 4.6% compared to 5.1% in 2011.
While the lower discount rate led to an increase in the schemes' liabilities, the increase in the schemes' assets, from investment performance and the Group's ongoing contributions, has enabled a reduction in the net deficit.
There are a number of components to the risk management framework, each of which gives clear ownership to the management team. These components allow us to track the risk profile of the Group, understand mitigating controls and monitor the risk profile in order to ensure that the risks that we accept do not fall outside of our appetite.
These components include: • A risk register that summarises the principal risks faced by the Group.
• Risk and control self assessments performed by teams across the Group and approved by senior management.
The majority of the Group’s revenue is earned from management fees which are calculated on the basis of the value of AuM. The value of AuM will be affected by general market movements, as well as investor appetite and actual investment performance achieved by the asset managers.
We believe that our conservative style has helped to attract assets through a period of ongoing economic uncertainly. Our equities business has grown significantly in recent years. We continue to work on moderating inflows to some of these products to avoid any risk of dilution in the quality of the portfolios.
We have controls throughout the client lifecycle to mitigate breaches. These include checks when we take on clients, trade and terminate. We monitor client and fund limits on our systems.
Our reputation and client retention could be damaged through significant changes in investment personnel.
We have a team based approach, which seeks to avoiding reliance upon any one individual.
Client relationships are fundamental to our business and retention of AuM. We source business through two channels of distribution: directly from institutions, or through investment intermediaries.
We manage the risk of client retention by ensuring that our client relations teams keep in regular contact with clients to ensure that we address their changing needs. The Board views meeting customers needs and expectations as integral to the corporate culture.
Aberdeen has a global network of offices that allows us to service local clients and the leading private banks and wealth managers.
We have also brought in product specialists into distribution for key capabilities, such as property, money market and solutions.
Risk of poor product design or that delivery of the final product was not what was intended. It can arise from creating new products, or risk that existing products no longer meet investor requirements.
External service providers The Group relies on a number of third party relationships and services to carry out business functions. The risk arises from the inability to effectively carry out robust evaluations of third parties prior to Aberdeen engaging in dealings.
Our reputation could be damaged if our brand or marketing activities are inconsistent with our culture or way of doing things.
The compliance team works closely with the business to check that our marketing materials are consistent with our products and capabilities.
Aberdeen operates in a complex and dynamic regulatory environment. Risks arise from legal and regulatory obligations and the failure to correctly interpret law or changes in the law which may materially and adversely impact the Group. The Group may also be subject to regulatory sanctions or loss of reputation from failure to comply with regulation.
The management of legal and regulatory risk is the responsibility of senior management of all functions, supported by the in-house legal and compliance teams.
The legal and compliance teams are responsible for tracking legal and regulatory development to ensure that the Group is well prepared for changes. As well as developing policies, delivering training and performing monitoring checks, they also provide advice to other divisions to enable compliance with legal and regulatory requirements.
During 2012, credit ratings of a number of major banks were downgraded. We monitor our exposure to banks continuously and have increased the number of counterparties where we deposit our cash. The Group's treasury function is supported by the front office credit team, as well as the market risk function who also perform internal credit reviews.
variations in the sterling value of operating costs and interest costs will, to an extent, offset any similar impact of fluctuating exchange rates on revenues.
Corporate governance is very important to us at Aberdeen. It is one of the qualities that we look for in the companies in which we invest – and we believe that it is important that we achieve the same high standards. We have a conviction that companies adopting leading corporate governance practice will be more successful and deliver enhanced shareholder returns.
The Board has identified its five core values of integrity, quality, teamwork, ambition and challenge, providing a framework for communications of what matters to the Group for the benefit of all our stakeholders. Full details are available on our website.
The following were some of the key features of corporate governance oversight in 2012.
Overseas visits The visits to our overseas offices are an important part of the Board programme. This gives the Board members an opportunity to meet the local teams – through both formal presentations, and ‘at desk’ demonstrations of the investment process.
Training Board members receive regular training and updates from the business and all are obliged to carry out continuing professional development on their own in accordance with the Group's internal guidelines. All directors have, in the year under review, met the internally set requirements.
Nominations committee • Regularly review the structure, size and composition required of the Board compared to its current position.
• Consider appropriate succession planning for directors and other senior executives.
• Keep under review the executive and nonexecutive leadership needs of the organisation.
• Review and assess the annual internal audit plan and internal audit function, and monitor management’s responsiveness to the findings and recommendations of the internal auditor.
• Assess annually the independence and objectivity of the external auditor.
Date of appointment Roger was appointed to the Board as an independent nonexecutive director on 23 January 2004 and was appointed Chairman on 22 January 2009. Roger is also Chairman of the nominations committee.
Background and experience Martin trained as a chartered accountant prior to moving into investment management with an Aberdeen firm of solicitors. He is a founding director and shareholder of the Company. Martin is also a director of a number of Aberdeenmanaged investment trusts and funds' boards. Date of appointment Martin was appointed to the Board on 1 July 1983.
Date of appointment Anita was appointed to the Board on 1 October 2004.
Other appointments • victrex PLC (chairman) • IMI plc (non-executive director) • Lloyds Banking Group plc (non-executive director)
Background and experience Julie was formerly a board member of UBS Investment Bank and a non-executive director of the insurance company Paternoster. Within UBS, she held a number of global leadership positions with a specialised background in risk management and fixed income. She started her financial career 20 years ago at JP Morgan, after graduating with first class honours in Economics from St John’s College, Cambridge.
Date of appointment Julie was appointed to the Board on 4 May 2011.
He graduated with an MA in Economics from the University of Edinburgh and is a member of the Institute of Chartered Accountants of Scotland. Rod is a director of a number of Group subsidiary companies.
Date of appointment Rod was appointed to the Board on 1 October 2012.
Date of appointment Andrew was originally appointed to the Board in 1987 and then again on 23 January 2004 and was appointed Deputy Chief Executive in 2008.
Date of appointment Richard was appointed to the Board on 23 April 2012 and is Chairman of the risk committee.
Other appointments • Hansteen Holdings PLC (senior independent director) • ISG PLC (non-executive director) • Alstria Office REIT-AG (supervisory board member)
Date of appointment Jim was appointed to the Board on 23 April 2010 and is Chairman of the audit committee.
Date of appointment Giles was appointed to the Board on 1 December 2000.
Other appointments • Tamar European Industrial Fund (chairman) • IRP Property Investments Limited (director) • EP Global Opportunities Trust (director)
Gordon Brough General Counsel & Deputy Group Head of Risk Gordon joined Aberdeen in February 2009 to head up the Group's legal function having previously been the partner responsible for the Group's affairs at Maclay Murray & Spens LLP. Prior to its merger with Maclays, Gordon had helped found specialist law firm, The City Law Partnership. He was appointed General Counsel and Deputy Group Head of Risk in 2012. Gordon is qualified as a lawyer in both Scots and English law.
Paul Griffiths Global Co-Head of Fixed Income Paul is the Global Co-Head of Fixed Income having joined Aberdeen in July 2009 via the acquisition of the Credit Suisse Asset Management business, where he was chief investment officer and global head of fixed income. Paul previously held a similar role at AXA Investment Managers, as well as being its UK chief executive officer. Paul graduated with a BSc in Physics from the University of York.
Andrew Smith Global Head of Property Division Andrew joined Aberdeen in 2002, taking overall responsibility for Aberdeen’s international property investment team in 2010. He previously held senior positions at AMP Asset Management and Henderson Global Investors. Andrew graduated with a BA in Geography from the University of Birmingham.
The Group management board (GMB) comprises the six executive directors, plus the following members of senior management:
UK Corporate Governance Code The Company has complied throughout the year with the UK Corporate Governance Code (the Code) except where noted in the report below. We have also considered the new edition of the Code, published in September 2012, applicable for the 2013 financial year, and are working to ensure full compliance with its provisions during the forthcoming financial year. This report describes Aberdeen's corporate governance arrangements, explaining how the Group has applied the principles of the Code.
Board composition The Board currently comprises the Chairman, seven nonexecutive directors and six executive directors. The roles of the Chairman and Chief Executive are separate, clearly defined and have been approved by the Board. The Chairman, Roger Cornick, is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role. The Chief Executive, Martin Gilbert, is responsible for the day to day management of the Group. Anita Frew continues as the Senior Independent Director, providing a sounding board for the Chairman and serving as an intermediary for the other directors, where necessary. Further information regarding the experience of the Board is given in their biographies on pages 36 to 39.
Board effectiveness Summary of Board meetings The Board met eight times during the year to review financial performance and strategy and to follow a formal schedule of matters reserved for its decision, which includes the setting of Group goals, objectives, budgets and other plans. Comprehensive board papers, comprising an agenda and formal reports and briefing papers, are sent to directors in advance of each meeting. Throughout their period in office, directors are continually updated by means of written and oral reports, from senior executives and external advisers, on the Group’s business and the competitive and regulatory environments in which it operates, as well as on legal, environmental, social, governance and other relevant matters.
The Annual General Meeting is normally attended by all directors and the chairmen of each of the Board committees are available to answer questions. The Senior Independent Director is available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate. The Group continues to offer major shareholders the opportunity to meet any or all of the Chairman, the Senior Independent Director, the Chairman of the remuneration committee and any new directors. The Group will continue its policy of announcing the number of proxy votes cast on resolutions at the Annual General Meeting and any other general meetings.
Conflicts of interest The Board confirms that it has considered and authorised any conflicts or potential conflicts of interest in accordance with the Group's existing procedures and has also implemented specific guidelines to address any potential conflicts that may arise in the future. The Board has specifically considered the other appointments held by directors, details of which are contained in their biographies on pages 36 to 39 and has confirmed that it believes that each is able to devote sufficient time to fulfil the duties required of them under the terms of their contracts or letters of appointment.
Board evaluation A formal process has been established, led by the Chairman, for the annual evaluation of the performance of the Board, its appointed committees and each director, to ensure that they continue to act effectively and efficiently and to fulfil their respective duties, and to identify any training requirements.
In contrast to the previous two Board evaluation exercises, which were carried out by an external consultant, this year's review was undertaken internally with the Chairman having received the advice of an external consultant, MWM Consulting, who did not provide the Group with any other services. The Chairman undertook interviews with each member of the Board and this was followed up with discussion at Board and committee meetings.
Board training All directors have access to independent professional advice, if required, at the Company’s expense, as well as to the advice and services of the Company Secretary. New directors appointed to the Board receive a full, formal and tailored induction, which includes meetings with relevant members of senior management, in order to help them gain a detailed understanding of the Group and its activities. During the year under review, the new director undertook induction training, which provided him with a wide range of input, including copies of past meeting papers and other governance information, including the current strategy and details of the Company's processes and procedures. The induction plan also offers the opportunity for a new director to meet with members of the Board and the executive in order to better understand their roles and the operations of the Group.
Risk management Risk management has been implemented in a top down fashion throughout the Group, starting at Board and GMB level, through to the individual operational departments. The audit and risk committees support the Board in discharging its oversight duties with regard to internal control, risk management and capital adequacy. These committees also have responsibility for ensuring that the Group strategy is informed and aligned with the Board’s risk appetite, as set out in a formal Board statement. The risk preferences arising from Board and committee discussions feed through to the planning processes for the individual business units whilst, at a higher level, help to define the overall risk appetite relating to economic capital, cashflow and earnings at risk and is embedded in the strategic planning process. The Board is also responsible for the Internal Capital Adequacy Assessment Process (ICAAP), a process required by the UK regulator, which summarises the risk management framework and regulatory capital requirements of UK regulated entities.
Internal control The risk management framework includes a sound system of internal controls that are designed to: • Identify and appraise all risks related to achieving the Group’s objectives including all business, operational, reputational, financial and regulatory risks; • Manage and control risk appropriately rather than eliminate it; • Provide reasonable, but not absolute, assurance against material misstatement or loss; • Ensure that appropriate internal controls are embedded within the business processes and form part of the Group’s culture, which emphasises clear management responsibility and accountabilities; • Respond quickly to emerging risks within the Group and the external business environment; and
• Include procedures for reporting any control failings or weaknesses to the appropriate level of management together with the details of corrective action.
Responsibility lies with the risk management committee, operating under terms of reference approved by the Board and chaired by the Group Head of Risk, for embedding the system of controls within the day-to-day operations of the Group and maintaining a strong control culture which emphasises clear management accountabilities. The committee drives the process of reporting and monitoring critical risks, issues and high priority projects. It serves to reconcile the key risks and issues identified by the business with those raised by the Group’s monitoring functions and provides assurance to the Board that risks and issues are adequately escalated and managed.
The heads of these functions, with the exception of internal audit, each report to the Group Head of Risk who, while also a director of the Group, in turn, reports to the Chief Executive and also attends and reports at meetings of the risk and the audit committees. The Head of Internal Audit reports to the Chief Executive as well as having unrestricted access to the Chairman of the audit committee.
Our operational risk system allows us to monitor, in detail, actual and potential risks and the expected financial impact of these on the Group, ensuring a stringent and comprehensive framework for controlling risk, with onward reporting to the audit and risk committees. More information on the specific risks facing the Group can be found on page 31 to 33 and further details on the operation of the audit and risk committees are detailed below.
The composition of the committees is reviewed annually, taking into consideration the recommendations of the nominations committee.
Audit committee Composition The audit committee is chaired by Jim Pettigrew. He is supported by three independent non-executive directors, Julie Chakraverty, Anita Frew and Giles Weaver. The Board is satisfied that all of the committee’s members have recent and relevant commercial and financial knowledge and experience to satisfy the provisions of the Code, by virtue of their holding or having held various executive and non-executive roles in other financial and asset management institutions. Additionally, Jim Pettigrew and Giles Weaver are chartered accountants.
Responsibilities The committee’s role is to assist the Board in discharging its duties and responsibilities for financial reporting, internal control and risk management, and the appointment and remuneration of an independent external auditor. The committee is also responsible for reviewing the scope and results of audit work and its cost effectiveness, and the independence and objectivity of the auditor.
In order to ensure the objectivity and independence of the auditor, the committee has approved a comprehensive policy to regulate the provision of non-audit services by the Group’s external auditor. The policy provides details of the types of service which are and are not permitted and those which require the explicit prior approval of the committee. Permitted nonaudit services include the provision of tax compliance services; the provision of certain recruitment services; and acting as reporting accountant in appropriate circumstances, provided there is no element of valuation work involved. The provision of tax advisory services, due diligence /transaction services and litigation services may be permitted with the committee’s prior approval. The provision of internal audit services, valuation work and any other activity that may give rise to any possibility of self-review are not permitted under any circumstance.
The committee also has responsibility for reviewing the Group's arrangements on whistle blowing, ensuring that appropriate arrangements are in place for employees to be able to raise, in confidence, matters of possible impropriety, with suitable subsequent follow-up action.
The committee received a number of regular reports at each of its meetings during the year. Reports are received from risk, compliance, internal audit and finance in order that the committee can carry out its role. The Group's external auditor also provided regular reports, both written and verbal, to each of the meetings. The committee continues to look to ensure that issues and matters presented to them are resolved in a timely manner.
Representatives of each of the relevant divisions are invited to attend and present their reports in person. During the year under review, the committee requested and received reports on the operations of the compliance division, looking in depth at their levels of staffing, timelines of reporting and of matters under review.
The members of the committee also met, individually, with the executive throughout the year, and this provided a forum for discussion outwith the formality of the five meetings held during the year. The Chairman reports back on these meetings to the committee where appropriate.
There was full attendance at all meetings by members, as shown in the table below:
Responsibilities The committee is responsible for reviewing the structure, size and composition of the Board and for recommending new directors for appointment to the Board. The Board, as a whole, has responsibility for the appointment of new directors and for nominating them for election by shareholders at the first opportunity following their appointment. The committee is also responsible for considering and making recommendations to the Board on succession planning for directors and other senior executives.
Responsibilities The report on the committee's activities is contained in the remuneration report, as set out on pages 50 to 62, and in the summary of Board meetings section on page 41 and 42.
Risk committee Composition The risk committee was chaired during the year by Giles Weaver and he was supported by four independent non-executive directors, Anita Frew, Richard Mully, Jim Pettigrew and Simon Troughton. Richard Mully joined the committee in April 2012 and was appointed Chairman of the committee subsequent to the year end in October 2012. Julie Chakraverty was appointed to the committee subsequent to the year end and all other members served throughout the year.
Report on the committee's activities during the year During the year the committee discharged its responsibilities, under its terms of reference and, in particular: a) reviewed the effectiveness of risk management, governance and compliance activity within the Group; b) advised the Board on considerations and processes for setting the Group's risk appetite and related tolerances; c) sought to ensure that senior management has in place procedures and mechanisms to identify and control all fundamental prudential operational, financial, reputational, and regulatory risks; d) reviewed and recommended the internal capital adequacy assessment process; e) sought to ensure that all risks were being addressed by management in line with the Group's risk appetite; and f) reviewed the committee's terms of reference, carrying out an annual performance evaluation exercise and noting the satisfactory operation of the committee.
Meetings and attendance The committee operates under formal terms of reference and held four formal meetings during the year, three of which were held on the same day as the meetings of the audit committee, in order to facilitate appropriate interaction between the two committees. In addition to the members of the committee, other regular attendees at the meetings included the Chairman of the Board, the Chief Executive and the other members of the Board, the Head of Risk, the Head of Internal Audit, the General Counsel and representatives of KPMG Audit plc. There was full attendance at all meetings by members, as shown in the table below: Maximum possible attendance Meetings attended
As with last year, we continue to enjoy commitment from the Board through to regional offices and individual teams, ensuring a seamless flow between our responsible business practices and day to day global operations.
Stewardship Corporate governance lies at the heart of our investment process as we believe that those companies adopting best practices in corporate governance will be more successful in their core activities and deliver enhanced returns to shareholders. The Group’s Corporate Governance Principles provide a global framework for investment analysis, shareholder engagement and proxy voting, combining international best practice with an emphasis on understanding the economic, legal and cultural context of each company. This year, the Group published its second annual equity engagement report which details the breath of our engagement with investee companies and illustrates how this engagement may affect investment decisions. This is published on the corporate governance page of our website.
We endeavour to exercise proxy votes at all shareholder meetings where we are authorised to do so by our clients. voting decisions are made by our investment managers, not outsourced to a third party, and therefore reflect our knowledge of the investee company and discussions held with management. In the year to 30 September 2012, Aberdeen voted on over 18,000 resolutions at more than 1,600 shareholder meetings, supporting management in over 92% of proposals. Our voting record is regularly updated on the corporate governance page of our website.
At a community level, local foundation committees have been encouraged to seek partnerships with smaller charities where funds can be seen to have a meaningful and measurable impact and where employees can use their time and skills to support the selected projects. In the first seven months of operation, donations were made to 46 charities in 14 of the Group’s global office locations. These charities have ranged from those focused on supporting underprivileged children and education, to disaster relief and working with young people involved in the youth justice system or at risk of involvement.
In addition, the Group also has strategic sponsorships such as Aberdeen Asset Management Cowes Week and the Aberdeen Asset Management Scottish Open and the Group has been able to go beyond the Foundation to assist partner charities at all of the events.
The global environmental committee and facilities teams have responsibility for coordinating environmental activities across the business and ensuring that activities are carried out in line with the Group wide environmental policy. Regional committees are in place to implement programmes at a local level and to build on the work that has taken place in previous years to reduce our environmental footprint.
Carbon emissions from business travel Reducing emissions from business travel remains a challenge, however, we are committed to making progress in this area. We classify business travel as air, train, car mileage and hotel accommodation. This year, focus was placed on extending and improving our video conferencing capabilities, with high quality facilities now installed in 14 of our global offices. As a result, video conferencing usage has more than doubled from last year.
Key performance indicators and targets To help focus efforts and achieve improvements, key performance indicators and targets have been set across the seven pillars of our corporate responsibility programme, details of which can be found in our corporate responsibility report on page 48.
Carbon footprint – office energy 2,138 2,191 tonnes CO2 2.50 2.79 tonnes CO2 / FTE
Aberdeen's remuneration policies are designed to support our business strategy, as a leading international asset manager. The objective is to attract, retain and reward talented individuals for the delivery of sustained, superior returns for our clients and shareholders. Aberdeen operates in a highly competitive international employment market, and aims to maintain its strong track record of success in developing and retaining talent.
During the course of the past year, the remuneration committee has reviewed a number of aspects of the remuneration policies, seeking to enhance further the close alignment with shareholders’ interests. This has resulted in some important developments, including: • For executive directors and members of the GMB, the vesting period for the deferred portion of annual bonus awards has been extended. Awards will now vest over a period of four years instead of three years. The deferred element remains unchanged at 75% of the total bonus award, substantially higher than the market norm; • The principle of clawback has been formalised in the annual bonus plan, to enable the committee to reclaim annual bonus where justified by exceptional adverse events or circumstances; • The minimum shareholding requirement for executive directors has been increased to 200% of annual salary (from 100% previously); each of our executives has a major investment in Aberdeen shares and complies comfortably with this requirement; and
For the second consecutive year, we propose that there be no increases in the base salaries for executive directors at the 1 January 2013 review. In future years, we expect that increases will be in line with inflation.
The committee would be pleased to have your support for the policies and practices detailed in our report.
Governance This report discusses the remuneration arrangements for directors and other senior employees, including those identified as Code staff as defined by the Financial Services Authority remuneration code (FSA Code); it has been prepared in compliance with the Companies Act 2006 and related regulations (the Regulations) and the UK Corporate Governance Code. Those sections of the report which have been audited by KPMG are identified as such.
A resolution to approve this report will be proposed at the forthcoming Annual General Meeting.
Attendance The committee held six scheduled meetings during the year, at which all members were present, and also held ad hoc meetings and several telephone conferences on matters arising. The Chairman of the Board, as well as the Chief Executive, Deputy Chief Executive and Finance Director, attend meetings of the committee by invitation, as does the Head of HR. None of these executives was present when matters relating to their own remuneration were discussed.
New Bridge Street (NBS) provided independent advice to the committee throughout the year. NBS does not provide any other services to the Group.
Key responsibilities of the committee The committee operates on the basis of detailed written terms of reference, which are reviewed annually and are published on the Group’s website. The committee was established by the Board to: a) determine and recommend to the Board the Group's policy on remuneration of executive directors and senior employees; b) determine the specific remuneration levels of the Chairman, the executive directors and other senior employees; c) determine the overall size of the annual bonus pool; d) ensure that appropriate performance targets are set and that any payments made to executive directors and senior employees reflect achievement against such targets; e) consider individual awards under any incentive scheme to all executive directors and other senior employees; f) consider any redundancy or severance payment which exceeds the terms of the Group’s standard policies; g) ensure that the Group maintains contact with its principal shareholders on remuneration matters - the committee Chairman keeps in regular contact with major shareholders and actively consults them on remuneration policies; h) approve all substantive changes to the Group's pension arrangements; i) ensure proportionate compliance with the FSA Code; and j) report to shareholders in accordance with relevant legal requirements and associated codes of practice.
Activities during the year The principal activities of the committee during the year included: • Reviewing the committee's terms of reference; • Reviewing the levels of base salary for executive directors and other senior staff; • Determining the maximum value of the overall annual bonus pool, taking account of the Group’s financial and operational performance; • Reviewing the policy for long-term remuneration, including considering whether long-term incentive awards should be re-introduced or whether the deferral period for annual bonus should be extended for members of the GMB and senior members of the fund management teams; • Considering the shareholding requirements for executive directors; • Assessing whether individual annual bonuses should be subject to a cap; • Formalising a policy on clawback of bonus awards in appropriate circumstances; • Assessing the level of performance against objectives for executive directors and senior employees and reviewing and recommending bonus awards accordingly; • Assessing the extent to which the performance conditions for vesting of LTIP awards were met and determining the appropriate vesting proportion; and
The committee takes into account the remuneration and employment conditions of employees throughout the Group when considering remuneration for executive directors, and seeks to apply a consistent remuneration philosophy. This includes, for example, considering the general levels of base salary increase and the principles applying to incentive pay.
Clawback The committee has formalised the clawback principle applied in the annual bonus plan. This enables annual bonus in the exceptional event of: a misstatement or misleading representation of performance; a significant failure of risk management and control; or serious misconduct by an individual.
Long-term remuneration The committee has not granted long-term incentive (LTI) awards since 2009. As part of the recent review, the committee considered whether it was appropriate to re-commence LTI awards.
The committee also concluded that the absence of a separate LTI programme helps to reduce the complexity of the package.
Shareholding requirements The committee increased the shareholding requirement for executive directors to 200% of base salary, twice the previous requirement. Deferred share awards arising from annual bonus awards are recognised as part of an individual’s shareholding.
• Any increases to reflect inflation are applied in a manner consistent with other Group employees; any other increases to be justified by reference to promotion or changes in responsibilities.
Fixed • To make contributions for the benefit of employees to appropriate defined contribution pension arrangements, subject to normal practice in the relevant country.
• The policy relating to other fringe benefits for executive directors is generally the same as for other Aberdeen employees.
• Executive directors and other staff receive medical insurance and life insurance cover in accordance with market practice in each country.
• 75% of the annual bonus is deferred for the executive directors into Aberdeen shares. Other senior employees have the opportunity to defer half of their 75% deferral into holdings in funds managed by Aberdeen, with the balance compulsorily deferred into Aberdeen shares.
• The committee determines the KPIs that will be applied in considering the overall size of the bonus pool.
• The committee considers individual bonus awards for executives taking account of their personal contribution to the Group's performance, and the levels of incentive pay for similar roles in the market.
Awards to individuals in any year are made 25% in cash and 75% deferred. The deferred element is awarded as follows: Form of deferred award Vesting period
Aberdeen shares In equal tranches over four years, vesting on the 1st, 2nd , 3rd and 4th anniversaries of the award.
Other staff Minimum of 50% in Aberdeen shares, up to 50% in funds managed by Aberdeen
In equal tranches over three years, vesting on the 1st, 2nd, and 3rd anniversaries of the award.
The deferral policy is intended to assist in the retention of talent and to create additional alignment of executives' interests with Aberdeen's sustained performance and, in respect of the deferral into funds, managed by Aberdeen, to align the interest of asset managers with our clients. The table below summarises performance outcomes for 2012, relative to a number of KPIs that were taken into account by the committee in considering annual bonus awards: Change in underlying profit before taxation +14% +44% +147%
In addition to these KPIs, there are specific personal objectives for the year, which are linked to the principal strategic objectives of the Group. For 2012, the principal objectives selected by the committee for the executive directors focused on the delivery of organic growth, the meeting of budgets and operating efficiencies, and ensuring key client and staff retention.
The committee's policy is that the aggregate bonus pool, covering awards made to all of the Group’s staff, should normally be no more than 25% of pre-bonus operating profit.
The participant does not obtain absolute ownership of any LTIP awards until the end of the measurement period and then only to the extent that the performance targets have been satisfied. Participants are entitled to receive any dividends paid on the shares during the measurement period. Such dividends paid to directors are disclosed in the audited section of the report.
Further, the LTIP rules state that no award will vest unless, in the opinion of the committee, the underlying financial performance of the Group over the relevant measurement period has been satisfactory.
The table below summarises the vesting outcomes of awards made in previous years.
iv) Share option scheme The Group has an executive share option scheme which is approved by HM Revenue and Customs and was approved by shareholders prior to its introduction. In March 2004, the scheme reached the end of the ten year period during which the grant of options was permitted. All options outstanding are now capable of being exercised, having met their performance criteria. Incentive options were also issued under the Group's LTIP in 2008.
Details of share options held by the executive directors are shown in the audited section of the report.
www.aberdeen-asset.com 57 v) Other benefits Private health care and life assurance is provided to all executive directors.
As the graph shows Aberdeen's TSR of 110% for the five year period was substantially above the two comparator indices.
Shareholding requirement The Board reviewed and refined its policy on shareholding requirements for executive directors. The Board has decided that executive directors should acquire and retain a beneficial shareholding (which includes deferred share awards which have not yet vested) equivalent to 200% of salary (previously 100% of salary), to be acquired over a period of no more than five years from the date of appointment. The beneficial holdings of all of the executive directors, which are summarised in the following table, comfortably exceed this requirement.
Audited information on executive directors’ interests in the shares of the Company is set out later in the report.
Martin Gilbert 30 August 1996 12 months 6 months One year’s remuneration
Non-executive directors Non-executive directors are engaged under letters of appointment and they do not have contracts of service.
The letters of appointment are available for inspection at the Company's registered office during normal business hours and are available on the Company's website.
The appointment will normally terminate on: i) a director choosing to resign voluntarily; or ii) a director being prohibited from serving by law, bankruptcy or illness; or iii) annually, if the nominations committee does not approve the extension of his/her appointment; or iv) a director being found guilty of misconduct; or v) a director not being re-elected by the shareholders following retirement by rotation at an Annual General Meeting.
Total 2,578 190 136 2,806 8,419 14,129 13,566 1 Expatriate benefits paid to Hugh Young include allowances for housing, and expenses over medical and travel. 2 2011 totals for Anne Richards and Hugh Young cover the period from their date of appointment rather than a full year.
Directors’ interests in ordinary shares arising from deferred element of annual bonus awards (audited information)
Hugh Young 751,209 – (751,209) 84.2p – vested 1 Awards stated as having vested have reached the earliest vesting dates set at the date of award; as such, the participant can exercise his or her right to require formal vesting at any time without restriction.
Bill Rattray 23.1.04 144,000 – – 144,000 59p Jan 2007 Jan 2014 Achieved
Anne Richards 17.6.08 150,000 – – 150,000 130.25p Jun 2011 Jun 2018 Achieved
Principal activity and business review The principal activity of the Group is the provision of asset management services. Further information on the Group’s business, which is required by section 417 of the Companies Act 2006, can be found in the following sections of the Annual report, which are incorporated by reference into this report: • Chairman’s statement on pages 2 and 3; • Business model and strategy on pages 10 to 13; • Employees on page 18; • Business review on pages 22 to 30; • Principal risks on pages 31 to 33; • Environmental, social and community matters on pages 48 to 49.
Financial The results for the year are shown in the Group income statement on page 73.
The proposed final dividend, if approved, will be paid on 24 January 2013 to shareholders on the register at the close of business on 7 December 2012. Coupon payments of £19.8 million have been paid on the 7.9% perpetual capital securities.
Richard Mully2 – – – – – – 1 The holdings for Messrs Gilbert, Rattray and Laing include shares awarded under the Group’s LTIP and which have achieved the relevant performance criteria and will vest in December 2012. Full details are given in the remuneration report. 2 At date of appointment. 3 At date of retirement.
There have been no other changes to the directors' holdings between 30 September 2012 and 23 November 2012.
Charitable contributions During the year, the Group made various charitable contributions totalling £1,045,000 (2011: £953,000), an element of which was contributed to the Group's Charitable Foundation. It is the Group’s policy not to make contributions for political purposes.
Directors’ indemnities The Company maintains directors and officers’ liability insurance which provides appropriate cover for any legal action brought against its directors.
Audit information The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
Electronic proxy voting Registered shareholders have the opportunity to submit their votes (or abstain) on all resolutions proposed at the Annual General Meeting by means of an electronic voting facility operated by the Company’s registrar, Equiniti Limited. This facility can be accessed by visiting www.sharevote.co.uk. CREST members may appoint a proxy or proxies by using the CREST electronic appointment service.
The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 65, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 37 Albyn Place Aberdeen AB10 1JB
Basis of preparation The financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards endorsed by the EU (adopted IFRS).
The financial statements have been prepared on the historical cost basis, except that certain of the Group’s financial instruments are stated at their fair values and the measurement of long-term employee benefits at present value of the obligation less fair value of any assets held to settle the obligation. The principal accounting policies, which have been consistently applied, unless otherwise stated, are set out below.
Going concern The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the directors' report (unaudited) on page 64.
Amendments to IFRS 10, 11 and 12 (December 2011) 'Transition guidance' 1 January 2013
The directors are still assessing the impact of these standards on the Group's financial results in the period of initial application.
All intercompany transactions, balances, income and expenses between Group entities are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Business combinations Purchases of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values at the acquisition date of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the income statement as incurred.
Where applicable, consideration for an acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its fair value at acquisition date. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS. Changes in the fair value of contingent consideration classified as equity are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (Revised 2008) are recognised at their fair values at the acquisition date, except that: • deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; • liabilities or equity instruments related to the replacement by the Group of an acquiree’s share-based payment awards are measured in accordance with IFRS 2 Share-based Payments; and
• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed at the acquisition date, and is subject to a maximum of one year.
Commissions and similar expenses payable to intermediaries are recognised when services are provided.
The Group is entitled to earn performance fees from a number of clients where the actual performance of the clients’ assets exceeds defined benchmarks by an agreed level of outperformance over a set time period. Performance fees are recognised when the quantum of the fee can be reliably estimated and it is probable that the fee will be received.
Finance costs Finance costs comprise interest payable on borrowings recognised using the effective interest rate method. They also include non-utilisation fees charged on the undrawn portion of the revolving credit facility.
Rental income from sub-leases is recognised on a straight-line basis over the term of the relevant sub-lease.
Pension costs The principal pension scheme operated by the Group is a Group personal pension scheme. In addition, overseas subsidiaries make contributions to various trade and state defined contribution schemes. Contributions to these defined contribution pension schemes are recognised as an expense in the income statement as they become payable under the rules of the schemes.
The Group also operates a number of legacy defined benefit pension schemes which arose on acquisitions, one of which is operated by the Company. All schemes are closed to new membership and to future service accruals. The Group’s net obligation in respect of these schemes is calculated separately for each scheme by estimating the amount of future benefit that members have earned in return for their service in prior periods; that benefit is discounted to determine its present value, and the fair value of any scheme assets is deducted. The benefits are discounted at a rate equal to the yield on high credit rated corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
Share based payments The Group issues equity-settled and cash-settled share based payments to certain employees. valuation approach, assumptions and schemes are disclosed in note 22.
For cash-settled share-based payments, a liability is recognised for the goods or services acquired, measured initially at the fair value of the liability. At each balance sheet date until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with any changes in fair value recognised in profit or loss for the year.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities
Deferred tax is provided using the balance sheet liability method and is calculated at the tax rates substantively enacted that are expected to apply when the asset is realised or the liability settled.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised, except: • in respect of taxable or deductible temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that they will not reverse in the foreseeable future.
Property, plant & equipment is depreciated so as to write off the cost of assets, on a straight line basis, over their estimated useful lives as follows: • Heritable property: 50 years
Management contracts and distribution agreements Intangible assets, such as management contracts and distribution agreements acquired as part of a business combination, are capitalised where it is probable that future economic benefits attributable to the assets will flow to the Group and the fair value of the assets can be measured reliably.
Software Purchased intangible assets have a finite life and are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight
www.aberdeen-asset.com 71 line basis according to the useful economic life of the intangible asset which, for software, is estimated at five years. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates.
Convertible bonds that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments with a liability and equity component. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The equity component of the convertible bonds is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest rate method.
The Group has adopted trade date accounting. Accordingly, a financial investment is recognised on the date the Group commits to its purchase and derecognised on the date on which the Group commits to its sale.
Investment contracts The Group sells unit linked life and pension contracts through its insurance subsidiary, Aberdeen Asset Management Life and Pensions Limited (L&P). Management fees earned from these contracts are accounted for as described in the accounting policy for revenue.
Equity instruments Perpetual subordinated capital securities The 7.9% perpetual subordinated capital securities are classified as an element of equity as the securities are irredeemable, except at the Company’s option, and coupon payments are discretionary. Coupon payments, net of attributable tax, are recognised as distributions within equity.
Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense. No provision is established where a reliable estimate of the obligation cannot be made.
Transactions in foreign currencies are translated to the functional currency at the exchange rate ruling at the date of the transaction. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at the balance sheet date and any exchange differences arising are taken to the income statement. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated to the functional currency using the exchange rate at the date of the transaction and so no exchange differences arise. Non-monetary assets and liabilities stated at fair value in a foreign currency are translated at the exchange rate ruling at the balance sheet date. Where fair value movements in assets and liabilities are reflected in the income statement, the corresponding exchange movements are also recognised in the income statement. Where fair value movements in assets and liabilities are reflected directly in other comprehensive income, the corresponding exchange movements are also recognised directly in other comprehensive income.
Amortisation and impairment of intangible assets – (78.1) (78.1) – (77.8) (77.8)
Net actuarial gain (loss) on defined benefit pension schemes 0.6 6.0 (1.6) (0.1)
Available for sale assets: – losses during the period (0.7) (4.7) (1.4) (2.8)
– losses recycled from equity to the income statement 4.6 1.7 0.4 –
Attributable to: Equity shareholders of the Company 200.6 176.6 196.1 140.4
Liabilities Non-current liabilities Interest bearing loans and borrowings 25 – 82.0 – 82.0
The financial statements were approved by the Board of Directors on 23 November 2012, and signed on its behalf by: R C Cornick Chairman W J Rattray Finance Director
Arising on the issue of shares – 0.1 – – – – – – – – 0.1
Profit for the period – – – – – – – 142.6 – 14.2 156.8 Other comprehensive expense – – – – – (2.1) – (0.1) – – (2.2) Total comprehensive (expense) income – – – – – (2.1) – 142.5 – 14.2 154.6 Arising on the issue of shares 0.1 0.1 – – – – – – – – 0.2 Share based payment charge – – – – – – – 54.4 – – 54.4 Purchase of own shares – – – – – – – (98.1) – – (98.1) Dividends paid to shareholders – – – – – – – (86.1) – (14.2) (100.3)
Conversion of preference shares – 0.8 – – – – (0.8) – – – – Share based payment charge – – – – – – – 54.1 – – 54.1 Purchase of own shares – – – – – – – (83.1) – – (83.1) Dividends paid to shareholders – – – – – – – (106.2) – (14.9) (121.1)
Total equity £m Group Balance at 30 September 2010 114.8 812.1 31.1 172.7 8.4 (5.7) 10.3 (170.5) 13.6 198.1 1,184.9 Profit for the period – – – – – – – 169.7 – 14.2 183.9 Other comprehensive income (expense) – – – – 2.3 (2.3) – 6.9 – – 6.9
Acquisition of businesses, net of cash acquired – (3.3) – –
Cash and cash equivalents at 1 October 209.5 150.8 (229.9) (117.5)
Exchange rate fluctuations on cash and cash equivalents 1.1 (2.7) (0.4) 1.3
Cash and cash equivalents at 30 September 347.9 209.5 (189.9) (229.9)
Notes to the financial statements For the year to 30 September 2012 1 Segmental disclosures The Group operates a single business segment of asset management for reporting and control purposes.
Operating profit is stated after charging (crediting): Fees payable to the Company's auditor for the audit of the Company's accounts 0.2 0.2
Fees payable to the Company's auditor and its associates for other services
– audit of the Company's subsidiaries pursuant to legislation 1.0 1.1
Fees paid to the Company's auditor Other services pursuant to legislation includes £41,000 (2011: £40,000) for review of the interim statement.
Decrease (increase) in open end fund receivables 69.7 (30.4) – –
(Decrease) increase in open end fund payables (75.0) 38.3 – –
Aggregate employee costs, including directors: Salaries and cash bonuses 184.8 165.2
Aggregate employee costs, including directors: Salaries and cash bonuses 31.4 30.4
Average number of employees during the year 351 391 6 Net finance costs £m £m
Interest on overdrafts, revolving credit facilities and other interest bearing accounts 1.7 0.2
Release of discount on liability component of convertible bonds 2.0 1.7
Current tax expense UK corporation tax on profit for the year 24.4 23.2 Adjustments in respect of prior periods (2.6) (1.3)
Reconciliation of effective tax rate Profit before tax 269.7 224.1 Income tax calculated at the UK corporation tax rate 25% (2011: 27%) 67.4 60.5 Effect of lower tax rates applicable in foreign jurisdictions (25.5) (33.0) Effect of capital gains deductions and exempt capital losses (0.4) 0.8 Movement in unrecognised deferred tax asset 8.2 13.7 Change in UK tax rates on deferred tax balances 1.9 (1.7) Non-taxable income (4.9) (0.9) Other timing differences 0.9 (0.1) Adjustments in respect of prior years (1.5) 0.9 Total tax expense in income statement 46.1 40.2
Domestic tax rate The UK tax rate for the year is 25% (2011: 27%).
The effective tax charge borne by the Group's UK subsidiaries will reduce accordingly in future years.
All UK deferred tax assets and liabilities that will unwind after 1 April 2013 have been recognised at the rate of 23%, being the rate substantively enacted by the UK Parliament, effective from that date.
Dividends on ordinary shares: The total ordinary dividend for the year is 11.5p per share including the proposed final dividend for 2012 of 7.1p per share.
Coupon payments in respect of perpetual capital securities (net of tax) (14.9) (14.2) (14.9) (14.2)
Profit for calculation of basic earnings per share, as above 208.5 169.4 270.0 227.2
Profit for calculation of diluted earnings per share 213.0 173.7 274.5 231.5
The recoverable amount of the CGU is determined by value-in-use calculations which use five year cash flow projections based on the Group's approved budget for the year to 30 September 2013 and which take into account the market conditions prevailing at the time. A long-term growth rate is used to extrapolate the cash flows within the value-in-use calculations for later years. The long-term growth rate assumption of 2% is in line with the long-term nature of the Group's business and in line with the Board's view that the Group will operate as a going concern in the long-term.
Impairment tests were performed using the higher of value-in-use calculations (using methods and assumptions described above in relation to goodwill) and estimates of fair value less costs to sell. Both measures of value were compared with the carrying value of the contracts. An impairment charge of £10.0 million was recognised in the year to 30 September 2011 following the decision that DEGI International was to be placed into a controlled wind-down over a three year period.
Indefinite life – open end fund contracts 79.3 N/A Indefinite 99.3 N/A Indefinite
Company impairment review A review of goodwill and management contracts held by the Company was carried out on the same basis as the Group review described above. There were no indicators of impairment in respect of the management contracts held by the Company. No impairment of goodwill or management contracts has been recognised in the year.
Charge for year – 1.3 2.9 – 4.2 On disposals – – (1.6) – (1.6)
The Company's investments in subsidiary undertakings are measured at cost less provision for impairment. The increase during the year relates to an internal legal entity restructuring.
The principal subsidiaries at 30 September 2012 were as follows: Subsidiary undertakings Principal activity
Aberdeen International Fund Managers Limited Fund distribution 100 Hong Kong Hong Kong
Aberdeen Asset Management Life and Pensions Limited Life and Pensions 100 England UK
Due from trustees for open end fund redemptions 41.2 117.6 – –
Due from investors for open end fund sales 14.8 8.1 – –
The risks and rewards of these assets fall to the benefit of or are borne by the underlying policyholders. Therefore, the investment contract liabilities shown in the Group's balance sheet are equal and opposite in value to the assets held on behalf of the policyholders. The Group has no direct exposure to fluctuations in the value of assets which are held on behalf of policyholders, nor to fluctuations in the value of the assets arising from changes in market prices or credit default. The Group's exposure to these assets is limited to the revenue earned, which varies according to movements in the value of the assets.
Cash and cash equivalents in the statements of cash flows 347.9 209.5 (189.9) (229.9)
At 30 September 2012, the Group had £100 million (2011: £100 million) of undrawn committed borrowing facilities under its revolving credit arrangements (note 25).
The carrying amounts of the Group's cash and cash equivalents are denominated in the following currencies: Group Company £m £m £m £m
289,700 ordinary shares of 10p each were issued at an average price of 52.8p pursuant to the exercise of options granted to employees under the 1994 Executive Share Option Scheme.
4,401,151 ordinary shares of 10p each were issued on conversion of convertible preference share units.
1,621,621 ordinary shares of 10p each were issued in respect of the conversion of £3 million of 3.5% convertible bonds 2014.
Expense arising from the award of shares and options under the LTIP 2.2 4.7 1.3 0.9
Deferred share awards - equity settled The Group has made the following deferred share awards, which are equity settled, do not have ongoing performance conditions, but have a time vesting condition: Number
Deferred share awards - cash settled An element of bonus awards will be settled in cash by reference to the share prices of certain Aberdeen managed funds. These are accounted for as cash settled awards and are revalued to market price at the end of each reporting period. At 30 September 2012, the value of liabilities arising from cash settled deferred awards was £12.5 million (2011: £5.9 million). The fair value movement of the awards from grant date to the 30 September 2012 was £0.3 million.
LTIP £2.2 million (2011: £4.3 million) of the LTIP charge arises from 20,400,000 incentive options granted on 17 June 2008. These awards vest, subject to the satisfaction of the performance conditions, one third after 3 years, one third after 4 years and one third after 5 years. The vesting in years 4 and 5 remains subject to continued employment with the Group.
The performance criteria for the awards are linked to the growth in diluted earnings per share over the measurement period (3 years from date of award) compared with the average movement in the stock markets in which assets managed by the Group are invested. The share price at 17 June 2011 was 216.0p, compared to 130.25p at date of award.
Nature and purpose of reserves Share premium account The share premium account is used to record the issue of share capital above par value. This reserve is not distributable and can only be reduced with court approval.
Merger reserve The merger reserve is used to record share premium on shares issued by way of consideration in respect of acquisitions. The realised element of the merger reserve can be used to offset amortisation and impairment of intangible assets charged to the income statement. This reserve is not distributable.
Fair value reserve This reserve records fair value changes on available for sale investments until the investments are derecognised.
Retained profit Retained earnings comprises: • all realised gains and losses through the income statement less dividend distributions; • actuarial gains and losses recognised in the pension liability, and related deferred tax; • gains and losses on available for sale assets and deferred tax on these movements; • transactions relating to equity-settled share-based payments, and all deferred tax movements on share-based payments reflected through equity; and
The Company is authorised pursuant to section 701 of the Companies Act 2006 to make market purchases of ordinary shares.
No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral the Company would not declare or pay any dividend on its ordinary or preference share capital.
Coupon payments are made quarterly in arrears on 28 February, 29 May, 29 August and 29 November in each year.
On 17 December 2009, the Group issued £90 million 3.5% convertible bonds 2014. The bonds have a term of five years and unless previously redeemed, converted, or purchased and cancelled the bonds will be redeemed at their principal amount on 17 December 2014. Interest is payable semi-annually in arrears on 17 June and 17 December. The bonds are convertible into ordinary shares of the Company at any time after 28 January 2010 at a conversion price of 185p.
The Company has negotiated revolving credit facilities totalling £100 million with Lloyds Banking Group and Barclays Capital which run to 6 July 2014. Interest is charged at 1.75% over LIBOR on drawn amounts, with non-utilisation fees of 0.6125% on undrawn balances.
Due to trustees for open end fund creations 24.3 20.7 – –
28 Operating leases The Group and Company have non-cancellable operating lease rentals which are payable as follows: Group Company
Land and buildings Motor vehicles and plant and equipment Land and buildings £m £m £m £m £m £m
Between two and five years 50.5 46.4 1.0 0.5 19.9 19.0
During the year ended 30 September 2012, £13.5 million was recognised as an expense in the income statement in respect of operating leases (2011: £14.4 million).
Sub-lease receivables At the year end future minimum rentals under non-cancellable operating leases were as follows: Group Company
www.aberdeen-asset.com 103 29 Fair value of financial instruments Set out below is a comparison by category of the carrying amounts and fair values of all the Group and Company's financial instruments that are carried in the financial statements.
Designated as fair value through profit or loss: Stock of units and shares 0.2 0.4 0.2 0.4 – – – –
Assets backing investment contract liabilities 2,311.9 1,128.1 2,311.9 1,128.1 – – – –
Designated as available for sale: Other financial assets: Other investment held at amortised cost 15.9 – 15.9 – 15.9 – 15.9 –
Interest bearing loans The fair value of borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates.
The valuations have considered similar issues available in the market and the liquidity of liabilities. This excludes the unamortised issue costs of £1.2 million.
The fair value of the liability component of the convertible bonds is determined using a 5.85% yield based on a similar instrument, assuming three years to maturity without conversion.
As explained in note 18, the risks and rewards of managing these assets are the same as other assets under management as the financial risks and rewards attributable to theses assets also fall to be borne by, or to the benefit of, clients. Hence, while a number of significant financial instruments are recognised in the balance sheet in respect of the subsidiary, the key risk to the Group is the impact of the level of the fees which are earned from this entity which are directly impacted by the underlying value of the policyholder assets. While by necessity this subsidiary company has some insurance risks, these risks are completely reinsured, thereby negating any ultimate insurance risk to the Group's equity holders.
Fair value measurements recognised in the balance sheet The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which fair value is observable: – Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities; – Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
– Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Investments in life and pensions subsidiary 23.1 – – 23.1 Available for sale financial assets Other investments 2.1 – 44.7 46.8
The Group's risk committee oversees how management monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Board has approved the risk appetite statement, which sets out the quantum and types of risk that the Group is willing to accept in pursuing its objectives. The risk appetite statement is a top-down framework against which policies, systems and limits can be set. The Group’s risk committee monitors compliance with the risk appetite statement through a series of key performance indicators.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees are involved and understand their roles and obligations.
As detailed in note 29, the carrying value of financial instruments approximate their fair value, with the exception of interest bearing loans and borrowings. The Group's maximum exposure to credit risk is represented by the carrying amount of its financial assets.
30 Financial risk management (continued) Details of provisions against trade receivables at 30 September are as follows: Group £m £m
This is a 100% provision held against gross trade receivable balances of £0.5 million at 30 September 2012 (2011: £0.7 million).
Fees are billed to clients as soon as values are available and settlement is due within agreed contractual terms. As a result, the average level for debtors and accrued income outstanding, at any point in time, will represent approximately 2.5 months' revenue.
At 30 September 2012 the Group had three (2011: six) individual clients with greater than £1 million outstanding. The total outstanding was £4.6 million (2011: £22.7 million).
The Group, in some situations, may be exposed to a concentration of credit risk, particularly from some of its larger clients or groups of connected clients. This may arise during the period from recognition of management fees in the income statement and settlement of fees by clients. very few clients have external credit ratings.
The Group operates and manages a number of open end funds and in doing so it seeks as far as possible to match the purchase and sale of investments in order to match the receipt or payment of funds from or to clients. Where these positions are not matched the Group may be required to fund any shortfall although due to the short settlement period for these transactions the risk relating to unsettled transactions is considered to be small. In addition should any investor default on any payment due the Group would be entitled to recover any costs from the investor.
iii) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due or can only do so at a significantly increased cost.
Liquidity risk – Company The expected cash flows related to the Company's financial liabilities are as follows: As at 30 September 2012
All other Group and Company financial liabilities are repayable within one year or on demand.
Interest bearing loans and borrowings 82.7 82.7 – – – – –
Interest bearing loans and borrowings 83.7 83.7 – – – – –
Interest bearing loans and borrowings 453.1 453.1 – – – –
The no interest financial assets do not have maturity dates. They principally comprise available for sale investments, seed capital investments and other debtors.
The floating rate financial assets principally comprise cash and deposit balances which earn interest at rates which fluctuate according to money market rates.
The sensitivity analysis covers the financial instruments at each of the balance sheet dates and assumes changes in market variables. It should however be noted that due to the inherent uncertainty in world financial markets the assumptions made may differ significantly from the actual outcome particularly as market risks tend to be interdependent and are therefore unlikely to move in isolation.
The following assumptions have been made in respect of the market risks: • Sterling exchange rates are assumed to increase or decrease by 10%
• Market interest rates are assumed to increase or decrease by 1%
Financial investments at fair value through profit or loss 3.2 (3.2) – –
The Group’s capital structure consists of equity instruments, retained earnings and other equity reserves together with the perpetual capital securities. The perpetual capital securities satisfy the requirements of financial reporting standards for treatment as equity and are treated as an element of capital for regulatory purposes.
Subsequent to the year-end, the capital position has been strengthened further by the conversion of £65.1 million of convertible bonds to ordinary shares. This is discussed in note 33.
The Group is required to undertake an Internal Capital Adequacy Assessment Process (ICAAP), under which the Board quantifies the level of capital required to meet operational risks; this is referred to as the Pillar 2 capital requirement. The objective of this process is to ensure that firms have adequate capital to enable them to manage their risks which may not be adequately covered under the Pillar 1 requirements. This is a forward looking exercise which includes stress testing for the effects of major risks, such as those discussed on pages 31 to 33. These tests consider how the Group would cope with a significant market downturn, for example, and include an assessment of the Group's ability to mitigate the risks.
At 30 September 2012 the Group had three subsidiaries which are registered in the United Kingdom and regulated by the FSA and a further 35 subsidiaries which are subject to regulation in a number of overseas jurisdictions. With the exception of Aberdeen Asset Management Life and Pensions Limited, which is a regulated insurance firm, all others are regulated investment firms and are part of the Group consolidation for regulatory capital reporting purposes. The overseas regulated companies are subject to regulatory capital requirements which are determined by the respective local regulators.
All the regulated companies in the Group maintained surpluses over their respective regulatory capital requirements throughout the year.
The Group contributed the following amounts to defined benefit and defined contribution plans and had amounts outstanding at 30 September each year as follows: Employer contributions
32 Retirement benefits The Group's principal form of pension provision is by way of three defined contribution schemes operated worldwide. The Group also operates several legacy defined benefit schemes: the CGA Staff Pension Fund, the Murray Johnstone Limited Retirement Benefits Plan and the Edinburgh Fund Managers Group plc Retirement & Death Benefits Scheme and the DEGI Pension Plan. These defined benefit schemes are closed to new membership and to future service accrual.
Overseas schemes 9.4 7.9 ii) In respect of the Group’s defined benefit schemes: Pension cost charged to operating profit: UK and DEGI schemes 1.9 1.3
The pension obligations are recognised as non-current liabilities in the balance sheet and are stated gross of the related deferred tax asset. The pension surplus is recognised as a non-current asset in the balance sheet and is stated gross of the deferred tax liability.
32 Retirement benefits (continued) The weighted average assumptions used to determine the net pension cost are as follows: Discount rate 5.1 5.0
Rate of compensation increase (applies to Murray Johnstone only) 5.2 5.2
Expected age at death for a male currently aged 40 retiring in the future at age 60 90.5 89.6
Expected age at death for a female currently aged 40 retiring in the future at age 60 91.8 90.9
The mortality tables used for the DEGI scheme were RT2005G with 80% invalidity.
Fair value of scheme assets at end of year 150.5 127.0
Amounts recognised in the statement of comprehensive income in the year include the amount shown above for the Group's main defined benefit schemes plus an actuarial loss of £1.2 million for other schemes.
32 Retirement benefits (continued) The Group expects to pay approximately £7.1 million to the UK defined benefit schemes in the next financial year.
Expense recognised in the income statement Interest cost 7.5 7.3 Expected return on scheme assets (5.5) (5.9)
Amount recognised in other comprehensive income Actuarial gain in the year 1.9 4.7 Cumulative amount recognised (34.4) (36.3)
5) Five year summary The following disclosures relate to all Group schemes.
The trustees of the funds are required to act in the best interests of the funds' beneficiaries.
Five year summary 2012 £m 2011 £m 2010 £m £m 2008 £m
Tax on profit on ordinary activities (46.1) (40.2) (18.3) (3.8) (13.6)
Aberdeen Private Wealth Management Limited No. 1 Seaton Place, St Helier, Jersey JE4 8YJ
Asia Pacific Aberdeen Asset Management Company Limited Bangkok City Tower, 28th Floor, 179 South Sathorn Road, Thungmahamek, Sathorn, Bangkok 10120, Thailand
Aberdeen Asset Management Sdn Bhd Suite 25.3 Level 25, Menara IMC, Letter Box No. 66, No. 8 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
Aberdeen Asset Management Asia Limited 21 Church Street, #01-01 Capital Square Two, Singapore 049480
Aberdeen Asset Management Limited Level 6, 201 Kent Street, Sydney, NSW 2000, Australia
Aberdeen International Securities Investment Consulting Company Limited 8F, No.101 Songren Road Xinyi Dist, Taipei City Taiwan (R.O.C.) 110-73 Tel: +886 2 8722 4516 Fax: +886 2 8722 4501
Aberdeen Asset Management Hungary Alapkezelõ Zrt. 6th Floor, B torony, váci út 1-3, 1062 Budapest, Hungary
Aberdeen Global Services S.A. 2b, rue Albert Borschette, L- 1246 Luxembourg
Aberdeen Asset Management France SA Washington Plaza, 29 Rue de Berri, 75408, Paris Cedex 08 Tel: +33 1 7309 0300 Fax: +33 1 7309 0328
Aberdeen Asset Management AB Sveavagen 25, Box 3039, 103 63 Stockholm, Sweden Tel: +46 (0) 412 80 00 Fax: +46 (0) 412 86 00
Aberdeen Asset Management Norway AS Henrik Ibsens gt. 100 0255 Oslo, Norway
Aberdeen do Brasil Gestão de Recursos Ltda. Av. São Gabriel, 477 - 4º andar - Jardim Paulista São Paulo, Brazil, SP 01435-001
Aberdeen Asset Management Inc. 161 Bay Street, 44th Floor TD Canada Trust Tower Toronto, Ontario Canada M5J 2S1
Aberdeen Asset Management Inc. 49th Floor, 712 Fifth Avenue New York, New York 10019 USA
Details of other office locations can be found on the Group’s website at www.aberdeen-asset.com
Aberdeen Asset M anagem ent PLC Annual Report and Accounts 2012