As a long-term savings and investments business, AUA is a key driver of income and therefore shareholder value. AUA was up 12% to a record £244.2bn.
EEV operating capital and cash generation reflects our ability to generate capital and cash. This enables further investment in the business and the payment of dividends to our shareholders. This decreased by 17% to £582m due to costs associated with increased sales and lower benefit from one-off items.
EEV operating profit before tax measures our ability to effectively manage our existing book of business and to write profitable new business. EEV profitability decreased by 16% to £915m, with 2012 including significant benefit from one-off items.
Group underlying performance increased by 19% to £638m (2012: £534m) and business unit underlying performance increased by 25% to £704m (2012: £561m). 2013 benefited from a strong performance in Standard Life Investments and the UK.
£867m* £751m * Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits.
15.8 pence per share Full year dividend (subject to shareholder approval)
£466m IFRS profit after tax attributable to equity holders – 30% decrease
If you want to know the definitions for these financial terms, you will find them in the glossary on pages 283 to 288.
A narrative review of the Group’s performance that includes an overview from the Chief Executive and details of our individual businesses. You can also find out about our approach to risk management and sustainability.
Another year of good progress I am pleased to report another year of good progress for Standard Life. Our world-class investments business has continued to deliver innovative propositions and excellent performance. We have continued to build our global presence and also maintain our leading position in the UK savings and pensions market, which is one of the most competitive and dynamic in the world. Our strong balance sheet allows us to look after the savings and pensions of around six million people across the world through our whollyowned businesses in the UK, Canada, USA, Germany, Ireland, Hong Kong, Singapore, and Dubai. We are very conscious of the important part we play in many people's lives. It is a special responsibility to have and we strive constantly to ensure that we live up to our customers’ expectations.
Our approach to corporate governance continues to be, we believe, best in class, both in the way we conduct ourselves and the way in which we exercise our stewardship responsibilities towards the companies in which we invest. A strong, engaged board is central to this. We constantly refresh the people on your board to ensure that it contains excellent people from a variety of backgrounds, maintains its great expertise and provides ongoing constructive challenge. Martin Pike, formerly a leading consulting actuary, joined us and two people left our Board during the year – Jackie Hunt stepped down as our Chief Financial Officer to take up a Chief Executive position at Prudential UK, and Sheelagh Whittaker left our Group Board to join the board of Standard Life Canada. And after six years’ excellent service, Colin Buchan will retire from the Board at the next AGM on 13 May. Some of these departures have hurt our diversity statistics a little in the short-term but we’re determined to maintain our diversity balance, not just on our boards, but also throughout the Company.
It is our people that make Standard Life special. Our executive leadership continues to push the business forward, keep it safe and strong and expand its reach. We strive to put ourselves in our customers’ shoes and give them the standards of service that we would expect to receive ourselves. I’m confident 2014 will be another good year for Standard Life.
1. Strategic report 1.1 Chief Executive’s overview Standard Life has had another strong year with Group underlying performance up 19% to £638m. Group operating profit reduced by 13% to £751m due to a particularly strong prior year which included a higher positive impact of one-off items. We continue to invest to meet the large scale changes in our markets. As a result, higher growth has been delivered.
In the UK we are capitalising on the opportunities created by the Retail Distribution Review and auto enrolment. We attracted 340,000 new customers and increased assets by 13% to £150bn. Standard Life Investments had a particularly good year with third party net inflows of over £10bn as a result of excellent investment performance, broadening geographical reach and an expanding investment offering. In Canada, we are delivering against our transformation strategy.
Our business has been shaped and positioned to benefit from evolving customer needs and regulatory changes. This, combined with our investment expertise and focus on providing value for our customers, is driving demand for our propositions across the retail, workplace, institutional and wholesale channels. We remain very well positioned for the future and look forward with confidence to delivering growing returns for our shareholders.
Strong market position delivering growth in assets, revenue and returns Our goal is to create shareholder value through being a leading customer-driven business focused on long-term savings and investments propositions in our chosen markets. This is underpinned by a simple business model: increasing assets, maximising revenue and lowering unit costs while optimising the balance sheet.
During 2013 we have continued to make good progress in each of our businesses. Growth in revenue reflects customer demand for our propositions, while continued work on controlling costs has enabled us to increase operating leverage, in turn driving an ongoing improvement in underlying performance. • Continuing strong growth from the UK business, attracting 340,000 new customers, reflecting the success of our business model and also the opportunities created by the Retail Distribution Review and auto enrolment • Strong flows and investment performance driving Standard Life Investments operating profit • Growing our fee based business in Canada, leveraging Standard Life Investments expertise with launch of 20 new funds and expanded bank distribution • Continued progress in Asia and Emerging Markets, with our business in Hong Kong ranked 3rd in the savings and investment market and is the market-leader in the broker and IFA segment.
Delivering on our sustainability strategy • Maintained our positions in DJSI World, DJSI Europe and FTSE4Good sustainability indices, reflecting our continued performance in delivering on our sustainability strategy • A main focus was on employability, in particular our placement programme for young people, in partnership with Edinburgh City
Outlook Our UK business has been shaped and positioned to benefit from regulatory, market and demographic changes. Our retail platform is gaining market share as we continue to deepen relationships with a growing number of advisers. Our corporate business has a good pipeline for 2014 which includes significant auto enrolment activity.
Canada continues to build momentum in its fee based propositions, however its contribution in 2014 at a Group level will be impacted if weakness in the Canadian Dollar continues. Our Asia and Emerging Markets business is well positioned for future growth in the attractive international markets in which it operates.
Group profitability Operating profit before tax is the key performance indicator for the Group and decreased by 13% to £751m, following significant management actions in Canada in 2012 and the £96m benefit from the UK professional indemnity insurance claim included in 2012. IFRS profit for the year was £496m (2012: £694m).
Find out more about our financial performance in Section 1.3 – Group financial overview.
• £5.3bn, or 53% of third party net flows in 2013 from outside the UK • Retention rates amongst the best in the industry, with redemptions at just 15% of opening third party AUM
• Pipeline of institutional business remains robust and we continue to attract considerable interest, increasingly from outside the UK
• Continued to deliver excellent investment performance over all key time periods
• Continued to extend our global reach with expansion in Boston and Hong Kong
Our goal Driving shareholder value through being a leading, customer centric business focused on long-term savings and investments in our chosen markets.
Our aspirations We are in the business of helping our customers to look forward to a well-planned financial future with confidence, through the long-term savings and investments solutions they get from us.
• In 2013, 292,000 employees joined our UK corporate pension schemes with total employees now 1.4 million
• In Canada, corporate pensions Target Liability Bond Funds were launched and we also expanded our range of corporate benefits services and tools.
• HDFC Life continues to grow and is a leading force in the private market in India
• HDFC Life paid its first dividend to shareholders in December 2013
• HDFC Asset Management, our associate business remains the largest mutual fund provider in India with 4.6 million customers
• In China, Heng An Standard Life has taken strategic action to focus on sustainable growth by targeting higher margin regular premium business.
• Ongoing investment in technology and investment solutions created greater capacity to take on new business
• We celebrated our 180th anniversary in Canada during 2013 and remain well placed for introduction of Pooled Registered Pension Plans (PRPP) and overall need for greater private pension provision.
• Taking the lead in securing super clean share classes and concluded negotiations with 14 investment management companies enabling us to deliver preferential terms to customers
• Platforms are well positioned for growth, outperforming in a fast growing market
• One of the fastest growing retail segregated fund franchises in Canada.
• We established an Asia Advisory Board to provide guidance and advice on our strategy to grow across the region
• Increased scope for distribution of Standard Life Investments and HDFC Asset Management investment products.
1. Strategic report continued 1.1 Chief Executive’s overview continued Market overview The latter part of 2013 saw more investor confidence with major economies showing signs of recovery, helped by very considerable support from central banks. Equity markets benefited from continued earnings growth, while global fund flows suggested that investors were gradually increasing their risk appetite as inflows to equity markets exceeded those to bonds for the first time in a number of years. During 2013 as a whole, share prices rose strongly in most developed markets, although many emerging markets lagged behind due to economic and political concerns. The average daily FTSE All-Share Index rose by 15% between 2012 and 2013 buoyed by increased investor confidence with the potential of a strong recovery in the US, and initial signs of recovery in the Eurozone.
Pooled Registered Pension Plans (PRPP) are being introduced in Canada, aiming to encourage saving for a retirement income for those individuals who do not have access to a corporate pension plan via their workplace. We have developed a strong PRPP proposition and we were granted a licence to be a federal PRPP administrator in September 2013.
Solvency 2 is a major European regulatory change initiative that will bring consistency to the way in which EU insurers manage capital and risk, with the aim of enhancing protection for consumers. In November 2013, the European Parliament, Council and Commission reached an agreement on the Omnibus II Directive. The agreement on Omnibus II enables the Solvency 2 framework to become operational by 1 January 2016. We continue to closely monitor the development of Solvency 2 and our business is well placed to implement the necessary changes expected to be required before 2016.
For this reason, we have engaged with key politicians and analysed the relevant papers published by both sides of the independence debate. These include the Scottish Government publication Scotland’s Future (the ‘White Paper’) and the UK Government’s Scotland Analysis series.
1.2 Group key financial performance indicators Group operating profit before tax1
Group operating profit is a measure of our ability to deliver long-term returns for our shareholders and provides an indication of our dividend paying capability. • Group operating profit before tax reduced by 13% to £751m, due to a particularly strong prior year which included significant management actions in Canada and the £96m benefit from the UK professional indemnity insurance claim
• Fee based revenue increased by 15% or £188m to £1,459m, with strong demand for our propositions in the UK and Standard Life Investments, and higher asset values.
• Total net inflows almost doubled to a record £9.6bn • Record level of third party assets in Standard Life Investments at
1. Strategic report continued 1.3 Group financial overview Our financial results demonstrate our ability to deliver sustainable returns for our shareholders. We continue to develop high-quality and innovative solutions that meet the changing needs of our customers. Our financial performance is detailed below.
IFRS profit IFRS profit after tax attributable to equity holders reduced to £466m (2012: £665m) mainly due to the impact of a rise in yields on debt securities, lower management actions in 2013, benefit from the UK professional indemnity insurance claim included in 2012 and an increased tax charge. The tax expense attributable to equity holders’ profits in 2013 was £90m (2012: £51m). IFRS profit for the year of £496m (2012: £694m) also includes profit attributable to non-controlling interests of £30m (2012: £29m). 2012 results have been restated to reflect the revised requirements following the amendment to IAS 19 Employee Benefits which reduced the comparative period results by £33m.
• Maintenance expenses increased to £876m reflecting further investment in our businesses. Maintenance expenses expressed as a proportion of average AUA improved further to 41bps (2012: 45bps).
Fee based revenue 927 839 521 408 194 172 54 46 (237) (194) 1,459 1,271 Spread/risk margin 162 112 - - 351 393 - - - - 513 505 Total income 1,089 951 521 408 545 565 54 46 (237) (194) 1,972 1,776 Acquisition expenses (227) (203) - - (76) (79) (22) (10) - - (325) (292) Maintenance expenses3 (485) (463) (351) (281) (234) (240) (43) (41) 237 194 (876) (831) Group corporate centre costs3 - - - - - - - - (53) (50) (53) (50) Capital management2 3 12 - - 16 107 - - (13) 23 6 142 Share of JV and associates’ PBT - - 22 18 - - 5 8 - - 27 26 Other - 96 - - - - - - - - - 96 Group operating profit before tax 380 393 192 145 251 353 (6) 3 (66) (27) 751 867
Professional indemnity insurance claim - 96 Group operating profit before tax 751 867 10 Standard Life
• Group corporate centre costs increased slightly to £53m (2012: £50m) • Capital management reduced to £6m due to lower investment return on shareholders’ funds and higher financing costs following the issue of subordinated debt in 2012. Gains on property sales in Canada generated £3m (2012: £72m). • HDFC Asset Management, our associate business which is included in the results of Standard Life Investments, contributed £22m to profit (2012: £18m). Our share of profit from the life joint venture businesses in Asia reduced to £5m (2012: £8m), mainly due to higher new business strain driven by the expansion of our Indian joint venture’s unit linked product sales in 2013.
Group tax expense and total tax contribution The tax expense attributable to equity holders’ profits in 2013 was £90m (2012: £51m) of which £141m (2012: £124m) related to operating items and a credit of £51m (2012: credit £73m) to non-operating items. The increase in the total tax expense reflects a higher tax charge in our UK and Europe business in 2013 and a non-recurring release of current and deferred tax on a number of items in 2012. The effective tax rate increased from 7% to 15%.
In 2013, our total tax contribution to tax authorities in all the jurisdictions in which we operated was £870m (2012: £932m) of which £492m (2012: £631m) related to the UK. Of the total, £313m (2012: £417m) was total taxes borne by the Group whilst £557m (2012: £515m) represents total tax collected by us on behalf of tax authorities. Total taxes borne and total tax contribution is less than 2012 mainly due to a reduction in the UK tax payable on policyholder investment returns as a result of bond market movements.
Of the non-corporation tax items, the largest is PAYE deducted from both pension annuity payments made to customers and from employee payroll payments, demonstrating the Group’s wider economic contribution.
Group operating return on equity Return on equity measures our success in generating profit relative to our shareholder capital. Group operating return on equity decreased to 14.7% (2012: 19.2%) mainly due to an increased tax charge and the reduced operating profit before tax. The prior year result benefited from a non-recurring release of deferred tax on a number of items. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.
Find out more about the IFRS results in Section 1.4 – Business segment performance and Section 1.9 – Basis of preparation.
Assets under administration £244.2bn £218.1bn 12% Net flows £9.6bn £5.0bn 92% Present value of new business premiums £22.9bn £19.3bn 19% New business contribution £320m £339m (6%)
• Fee business AUA increased to £210.1bn (2012: £180.7bn) with 86% (2012: 83%) of total AUA now related to fee business
• Spread/risk business AUA reduced to £23.5bn (2012: £25.7bn) due to negative market movements which were impacted by the increase in yields on debt securities and net outflows in the UK due to scheduled annuity payments.
Short-term fluctuations in investment return and economic assumption changes (92) (29)
Closing EEV per share before dividends 353p 13p 2012 special dividend to equity holders
• Present value of new business premiums (PVNBP) for the Group increased by 19% to a record £22,903m. UK and Europe sales rose by 28%, partly offset by a 19% fall in Canada.
• Total internal rate of return (IRR) for the Group remained stable at 13%. The low interest rate environment continues to impact the returns on business written in Canada, which generated an IRR of 7%.
EEV per share 353p 343p 3% EEV operating profit before tax1 £915m £1,083m (16%) EEV profit before tax1 £1,279m £1,301m (2%) 1 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits.
Group embedded value Group embedded value increased to £8,423m (2012: £8,142m) representing an EEV per share of 353p. EEV per share increased by 38p before dividend distributions, including EEV operating profit after tax of £683m (29p per share). EEV non-operating profit after tax was £305m (13p per share), mainly comprising investment variances of £234m and economic assumption changes of £143m. The 4p decrease in EEV per share from other and non-trading items was mainly due to adverse foreign exchange movements, mostly relating to Canada.
EEV profit before tax EEV profit before tax of £1,279m (2012: £1,301m) comprises operating profit of £915m (2012: £1,083m) and non-operating profit of £364m (2012: £218m).
(2012: £380m) included £176m of favourable operating tax variances and £144m from improved modelling of cashflows. 2012 profit of £380m included £453m of gains from asset strategy changes, improved modelling, property disposals and benefit from the UK professional indemnity insurance claim.
Canada 2,894 3,584 36 45 1.3 1.3 7 8 10 11 Asia and Emerging Markets 933 774 39 27 4.2 3.5 13 13 7 7
EEV non-operating profit before tax Total EEV non-operating profit before tax of £364m (2012: £218m) included favourable investment return and tax variances of £293m (2012: £498m) and profit from economic assumption changes of £168m (2012: loss £106m). The favourable investment return and tax variances profit of £293m included a £333m profit from higher than expected investment returns. The £168m profit from economic assumption changes was due to the use of higher projected investment returns and the reduction in the UK corporation tax rate, partly offset by losses from higher discount rates.
Restructuring and corporate transaction expenses of £73m (2012: £114m) primarily relate to business unit restructuring programmes, Solvency 2 and costs arising from the acquisition of the private client division of Newton Management Limited.
EEV operating capital and cash generation1 £582m £701m (17%) 1 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits.
• Back book management operating capital and cash generation of £265m included £165m of favourable tax variances and £38m from changes to mortality assumptions.
Coverage of gross EEV operating capital and cash compared to new business strain decreased to 3.2 (2012: 4.2). Coverage of EEV operating capital and cash generation compared to the interim and final dividends (excluding 2012 special dividend) decreased to 1.6 (2012: 2.0).
Future earnings on covered business 1.3 Group financial overview continued 1 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits. 2 2013 based on estimated regulatory returns. 2012 based on final regulatory returns.
We welcome the positive steps in the development of the Solvency 2 regime during 2013 and expect our capital position to remain strong following implementation.
IFRS equity attributable to equity holders of Standard Life plc1 £4,227m £4,359m (3%) EEV1 £8,423m £8,142m 3% Group capital surplus2 £3.8bn £4.1bn (7%)
Shareholders’ capital resources 2.9 3.3 3.1 Capital resources arising from subordinated debt 1.9 1.9 1.1
Standard Life plc cash and liquid resources £907m £1,064m (15%) Full year dividend1 £375m £345m 8.7%
Liquidity management The Group maintains a strong liquidity position and this was shown in stress testing undertaken during 2013.
We also maintain contingency funding plans across the Group to ensure that each business unit is prepared for a liquidity issue. As part of this contingency planning, Standard Life plc, the Group’s ultimate holding company, maintains a £500m revolving credit facility with a syndicate of banks which will mature in March 2018. The Group's revolving credit facility remained unutilised during 2013 apart from a small drawdown to test the facility.
Dividends We propose a final dividend of 10.58p per share making a total of 15.80p (2012: 14.70p excluding the special dividend). This represents an increase of 7.5% per share. We will continue to apply our existing progressive dividend policy taking account of market conditions and our financial performance.
Standard Life plc cash and liquid resources 2013 2012 £m £m
Additional investments in subsidiaries (97) (131) Additional investments in associates and joint ventures (19) (16) Issue of external subordinated liabilities - 497
1. Strategic report continued 1.4 Business segment performance 1.4.1 UK and Europe Financial highlights1 2013 2012 Movement Operating profit before tax2 £380m £393m (3%) Operating return on equity2 20.0% 25.4% (5.4% points) Assets under administration £166.0bn £146.2bn 14% Net flows £3,358m £1,922m 75% EEV operating profit before tax2 £483m £813m (41%) 1 Standard Life Wealth included in UK results. From 1 January 2014 Standard Life Wealth will be included in Standard Life Investments results. 2 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits.
Market update Auto enrolment and the Retail Distribution Review (RDR) continue to influence developments and change across the UK market. Capitalising on these changes has helped us to secure over 340,000 new customers during the year. Financial advisers are increasingly focused on the long-term financial needs of their clients and are becoming less product-centric. They are looking towards platforms and simple investment propositions to improve their business efficiency, meet increasing regulatory demands and to provide a better customer experience. The platform market already exceeds £250bn in AUA and is forecast to grow to £600bn by 2018 with a greater concentration towards fewer providers.
In November 2013, the UK Government launched a consultation on pension charges for workers automatically enrolled into workplace pensions including the potential introduction of a charge cap. The level of any cap will be confirmed as part of the outcome of the consultation which we expect to be published in Q1 2014. However, the Government has confirmed that any charge cap will not be implemented before April 2015, in order to give employers at least twelve months notice of rules that will apply to them. We believe that we offer competitive pensions which meet our customers’ needs including those joining schemes through auto enrolment. Although charges are an important element of providing a good value pension, contribution levels, investment selection and performance are also critical factors and it is important that a debate on charges does not distract from the important work being done to make the auto enrolment project a success.
Several regulators in EU member states are considering the introduction of regulation similar to elements of the UK’s RDR. In January 2014, the European Parliament and Council reached a compromise on the Market in Financial Instruments Directive II (MiFID II) and are currently finalising wording, which may also include text that resembles language from RDR. Work being done at the EU level, notably the Insurance Mediation Directive (IMD II) and Packaged Retail Investment Products (PRIPs) will further solidify the rules surrounding retail financial products. Our experience in the UK, together with an increasingly positive sentiment across Europe towards a greater need for pension savings, means that our business is well placed to meet market and regulatory changes in our operations in Europe.
Whilst the UK economy is showing good signs of recovery, we remain alert to the continuing economic and political risks, including Eurozone volatility and the potential for rising interest rates in the UK. Germany is the largest savings market in Europe and its export driven economy has continued to grow despite the Euro crisis and recession affecting other major economies in Europe. We have also seen increasing market confidence in Ireland, where lower retail bank deposit rates and the removal of the Government blanket deposit guarantee further encouraged consumers to move investments into longer term products.
AUA as our new style propositions continue to attract net inflows while our older style propositions benefit from ongoing increments, market movements and our retention activity. The average revenue yield on fee based business reduced to 67bps (2012: 72bps) reflecting changes in business mix.
• Spread/risk margin increased by 44% to £154m benefiting from a reduction in actuarial reserves arising from mortality assumption changes
Europe operating profit increased by 7% to £45m. Our business in Ireland benefited from operating assumption changes, higher AUA and improved cost management. In Germany, the impact of higher strain from new business sales was offset by modelling improvements leading to a reduction in actuarial reserves. UK profit contribution1 Overall UK profit contribution increased by 20% to £500m (2012: £415m).
Profit contribution from spread/risk products increased by 51% to £142m (2012: £94m) benefiting from reserve releases arising from assumption changes.
UK Europe UK and Europe 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m
Analysis of UK and Europe operating profit before tax 2013 2012 £m £m
1. Strategic report continued 1.4 Business segment performance continued 1.4.1 UK and Europe continued EEV operating profit UK and Europe EEV operating profit before tax was lower at £483m (2012: £813m), with the prior period benefiting from back book management actions taken to reduce the risk exposures of the UK business and the one-off professional indemnity insurance claim. UK and Europe core EEV operating profit before tax reduced to £439m (2012: £458m) due to lower new business contribution reflecting changes in product mix, with lower sales of annuities combined with increased sales of lower margin corporate pensions business. Operating return on equity UK and Europe operating return on equity of 20.0% (2012: 25.4%), reflects a £46m decrease in operating profit after tax to £332m (2012: £378m) due to an increased tax charge in 2013 and the benefit in respect of a professional indemnity insurance claim included in the 2012 results.
Assets under administration and net flows UK and Europe AUA increased by 14% to £166.0bn. Fee based business AUA, which accounts for 87% of total AUA, increased by 17% to £145.2bn due to a combination of higher net flows and positive market movements.
In the UK, net flows into our new style retail propositions continued to grow, increasing by 11% to £3.1bn, reflecting stronger gross inflows of £5.9bn (2012: £5.2bn).
In our Europe business, fee based AUA grew by 15% to £15.7bn, driven by net inflows, which increased slightly to £1.2bn (2012: £1.1bn) and favourable market movements. Sales and inflows have improved from 2012, driven largely by the quality of our investment proposition and our marketing campaign in the Ireland branch.
New business performance Total UK and Europe PVNBP sales increased by 28% to £19,076m (2012: £14,935m). This was against a backdrop of subdued, although improving, retail consumer sentiment and ongoing economic uncertainly and a continually evolving market environment following the introduction of RDR. Sales of corporate pensions increased by 73% benefiting from the implementation of auto enrolment and the strength of our propositions for the workplace pension market.
UK corporate 1,981 1,224 29.2 24.5 UK retail and corporate fee based business 2,408 920 18 Standard Life
• Negotiations concluded with 14 investment management companies, enabling us to deliver preferential terms to customers in a simple, transparent and tax-efficient way. As well as creating value for our customers this will remove significant complexity for advisers and our business.
• MyFolio, managed by Standard Life Investments, provides an attractive investment outsourcing option to advisers and customers. In the UK, MyFolio AUA increased by 82% to £4.0bn (2012: £2.2bn). Distribution of MyFolio in Ireland has progressed well, accounting for 25% of total sales in 2013, and in Germany MyFolio now accounts for £60m of AUA.
• Launched Master Trust, our trust based pension solution in response to the growing market opportunities presented by auto enrolment and the large market for trust based schemes
• Our auto enrolment solution for SMEs was launched in 2013 with Standard Life Investment Active Plus III as the default fund providing a risk based default solution. We have now entered into arrangements with 22 strategic partners including Punter Southall and Barnett Waddingham to offer a packaged ‘off the shelf’ solution to their new auto enrolment clients.
• We secured 243 new corporate schemes (2012: 203 new schemes), which will bring an estimated 118,000 new employees (2012: 88,000 new employees)
• Our early experience of auto enrolment remains encouraging with an average opt out rate of less than 10% of those autoenrolled
• Our new in-house bulk hub, which specialises in bulk fund switches, has reduced end to end processing time by over 95% regardless of scheme size
• Providing our customers with high quality service remains very important to us. We will continue to invest in both the quality and efficiency of our customer service operation whilst maintaining a downward trend in overall unit costs and ensuring that the UK business is equipped to meet future growth demands.
We will continue to leverage our investment expertise and work closely with the wider Standard Life Group, and with our strategic partners including Sumitomo Mitsui in Japan, HDFC in India and John Hancock in the US, while exploring and capitalising on further opportunities for growth elsewhere.
Our ‘Focus on Change’ investment philosophy continues to drive our investment processes, delivering strong performance with over 90% of third party AUM funds ahead of benchmark for all key time periods. We play a leading role in governance and stewardship. Strong corporate governance along with responsible stewardship of a business’ assets, employees, customers and environment has a fundamental impact on long-term investment returns. During 2013, we voted at 1,939 shareholder meetings and undertook 511 Environmental, Social and Governance engagements, promoting high standards of governance and stewardship.
During 2013, Standard Life Investments became the first designated Worldwide Partner in the history of the Ryder Cup, extending our brand reach and building our global growth strategy. The Ryder Cup's heritage, values and strong team ethos are an excellent match to Standard Life Investments’ core beliefs and ambition.
Market update The latter part of 2013 saw more investor confidence that the major economies were recovering, helped by very considerable support from central banks. Equity markets benefited from continued earnings growth, while global fund flows suggested that investors were gradually increasing their risk appetite as inflows to equity markets exceeded those to bonds for the first time in a number of years. During 2013 as a whole, share prices rose strongly in most developed markets, although many emerging markets lagged behind due to economic and political concerns.
• Maintenance expenses increased to £351m reflecting the investment in growing the business and diversifying our sources of revenue both geographically and by product category. We have expanded our geographical footprint and invested in our operational and technology infrastructure while maintaining control of our cost base.
• HDFC Asset Management, our associate business, remains the largest mutual fund provider in India and contributed £22m (2012: £18m) to operating profit before tax.
Operating return on equity Operating return on equity increased to 67.4% (2012: 52.0%), reflecting the increased profitability of our business and an efficient and scalable capital base.
Our UK wholesale retail business continued to perform well with net inflows into our range of UK mutual funds up 36% to £3.4bn (2012: £2.5bn) and represented a market share of gross sales at 4.9% (2012: 4.7%). We also recorded the highest net sales in the industry in 2013, with the total for the year almost double that of our nearest competitor.
• Standard Life Investments announced the launch of a second Global Emerging Markets Debt Fund, for retail and institutional investors in Europe.
• Achieved record third party AUM of £97.4bn driven by third party net inflows of £10.1bn • Our share of the wholesale market in the UK continues to grow, with gross sales increasing to 4.9% (2012: 4.7%). UK mutual funds AUM now exceeds £19.5bn, representing 20% of third party assets. • Developing our multi-asset portfolio of products which comprises our suite of global absolute return strategies and balanced funds including the recent launch of the Enhanced-Diversification Growth Fund • Market-leading range of MyFolio risk based funds, used extensively within our long-term savings and investments business, continues to be very popular with AUM of £4.0bn • Development of our real estate product suite including the intent to enter the commercial real estate debt market and the launch of a Canadian Real Estate Fund • Strong pipeline of new investment initiatives which positions us well to continue to meet the changing demands of our clients through new and innovative investment solutions. Lowering unit costs
• Maintenance expenses expressed as a proportion of average AUM were 19bps (2012: 17bps). This reflects the ongoing development of our investment capability and expanding distribution and geographic reach.
In light of the current investment climate, the Canadian market has been focused on product management and retention. We have launched a comprehensive programme aimed at getting Canadians to break free from financial inertia caused by financial uncertainty and the volume and complexity of information. Our new online tool, the Motion Profiler, allows both existing and potential customers and their advisers to understand how finances and investing fit into their broader life goals and concerns, and what might be preventing them from saving or holding them back from investing.
The need for greater private pension provision through employers is also very evident. We continue to engage with policy makers and employers to develop propositions that meet our customers’ needs. We expect that demand for defined contribution retirement solutions will increase with the continued shift away from defined benefit pension plans, particularly by private sector employers. In addition, the introduction of Pooled Registered Pension Plans (PRPP) will make pensions saving much more accessible to employees of small and medium-sized enterprises who represent the majority of employers in Canada. Whilst provincial legislation introducing PRPP has experienced delays, provinces representing over 50% of all businesses in Canada have enacted PRPP legislation and are in the process of introducing guidelines and issuing licenses to providers. Quebec is the most advanced and is the only province with an announced timetable for implementation following the adoption of the Voluntary Retirement Savings Plans (VRSPs). From July 2014, VRSPs will include mandatory auto enrolment for Quebec-based businesses with more than five employees but voluntary contribution from employees, over a deferred period.
The key movements in operating profit were: • Fee based revenue increased by £22m due to higher average AUA • Spread/risk margin reduced due to lower actuarial reserving changes which generated a gain of £24m (2012: gain £91m). Spread/risk margin was also impacted by a reduction in total management actions to £91m (2012: £109m). Specific management actions of £42m (2012: £81m) reflected gains from property sales and the renegotiation of an existing reinsurance arrangement. Other ongoing regular management actions to enhance the investment yields on assets contributed £49m (2012: £28m). These items were partially offset by better than expected claims and investment experience and higher returns from existing business.
• Maintenance expenses decreased by £6m to £234m and expressed as a proportion of average AUA improved to 88bps (2012: 95bps)
Net inflows into fee based propositions reduced by £243m to £572m (2012: £815m) due to lower flows into corporate pensions and net outflows from retail mutual funds, largely reflecting outflows in fixed income funds driven by the adverse interest rate environment. These were partly offset by strong growth in retail segregated funds, driven by the strength of our offering and adviser relationships.
Corporate • Launched ‘Pension in a Box’, a comprehensive and flexible retirement programme targeted at SMEs, which offers the complete
Plan for Life Programme member experience • Launched our Financial Education Centre for corporate pension members, providing better understanding of financial concepts through interactive multi-media tools and calculators • Our Group Retirement Centre focused on delivering retirement income planning services to customers and generated £90m in net inflows in 2013 • Launched Target Liability Bond Funds, a sophisticated solution for employers looking to address the challenges of the low interest rate environment and help them manage the transition from defined benefit to defined contribution plans • Added 22 new funds to our Quality and Choice platform, including 13 funds managed by Standard Life Investments and funds from four new external managers • In corporate benefits, we expanded our range of consulting services and tools, focusing on promoting sustainable health initiatives in the workplace • Enhanced our healthcare management approach by enabling the submission of claims directly from healthcare providers’ pointof -care and introduced digital statements and invoicing through our client website • Continued to develop our serious health issues Management and Support Programme to assist customers, ensure optimal quality and effectiveness of treatment and help plan sponsors to contain costs.
Retail • Continued to expand our mutual funds offering with new product launches, including Standard Life Investments managed US
Monthly Income, Tactical Bond funds, and Standard Life Mutual Funds’ Global Real Estate Fund • Enhanced our retail segregated funds proposition by adding the GARS fund and expanded our market reach by introducing a new class for all our funds destined for fee based advisers and their clients • Maintained leading position in individual segregated funds – ranked no.1 by net flows and market share of 13% as at 31 December 2013 • We now have access to five of the top six Canadian banks’ investment dealer platforms with the GARS mutual fund and other global funds managed by Standard Life Investments helping us to strengthen and build distribution relationships. Lowering unit costs
• Acquisition expenses as a proportion of sales were 263bps (2012: 220bps), adversely impacted by lower sales volumes in the year
• Maintenance costs as a proportion of average AUA improved to 88bps (2012: 95bps), reflecting continued efforts to improve efficiency.
Financial highlights – joint ventures (Standard Life’s share) 2013 2012 Movement
Operating profit before tax £5m £8m (38%) Operating return on equity 5.1% 7.9% (2.8% points) Assets under administration £1.6bn £1.5bn 7% Net flows £231m £249m (7%) EEV operating profit before tax £23m £18m 28%
Market update The long-term savings and investments market in Hong Kong remained competitive. Our business continued to attract higher net worth customers resident in Hong Kong and the wider region, improving our position in the market.
The life assurance market in China is dominated by local companies who account for over 90% of new business. For joint venture companies, sales increased by 45% in 2013, with low margin short term single premium business accounting for a significant share of this growth. The Heng An Standard Life management team continue to drive sustainable growth through offering a range of long-term assurance solutions and expanding their targeted distribution channels.
Profitability Operating (loss)/profit before tax Operating loss before tax is £6m (2012: profit £3m): • Fee based revenue increased by 16% in constant currency due to the growth in sales volumes • Total expenses increased by 25% in constant currency reflecting the increased investment in expanding our business into Singapore and Dubai and an impairment of deferred acquisition costs in Hong Kong due to policyholders ceasing to make regular premiums to their policies earlier than expected
• Revenue for wholly owned business increased by 16% in constant currency, reflecting the strong growth in AUA. Our wholly owned business continues to increase the diversification of revenue across products and territories.
• Further opportunities for greater collaboration with Standard Life Investments in Asia are being explored • In India, HDFC Life continues to generate strong net inflows as it focuses on improving customer experience and implementing new business quality initiatives. Increasing assets
• We offer propositions that help our customers invest during volatile market conditions. In Hong Kong, the Harvest 101 product will be re-launched mid-2014, meeting revised regulatory requirements and will continue to meet the needs of the target market of internationally mobile clients.
• Following the first anniversary of the opening of our branches in Singapore and Dubai, we aim to increase our asset base and provide solutions for a wide range of customers
• HDFC Life continues to be ranked in the top 3 private companies for overall new business sales in the life insurance market. Lowering unit costs
• Total expenses increased to £65m (2012: £51m), reflecting the costs associated with expanding our operations into Singapore and Dubai and the impairment of deferred acquisition costs in our Hong Kong business
• Successful transition of shared functions to Hong Kong in 2013 generated cost efficiencies and enabled improvements in capability as support services moved closer to the territories.
India and China JV businesses 5 8 Asia and Emerging Markets operating (loss)/profit before tax (6) 3
Market risk Credit risk Definition The risk that arises from the Group’s exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.
The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.
Equity and property risk • Changes in the value of future profits earned on unit linked funds and collective investment schemes where the funds are invested in equities and property
• Burnthrough from the Heritage With Profits Fund (HWPF) and German With Profits Fund (GWPF)
• Changes in the value of future profits on unit linked funds and collective investment schemes where the underlying funds are invested in overseas assets.
• Corporate bonds and commercial mortgages held in Canada to back annuities.
Whilst concerns about sovereign debt levels in certain Eurozone countries remain, the return of economic growth and the possibility of tapering the US Federal Reserve stimulus have led to yields in the UK, Germany and Canada rising. In managing our market risks in 2013 we have: • Introduced cashflow matching investment strategies for annuity business in Ireland and Germany which have reached sufficient size to make this feasible
• Monitored and managed the level of risk taken within the HWPF in line with Principles and Practices of Financial Management and the need to treat withprofits policyholders fairly
Our approach to managing credit concerns regarding debt issued by certain European sovereign states and banks remains the same and ensured we suffered no direct loss as a result of the financial crisis in Cyprus in 2013. We successfully restructured a number of reinsured external fund links which has resulted in reducing our potential credit exposures. We typically have minimal direct exposure to US sovereign debt. However, we have closely monitored political developments in the US regarding the debt ceiling and budget discussions given the potential wider implications for credit markets.
Operational risk is the risk of adverse consequences for the Group’s business, resulting from inadequate or failed internal processes, people or systems, or external events. Strategic risk is the risk associated with the robustness of the planning process and threats to achieving our strategy.
• Changes in the value of future profits earned in respect of Standard Life Investments’ third party AUM and segregated fund business.
Longevity • Annuity contracts written by the business where the current experience differs from that expected, there is more volatility of experience than expected, or the rate of improvement in mortality is greater than anticipated.
Expense • Changes in the value of future expected expenses • Shareholder is directly exposed to risk of expenses being above expectation.
• Systems unavailability and security exposures from emerging risks such as cyber threat
We continue to monitor liquidity for various asset classes particularly in the context of developments in the financial markets. During H1 2013 we refinanced our £500m syndicated revolving credit facility for a further 5 years and this remained undrawn at 31 December 2013. To further assist with liquidity management we have continued to: • Centrally co-ordinate strategic planning and funding requirements • Maintain our Euro Medium Term
The move to the new regulatory regime within the UK in April 2013 has had no significant impact on the Group to date.
Knowing our customers We operate in a very competitive market, and a strong knowledge of our customers is crucial in developing the right types of products and services to suit their needs. This means more than simply having accurate information on things like demographics, personal wealth and attitudes to risk, as has traditionally been the focus in our sector. We believe that it’s just as important to know how customers think and feel.
Another type of insight we’ve used to help inform the way we build customer relationships is a concept called ‘Personas’. By using pen portraits of our customer groups, this concept helps us understand the needs of different types of customers when we are designing or reviewing the services we offer to them. This type of insight is a powerful tool to help us shape our activities across the Group, and to deliver tailored and targeted experiences to our customers.
In the UK we are committed to following the Treating Customers Fairly principles – the UK financial services’ guiding principles for companies in this sector. Since 2009, we have used these principles as a minimum requirement in our approach to customer service, and we continue to invest in improving our customer processes and understanding with the aim of exceeding these outcomes. In 2013 we strengthened this commitment by creating a new policy. The new Conduct Risk policy helps us show that our commitment to delivering fair customer outcomes at all times – everything from our people, processes, leadership style and systems are key parts of the culture of our business.
improve these experiences. We will continue to build up our insight of our customers in 2014 and, importantly, take action as a result.
Another important focus area in 2013 was finding out how we can improve customer engagement through the communication channels we use – by testing and learning to help us produce quicker, more regular communications activity. For example, the digital retailing department we’ve set up in our UK business is responsible for delivering services that are driven by customer needs and the evolution of digital servicing. Its work involves improving our online channels and producing analysis and insight into customers’ digital requirements. By using this insight to inform our decision-making processes, it will help us prioritise the changes we should make to drive our future activities.
• Communication Innovation of the Year at the Professional Pensions UK Pensions Awards • Auto enrolment Innovation of the Year at the Professional Pensions UK Pensions Awards • Best benefits communications for a large company at the Employee Benefits Awards • Best flexible benefits plan for a large employer – highly commended at the Employee Benefits Awards • Five-star rating awarded for online service at the FT Adviser Online Service Awards • Standard Life Wealth won the Gold Standard for Discretionary Portfolio Management at the Incisive Media Awards • Best Group Pension Provider at the Corporate Adviser Awards. Standard Life Investments
• UK Equity Unconstrained Fund won the UK All Companies sector award at the Moneywise Fund Awards • Multi Asset Investing Team won top prize for the second time at the Scottish Financial Services Award • Large Investment Group of the year and the top awards in the UK equity category for our UK Equity Unconstrained Fund, and the Absolute Return category for our Global Absolute Return Strategies Fund, at the Investment Adviser 100 Club Awards 2013 • Best Client Service by an Investment Manager at the Engaged Investor Trustee Awards • MyFolio team won the adviser award for best Fund of Funds/Multi Manager at the Investment Week Fund Manager of the Year awards • DC Investment Provider of the Year, SRI/ESG Provider of the Year and Multi-Asset Manager of the Year at the UK Pensions
Awards 2013 • Best New Fund Launch for our MyFolio range at the Professional Adviser awards • Platinum award for our Global Absolute Returns Strategies Fund at the Portfolio Adviser Fund Awards • Keith Skeoch was named European Personality of the Year, by Funds Europe, the business strategy magazine for Europe’s asset management professionals. The award criteria were for someone who has made a major and significant contribution to the European funds industry in 2012/2013. It also took into account longer term achievements in, and contributions to, the industry.
1. Strategic report continued 1.7 Our people strategy Our people enable us to deliver our strategy. We are committed to bringing out the best in them and having a culture that encourages career development. We invest in the development of our people and understand that highly engaged employees can drive a positive impact on our profits and shareholder value. Listening to what our employees tell us gives us even greater insight into where we should focus action and strengthens the relationship our employees have with the organisation.
Leadership and talent We work with our people to bring out the best in them and allow everyone to fulfil their potential. We offer development opportunities for everyone at all levels, across all geographies throughout the organisation. Through our Group Development Framework, we focus on development across our talent pipeline right up to executive team level. This is driven by both business priorities and individual development needs. To attract and retain the best people, we make sure that they have the right development and career opportunities and they hold regular conversations with their managers about their development and aspirations. We understand the value of engaging the Board on our talent agenda. In June 2013 we provided a full update to the Nomination and Governance Committee on the progress over the last three years and priorities for the future.
Senior leadership We continue to invest in mentoring, coaching and development programmes for our future leaders to fulfil our aim of a sector leading senior leadership group. We have a particular focus on ensuring that our senior leadership group have meaningful and stretching development goals in place. In addition to some key external recruitment, we continue to ensure strong internal succession cover. To support this, we benchmark our top leaders against the best externally and continue to make targeted investment in future leaders a priority.
Talent programmes Our talent programmes continue to be a key focus at all levels. In 2013 we launched another cohort of each of our award-winning talent programmes – Emerging Leaders Development Support and Accelerated Development Support with over 50 participants across the Group. We work with external organisations to address key development needs and create a strong succession pipeline into senior roles within our organisation. Individuals participating on these programmes continue to move across the organisation, including internationally, and typically stay with us to develop their careers.
Engagement and well-being In 2013 we undertook a local staff survey in each business unit to understand how our areas of focus were beginning to make a difference. The survey was tailored for each local business with one consistent group question on technology and systems. Across the Group we saw positive feedback on how employees viewed the investment we have been making in technology and how this has helped make a difference to their engagement with the Group. The latest group-wide employee engagement survey took place at the beginning of 2014, the results of which will be used to understand the views of our people and focus local management actions for the year ahead.
Diversity and inclusion Standard Life has a strong focus on creating an environment where everyone is respected, valued and included as an individual. We’ve always promoted a culture of fairness and equality, and our practices align with both United Nations and International Labour Organisation’s standards. We believe that having a diverse and inclusive culture where our people can be themselves, are engaged and perform to their potential helps us deliver a great customer experience and helps to deepen the understanding we have of our customers’ needs. In 2013, our diversity agenda was accelerated across the Group and we delivered a range of activities to achieve our goals. This included introducing new mandatory diversity training, providing unconscious bias training and carrying out workplace or role adjustments for people with disabilities. Our employee network groups make an important contribution to our business and community. In 2013 we launched an employee network for our lesbian, gay, bisexual and transgender employees. This, along with other initiatives, resulted in our Stonewall Workplace Equality Index ranking improving from 351st to 224th, which Stonewall confirmed was one of the biggest rank increases they have seen. Our women’s development network also achieved a highly commended award at the 2013 European Diversity Awards after having been launched only 15 months previously.
We track and take action on gender and age related diversity in our leadership and talent pipeline populations, and will formally gather data on other characteristics across all levels from 2014. We continue to promote gender diversity and the business case for gender balance in leadership is clear. We have also gathered the gender data relating to senior managers in our Group (which includes the directors of our consolidated subsidiaries; members of our Executive Job Family and members of our Senior Leadership Group). From a total population of 105, 86 are male (82%) and 19 are female (18%).
1. Strategic report continued 1.8 Our sustainability strategy Our sustainability strategy is mapped to our Group’s business strategy, so that the commercial aims of our business are linked to our Environmental, Social and Governance responsibilities. Our overall aim is to ensure we operate in ways that will help secure a successful long-term future for our business.
The five material themes of our sustainability strategy 1 Listening and responding to customers 2 Operating and growing responsibly 3 Developing and engaging our people 4 Protecting our environment 5 Contributing to our communities.
In each section below, we have summarised what each theme is about and included an update on the work we have done to deliver against it during 2013. 1. Listening and responding to customers We believe a key part of being sustainable is to understand what our customers’ wants and needs are. The majority of our business is about providing long-term savings and investments products and these are designed to be held over many years. We need to be able to build understanding and trust, as well as listen. What customers tell us helps inform the types of products and services that we offer and we have several programmes in place to get feedback. Find out what we delivered against this theme in Section 1.6 – Our customers. 2. Operating and growing responsibly Good governance lies at the heart of the way we manage our businesses. We have a robust reporting programme in place to record our activities and accountabilities in the areas of corporate governance, risk management, anti-bribery and anti-corruption. Find out more about the activities and important updates in these areas in the Corporate governance section of this report.
Supply chain management In 2013 we began an important piece of work with a cross-section of our key suppliers, which included sending a questionnaire to find out more about social compliance and diversity, sustainability, and health and safety across these suppliers. The responses to the questionnaire helped give us a more detailed picture of the policies, processes and structures our suppliers have in place to meet their Environmental, Social and Governance responsibilities. This work has helped to foster stronger relationships across our supply chain that we aim to build upon in 2014 and beyond.
We are developing a wider Supply Chain Diversity and Sustainability Programme, which will be rolled out in 2014. We are planning activities to encourage areas of the business to work with and offer help to more local suppliers, particularly SMEs, as part of a strategic aim to diversify our supplier base. We have also created a Supplier Diversity and Inclusion Code of Conduct which will be launched during 2014.
During 2013 we continued, as part of a significant group-wide investment in technology, to roll out a single desktop operating system and suite of office tools to help increase productivity and collaboration. Key elements of this technology programme, called ‘digital workplace’, were a direct result of feedback from our 2012 employee engagement survey. We also announced the planned installation of Microsoft’s SharePoint software, our first group-wide collaboration system. We began a pilot in the UK and Ireland towards the end of 2013, and intend to build on the learnings from this as the system is rolled out across the Group during 2014. We hope to make optimal use of SharePoint to help reduce duplication of processes and increase collaboration in project work across the Group. 4. Protecting our environment In 2013, we worked to bring additional transparency to our greenhouse gas emissions data by gaining a greater understanding of the environmental impact of our Hong Kong office. We are now in a position to include our Hong Kong energy and travel data in our 2013 greenhouse gas emissions total. This means our overall greenhouse gas emissions have risen to 32,796 Tonnes CO2e. However, on a like for like basis, excluding Hong Kong, there is a reduction of 1% from 32,264 Tonnes CO2e in 2012 to 31,796 Tonnes CO2e in 2013.
The environmental impact of our business travel is now more accurate too. The class of travel affects the environmental impact, therefore we have replaced our average class calculation with a more realistic calculation which takes into account the travel class.
We believe having a greater understanding of our environmental impact allows us to continue to take specific actions to further reduce emissions.
We have disclosed our greenhouse gas emissions for our own business operations in the table below. This does not include our greenhouse gas emissions for our global real estate investment portfolio, however these emissions are disclosed in the Standard Life Investments annual Sustainable Real Estate Investments report.
FTE / Tonnes CO2e ratio Ratio 4.4 4.3 4.4 +2% 1 Scope 1 emissions include gas and fuel oil. 2 Scope 2 emissions include electricity. 3 Scope 3 emissions include business travel and transmission and distribution losses for electricity. 4 As a result of the change to our business travel calculations and a change to Department for Environment, Food and Rural Affairs conversion factors, the 2012 and 2006 greenhouse gas emission totals have been restated. 5 2006 Scope 3 emissions does not include travel from our Canadian business as it was not available at the time.
In November 2013, we launched our first group-wide initiative to encourage greener travel. Green Travel Week was designed to encourage our employees to ‘make a small change for a bigger impact’, by making individual pledges to reduce or rethink how they travel to and from work. One area of focus was on the impact that short, private car journeys have on the environment as several of our larger offices are in major cities, including Edinburgh, London, Toronto, Hong Kong and Boston. We offered help and information on using public transport as well as details of alternative transport, like organised cycling groups.
1. Strategic report continued 1.8 Our sustainability strategy continued 5. Contributing to our communities Employability is the main focus of our community initiatives (see separate section below), although we have continued to support other projects aimed at giving something back to the communities in which we operate.
Through the Standard Life Charitable Trust, an independent charity that we set up in 2009, we worked with the Royal British Legion, Ministry of Defence and the UK Government’s Money Advice Service to launch ‘Moneyforce’. This is a new money guidance website for Armed Forces personnel in the UK designed to help enlisted personnel manage their finances. It is recognised that this is an area that can be quite problematic for serving personnel, especially when they are posted abroad. The website www.moneyforce.org.uk, offers a range of help on a wide variety of money-related matters including budgeting, banking and managing debt.
We have supported and encouraged fundraising by our staff for many charities across the globe. In Canada, we organised a charity concert with the help of the Orchestré Symphonique de Montreal, which raised CA$107,000 for Canada’s Big Brothers, Big Sisters youth mentoring organisation. At Standard Life Investments, staff raised almost £95,000 to support Marie Curie Cancer Care. We also supported 13 other UK and Ireland charities, raising almost £90,000. In Hong Kong, we supported The Hong Kong Society for the Protection of Children and staff raised almost HK$35,000.
We are always keen to support new and different ways for our people to donate their time to help charities and organisations in our communities. Our Group Finance team offered to donate their skills and expertise to help organisations which needed them, instead of more traditional task-based contributions such as landscaping or renovating. The pilot has achieved some good results and we are looking at extending this type of charitable giving elsewhere in the Group.
In 2013, in addition to our staff fundraising, our total Group community contribution through donating money, staff time and items to charitable organisations was £1.6m.
Assurance We measure our progress using seven key performance indicators. These are independently assured by PricewaterhouseCoopers LLP: • Customer complaints recorded • Impact of technology on employee engagement • Succession planning for critical roles • Voting at shareholder meetings of investee companies • Environment, Social, Governance engagements • Carbon footprint (greenhouse gas emissions reported as kg of CO2e) • Total community contribution.
We’ve been encouraged by the success of the programme so far, especially the number of young people who have successfully progressed into a permanent job or on to further education. We were also pleased at the high number of young people who successfully gained full-time roles with us.
Highlights from around the Group • Standard Life Investments recruited seven young people on an Investment apprenticeship as part of their ‘Investment 2020’
initiative • We made a £65,000 donation to the ‘Tomorrow’s People’ charity to provide work skills to 60 disadvantaged young people living in Kent, UK • In Canada, we donated CA$10,000 to the Working Skills Centre and 12 of our employees volunteered too, offering practical skills and advice to people from disadvantaged backgrounds seeking employment.
We will continue to monitor our success with our progress being measured in our key performance indicators and our performance in sustainability indices like DJSI and FTSE4Good.
Appointed Chairman in May 2007, having been Deputy Chairman since March 2006. He became a Director of The Standard Life Assurance Company in July 2003. In October 2012, Gerry became Chairman of TheCityUK, the representative body for financial and related professional services in the UK. He has continued as an Independent Non-Executive of Deloitte LLP and the Lead Non-Executive at the Ministry of Defence. Other appointments include being a member of the Shareholder Executive Board of the Department of Business, Innovation and Skills (BIS) and Senior Adviser to the board of the Abu Dhabi Commercial Bank. Previously, he held senior positions within the Department of Health and Social Security and HM Treasury, and from 1986, spent 13 years with Schroders in London, Hong Kong and New York. He was Vice Chairman of Schroders’ worldwide investment banking activities from 1998 to 1999.
Appointed Director in May 2006, having been a Director of The Standard Life Assurance Company since March 2006. He is Chief Executive of Standard Life Investments Limited. Keith joined Standard Life Investments Limited in 1999 as Chief Investment Officer after nearly 20 years’ investment experience at James Capel & Company Limited in a number of roles, including Chief Economist and Managing Director International Equities. He is also a Director of the Investment Management Association, a non-executive Director of the Financial Reporting Council and a member of the Advisory Board of Reform Scotland. In November 2013 he was awarded European Personality of the Year by Funds Europe.
David Nish Chief Executive Age: 53 Tenure: 7 years Nationality: British Qualifications: BAcc University of Glasgow. Member of the
Appointed Chief Executive on 1 January 2010, having been Group Finance Director since November 2006 when he was appointed to the Board. He is also Deputy Chairman of the board of the Association of British Insurers and Chairman of its Long-Term Savings and Life Insurance Committee; a non-executive Director of the UK Green Investment Bank plc, where he also chairs the audit and risk committee; a member of the Advisory Council of TheCityUK and a member of the Financial Services Advisory Board of the Scottish Government. David was previously a partner with Price Waterhouse, and subsequently Group Finance Director and executive Director, Infrastructure Division at Scottish Power plc.
Senior Independent Director Age: 59 Tenure: 2 years Nationality: British Qualifications: Law Degree, Oxford University
John is a member of the Audit Committee; the Remuneration Committee and the Nomination and Governance Committee.
Colin was a non-executive Director of Standard Life Investments Limited from February 2002 to December 2011, serving as Chairman from 2008. As announced, Colin will retire from the Board following the 2014 AGM.
Colin is Chairman of the Investment Committee and a member of the Audit Committee; the Remuneration Committee and the Nomination and Governance Committee.
Non-executive Director Age: 57 Tenure: 2.5 years Nationality: French Qualifications: Degree in Civil Engineering, Ecole Nationale des Ponts et Chaussées, Paris; Law Degree Faculté de droit, Paris; MBA HEC Paris
Pierre is a member of the Investment Committee; the Remuneration Committee and the Risk and Capital Committee.
Non-executive Director Age: 57 Tenure: 7 years Nationality: British Qualifications: Law Degree, University of Edinburgh; MBA
Appointed Director in January 2007. He is also Chairman of Scottish Enterprise and Control Risks Group Holdings Limited, and was appointed a non-executive Director of MITIE Group PLC in July 2012. Crawford spent 22 years with Bain & Company Inc., the international management consultants, where he was Managing Director Europe. He was an independent member of the Department of Trade and Industry (DTI) Management and Strategy Boards from 2002 to 2007, and chaired the DTI’s audit and risk committee from 2003 to 2007.
Appointed Director in November 2009. He is also Chairman of Creston plc and Trinity Mirror plc and he is the Senior Independent Director of Ocado Group plc. He sits on the audit, remuneration and nomination committees of each of these companies. He is also Chairman of Investis Limited. David spent much of his career in senior financial executive positions, first with Emap plc where he served as Group Finance Director from 1989 to 2000, and more recently with Reuters Group plc, where he was Chief Financial Officer from 2000 to 2008, when Reuters Group became Thomson Reuters Limited.
Noel Harwerth Non-executive Director Age: 66 Tenure: 2 years Nationality: British and American Qualifications: Law Degree, University of Texas
Lynne Peacock Non-executive Director Age: 60 Tenure: 2 years Nationality: British Qualifications: BA North East London Polytechnic
Appointed Director in April 2012. Lynne is also a nonexecutive Director of Scottish Water, where she chairs its audit committee. She is a non-executive Director of Nationwide Building Society, and chairs its remuneration committee and is a member of its audit, risk and nomination committees. She joined National Australia Bank Limited in 2003 and, from 2004 to 2011, she was Chief Executive Officer, UK (Clydesdale Bank plc and Yorkshire Bank). Before that, Lynne was with Woolwich plc from 1983 to 2003, finishing her career there as Chief Executive Officer.
Appointed Director in September 2013. Martin joined R Watson & Sons in 1983, and progressed his career with the firm to partner level. His senior roles included Head of European Insurance and Financial Services Practice, Watson Wyatt from 2006 to 2009; Vice President and Global Practice Director, Insurance and Financial Services, Watson Wyatt during 2009 and, latterly, Managing Director, Risk Consulting & Software, EMEA, Towers Watson from 2010 to 2013. Martin is a member of the Investment Committee and the Risk and Capital Committee.
The Chairman’s statement, the Directors’ responsibility statement and the Corporate governance section form part of the Directors’ report. The Corporate governance section is submitted by the Board.
Forward-looking statements Various sections of the Annual Report and Accounts 2013, including but not limited to the Chairman’s statement, the Chief Executive’s overview and the Group financial overview, may contain forward-looking statements. These statements are based on the Group’s future plans, goals and expectations. These statements may be identified by words like ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘pursues’, ‘seeks’, ‘anticipates’ or words of a similar meaning.
The Company does not intend to update any of these statements.
Share capital You can find full details of the Company’s share capital, including movements in the Company’s issued ordinary share capital during the year, in Note 28 to the Group financial statements. You can also find an analysis of registered shareholdings by size, as at 31 December 2013, in the Shareholder information section on page 281.
Legal & General Group Plc 15 July 2013 Disposal Less than 3%
During the year, in accordance with the terms of the Standard Life Employee Trust Deed, the Trustees of the Standard Life Employee Trust waived all entitlements to current or future dividend payments for shares they hold under option on behalf of participants in the Company’s discretionary share plans between the grant and vest dates. Details of ordinary shares under option in respect of the Company’s discretionary share plans are shown in Note 46 to the Group financial statements.
The Trustees of the Standard Life (Employee) Share Plan also voted the appropriate shares in accordance with any instructions received from participants in the plan. Details of the Company’s employee share plan can be found in Note 46 to the Group financial statements.
Rights attached to shares Subject to applicable statutes, any resolution passed by the Company under the Companies Act 2006 and other shareholders’ rights, shares may be issued with such rights and restrictions as the Company may decide by ordinary resolution, or (if there is no such resolution or if it does not make specific provision) as the Board may decide. Subject to the Articles, the Companies Act 2006 and other shareholders’ rights, unissued shares are at the disposal of the Board.
Every member and duly appointed proxy present at a general meeting or class meeting has one vote on a show of hands. On a poll, every member present in person or by proxy has one vote for every share they hold. For joint shareholders, the vote of the senior joint shareholder who tenders a vote, in person or by proxy, will be accepted and will exclude the votes of the other joint shareholders. For this purpose, seniority is determined by the order that the names appear on the register for joint shareholders.
The Board may withhold payment of all or part of any dividends or other monies payable in respect of the Company’s shares from a person with a 0.25% interest (as defined in the Articles) if that person has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information about interests in those shares, which is required under the Companies Act 2006.
Subject to the Companies Act 2006, rights attached to any class of shares may be varied with the written consent of the holders of not less than three-quarters in nominal value of the issued shares of that class (excluding any shares held as treasury shares). These rights can also be varied with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. At every separate general meeting (except an adjourned meeting) the quorum shall be two persons holding, or representing by proxy, not less than one third in nominal value of the issued shares of the class (calculated excluding any shares held as treasury shares).
• Under a shareholders' agreement dated 15 January 2002 between The Standard Life Assurance Company and Housing Development Finance Corporation Limited (HDFC), pursuant to which the Group holds its interest in HDFC Standard Life Insurance Company Limited (HDFC Standard Life), upon a change of control of the Company, HDFC potentially has the right to terminate the joint venture and to purchase, or nominate a third party to purchase, the Group’s shares in HDFC Standard Life for a price determined in accordance with the agreement
Biographies of the Directors can be found on pages 39 to 41.
The UK Corporate Governance Code recommends that Directors of FTSE 350 companies should stand for election every year. In line with this, all our Directors will retire at the AGM on 13 May 2014. Martin Pike will stand for election and all remaining Directors who wish to continue in office will stand for re-election. As announced, Colin Buchan will retire from the Board following the 2014 AGM and therefore, will not stand for re-election.
Our people We recognise that our people are central to delivering our strategy and you can read about our commitment to bring out the best in them in Section 1.7 of the Strategic report – Our people strategy.
The Group remains committed to creating a high-performing, diverse and healthy working environment where everyone is respected, valued and included as an individual. We treat people with disabilities fairly in relation to job applications, training, promotion and career development. Adjustments are made to train and support employees who become disabled during their employment to enable them to continue and develop in their role.
We know that positive employee relations are vital in engaging our people and achieving business goals. Constructive staff representation provides an essential means of informing the Group’s strategy through the views and insights of our people. There are separate staff representation arrangements across different jurisdictions in the Group. In the UK, most employees are represented through partnership agreements with the Group's staff associations, VIVO and Bridge. In Ireland, there is an established agreement with Unite, and a Works Council was established in Germany in 2008.
Political donations No political donations were made during the year ended 31 December 2013. From time to time, we make our training facilities available to political parties, charities and other third sector organisations to facilitate debate and discussion on relevant public policy issues.
Disclosure of information to the auditors Each Director confirms that he or she has taken all steps necessary, in his or her role as a Director, to be made aware of any relevant audit information and to establish that PricewaterhouseCoopers LLP is made aware of that information.
In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and accounting estimates that are reasonable and prudent • state whether applicable IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements • prepare the financial statements on the basis that the Group is a going concern, unless it is inappropriate to presume that the
The Directors are also responsible for: • safeguarding the assets of the Company and the Group • taking reasonable steps to prevent and detect fraud and other irregularities • the maintenance and integrity of the Group’s website.
Directors’ responsibility statement Each of the Directors, whose names and functions are listed in the Board of Directors section on page 39, confirms that to the best of their knowledge and belief: 1. the Group and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and of the Company and taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.
2. the Strategic report includes the information required by DTR 4.1.8 and DTR 4.1.9 – a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties it faces.
Introduction and report from the Chairman of the Nomination and Governance Committee “Your Board adheres to the highest standards of corporate governance and ethical behaviour in directing the Group’s affairs and in its accountability to you as shareholders. As Directors, we believe this commitment is key to managing our business effectively and delivering shareholder value over the longer term. Your Board continues to take the quality of its performance seriously and strives to improve performance through annual reviews and continuing self-assessment”. Gerry Grimstone, Chairman and Chairman of the Nomination and Governance Committee.
Compliance Throughout 2013, the Company complied with all of the provisions set out in the Code issued by the Financial Reporting Council (FRC) in September 2012. This is available at www.frc.org.uk
The Board expects the Group to be a leader in corporate governance activities through its own actions and through its stewardship activities. The Nomination and Governance Committee regularly reviews the Group’s corporate governance framework against relevant generally accepted standards, guidance and best practice, and, as appropriate, recommends changes to the Board Charter to the Board. To contribute to external developments, the Committee, generally on behalf of the Board, submits responses to corporate governance consultation documents. The Group Company Secretary and General Counsel is responsible for advising the Board on all governance matters.
The Board regularly reviews reports from the Chief Executive and Group Finance on progress against approved strategies, plans and budgets, as well as updates from the Chief Executive of Standard Life Investments Limited (“Standard Life Investments”) on stock market and global economic conditions. There are also regular presentations from key business units and Group functions. The Chairman reports at each Board meeting on the activities he has undertaken on behalf of the Board and the Group since the previous meeting.
Roles of the Chairman and the Chief Executive The roles of the Chairman and the Chief Executive are separate. Each has clearly defined responsibilities, which are set out in the Board Charter.
The Chairman: • leads the Board and ensures that its principles and processes are maintained • promotes high standards of corporate governance • with the Chief Executive and the Group Company Secretary and General Counsel, sets agendas for meetings of the Board • ensures Board members receive accurate, timely and clear information on the Group and its activities • encourages open debate and constructive discussion and decision-making • leads the Board and individual Director performance assessments and training needs • speaks on behalf of the Board and represents the Board to shareholders.
Board composition, balance and diversity The Board’s policy is to appoint and retain non-executive Directors who bring relevant expertise as well as a wide perspective to the Group and its decision-making framework. The Directors believe that at least half the Board should be made up of independent non-executive Directors. As at 27 February 2014, the Board comprises the Chairman, eight independent non-executive Directors and two executive Directors. The Board continues to support its Diversity statement, first approved in November 2011, which states that it: • believes in equal opportunities and supports the principle that due regard should be had for the benefits of diversity, including gender, when undertaking a search for candidates, both executive and non-executive • recognises that diversity can bring insights and behaviours that may make a valuable contribution to its effectiveness • believes that it should have a blend of skills, experience, independence, knowledge and gender amongst its individual members that is appropriate to its needs 50 Standard Life
• is committed to maintaining its diverse composition • supports the Chief Executive’s firm commitment to achieve and maintain a diverse workforce, both throughout the Group, and within his executive team.
The Nomination and Governance Committee receives updates on progress towards achieving and maintaining diversity throughout the Group. This includes reviewing statistics on age, gender and full/part time working at all levels. The Group also promotes initiatives and programmes to raise awareness of why diversity matters. You can read more about our diversity activities in Section 1.7 of the Strategic report - Our people strategy.
Retirals and resignations Sheelagh Whittaker retired at the conclusion of the 2013 Annual General Meeting (AGM) after four years’ service. Recognising her experience of the Canadian market, Sheelagh has maintained her links with the Group through her appointment as a nonexecutive Director on the boards of our principal Canadian subsidiaries.
Board appointment process, terms of service and role Taking account of the Group’s strategy, as well as industry and regulatory developments, the Nomination and Governance Committee evaluates the Board’s balance of skills, diversity, knowledge and experience, in the context of the time served by nonexecutive Directors. The Committee uses the results of this focused analysis to direct its recruitment activities and appointment recommendations and reviews all recommendations to appoint independent non-executive directors to the boards of subsidiary companies.
Each non-executive Director is appointed for a fixed term of three years and shareholders then vote on whether to re-elect him or her at every AGM. Once a three-year term has ended, a Director can continue for further terms if the Board is satisfied with the Director’s performance, independence and ongoing time commitment. There is no specified limit to the number of terms a Director can serve, although the Board recognises the Code provisions regarding length of service when considering whether or not their appointment should be continued. The current average length of service of the non-executive Directors (excluding the Chairman) is just over three years. The Nomination and Governance Committee oversees the process to recommend continued appointments, but members of the Committee do not take part in discussions when their own performance – or continued appointment – is being considered. During 2013, the Committee recommended to the Board that the appointment of Colin Buchan should be continued from 1 January 2014. However, as announced, Colin will retire from the Board at the conclusion of the 2014 AGM after more than six years’ service.
The role of the non-executive Directors is to participate fully in the Board’s decision-making work – advising, supporting and challenging management as appropriate. You can see the format of the letter of appointment in the Board of Directors section of our website at www.standardlife.com/about/board or by writing to the Group Company Secretary and General Counsel. The letter confirms that the amount of time we expect each non-executive Director to commit to each year, once they have met all of
2. Governance information – Corporate governance continued the approval and induction requirements, is 30 to 35 days. When non-executive Directors accept the terms of their appointment, they confirm that they can allocate sufficient time to carry out their duties and responsibilities effectively. You can read more about the induction and development programme later in this section.
Director election and re-election Since 2011, we have given shareholders the opportunity each year to re-elect all the Directors. At the 2014 AGM all of the current Directors except Martin Pike and Colin Buchan will retire and stand for re-election. Martin, having been appointed since the previous AGM, will retire and stand for election. Colin Buchan will retire at the conclusion of the 2014 AGM and, therefore, will not stand for re-election.
You can read more supporting background information about the Directors and the reasons why the Chairman believes you should support their election or re-election, in the AGM guide 2014, which will be available at www.standardlife.com from 1 April, and in the Board of Directors summary on pages 39 to 41.
Gerry Grimstone was Chairman of the Board throughout the year. He remained Chairman of TheCityUK. He has also retained his non-executive positions with Deloitte LLP and the Ministry of Defence and his membership of the Shareholder Executive Board of the Department of Business Innovation and Skills. He is also Senior Adviser to the board of the Abu Dhabi Commercial Bank. The Board formally reviewed his performance and, taking into account his outside appointments, is satisfied that he has sufficient time to carry out his duties. John Paynter served as the Senior Independent Director (SID) throughout the period. As SID, he is able to support the Chairman, whom he meets regularly one-to-one, and is available to talk with shareholders about any concerns that they may not have been able to resolve through the normal channels of Chairman, Chief Executive or Chief Financial Officer, or if a shareholder considers these channels are inappropriate.
The Directors continued to review and authorise Board members’ actual and potential conflicts of interest on a regular and ad hoc basis in line with the authority granted to them in the Company’s Articles of Association (“the Articles”). As part of the process to approve the appointment of a new Director, the Board considers and, where appropriate, authorises his or her potential or actual conflicts. The Board also considers whether any new outside appointment of any current Director creates a potential or actual conflict before, where appropriate, authorising it. All appointments are approved in accordance with the Group’s Outside Appointments and Conflicts of Interest policies. In January 2014, the Board again reviewed all previously authorised potential and actual conflicts of interest of the Directors and their connected persons and concluded that the authorisations should remain in place until January 2016. Under the terms of the approval, conflicted Directors can be excluded from receiving information, taking part in discussions and making decisions that relate to the potential or actual conflict. The Board’s policy encourages executive Directors to take up one external non-executive Director role. David Nish continued as a non-executive Director of the UK Green Investment Bank plc and Keith Skeoch continued as a non-executive Director of the Financial Reporting Council. You can read more about the Directors’ outside appointments in their biographies on pages 39 to 41.
Advice Directors may sometimes need appropriate external professional advice to carry out their responsibilities. The Board’s policy is to allow them to seek this, at the Company’s expense. No Directors chose to seek external advice during 2013. All Directors also have access to the advice and services of the Group Company Secretary and General Counsel, whose appointment and removal is a matter for the Board.
The review comprised confidential online questionnaires (with the same external platform we used in 2011 and in 2012); the analysis of the responses; the development of a themed summary report and recommendations for improving performance and effectiveness. This year, members of Group Secretariat also met with each Director individually to discuss his or her ratings and comments, with particular focus on addressing any areas of concern. The output from these meetings informed both the results report and the individual review meetings the Chairman had with each Director.
Committee could improve. The Group Company Secretary and General Counsel, the secretaries of the Board Committees, and the other members of the executive team who interact frequently with the Directors and implement their recommendations and decisions, also completed questionnaires. The questions covered how the Board: • agrees and implements strategy • identifies, manages and responds to risks and uses risk appetites • works together as a team and across the Group • provides leadership and oversees the talent and development activities across the Group • holds management accountable • stays informed of the views of customers and employees • communicates with stakeholders • assesses and meets regulatory change • receives comprehensive and focused information • reviews its make-up, diversity and balance • oversees the responsibilities and effectiveness of Board Committees.
Outcome Group Secretariat produced reports based on the consolidated results of each part of the survey. The reports were then considered in detail by the Nomination and Governance Committee before being formally recommended to the Board. The Board report included an update which set out the progress made to implement the previous year’s recommendations. As in 2012, Directors were asked, where possible, to indicate whether and how matters had changed since the previous year. These rankings were positive.
Progress to implement the recommendations is monitored by the executive team and reported to the Nomination and Governance Committee.
Each Committee followed a similar questionnaire, reporting and feedback process. The Board concluded that the Committees had performed well and each Committee also reviewed its own results and recommendations in detail. These reviews are covered in the individual Committee sections of this report.
The feedback was summarised into a report which was reviewed by the SID and distributed to all Board members, except the Chairman. The Directors, led by the SID and without the Chairman being present, met to consider the report. They concluded that the Chairman had performed his role effectively, showed strong leadership of the Board and continued to devote significant time to the Group. The SID was responsible for passing feedback from the review directly to the Chairman.
The induction programme provides the background knowledge new Directors need to perform to a high level as soon as possible after joining the Board and to support them as they build their knowledge and strengthen their performance further. When a nonexecutive Director is appointed to one of the Board’s Committees, they receive relevant induction training on the Committee’s role and duties.
When Directors are appointed to the Board, they commit to broadening their understanding of the Group’s business. The Group corporate centre monitors relevant external governance and financial and regulatory developments and keeps the ongoing Board training and information programme up to date. During 2013, specific Board sessions took place on RDR, new generation platforms, with-profits matters and other product and customer developments. Similarly, the relevant Board Committees received updates on developments in financial reporting, remuneration and corporate governance. Non-executive Directors are actively invited to all parts of the Group’s business in order to familiarise themselves with how our business is conducted and to meet with staff.
difficult for all Directors to attend these meetings. If Directors are not able to attend a meeting because of conflicts in their schedules, they receive all the relevant papers and have the opportunity to submit their comments in advance to the Chairman or the Group Company Secretary and General Counsel. If necessary, they can follow up with the Chairman of the meeting.
Directors’ attendance at the 2013 Board and Committee meetings is shown in the following table. The Company Chairman is not a member of the Audit, Risk and Capital, Remuneration and Investment Committees. He does however attend the meetings of all Committees, by invitation, in order to keep abreast of their discussions.
Co rp or at e Re sp on si bi lit y
Report from the Chairman of the Audit Committee “The Board draws on the advice of the Audit Committee to support its effective governance over internal and external financial reporting. As Chairman of the Audit Committee I have had regular meetings with the Chief Financial Officer (and the Chief Executive, following the resignation of Jackie Hunt), the Director of Group Finance, the Group Chief Internal Auditor and the engagement partner from the external auditors. I was also actively engaged in the recruitment of the new Group Chief Internal Auditor who took up her position in February 2013. There are some areas of potential overlap between the Audit Committee’s remit and that of the Risk and Capital Committee, so I have spent time with the Chairman of the Risk and Capital Committee to discuss the efficient operation of the two Committees to make sure that all relevant issues are efficiently discussed and all risks associated with internal and external financial reporting are being covered. The Audit Committee has had another very busy year and I am pleased to present my report on its work and operation during 2013”. David Grigson, Chairman
The Committee members are David Grigson (Chairman), Colin Buchan, John Paynter, Lynne Peacock and Noel Harwerth. The Board considers them all to be independent non-executive Directors. The Board is satisfied that David Grigson, who is a chartered accountant and served as Chief Financial Officer of Reuters Group, has recent and relevant financial experience. The Board believes that the other members of the Committee have both the broad commercial knowledge and experience of financial management and reporting to bring the right mix of skills to the Committee.
The main issues reviewed and approved or recommended to the Board during 2013 included: January to March July to September • Preliminary Results 2012 • Annual Report and Accounts 2012 • Summary Financial Report 2012 • current material legal actions and litigation to support contingencies and commitments disclosure • the non-audit services policy.
• Interim Management Statements/Q3 Trading Results • initial findings from Financial Year 2013 year end work • the effectiveness of Group Internal Audit (GIA), the GIA
Financial reporting Accounting policies, practices and areas of judgement The Committee reviewed the Group accounting policies and confirmed they were appropriate to be used for the 2013 Group financial statements. The Committee also focussed on the valuation bases for the assets and liabilities, including the key assumptions used to measure the insurance and participating investment liabilities. The Committee reviewed the implications of the adoption of IFRS 13 Fair value measurement on how the fair value of assets and liabilities was calculated and agreed with the approaches being applied.
The Committee discussed the significant accounting and actuarial matters affecting the 2013 Group financial statements and considered the areas listed below to contain the most significant levels of judgement: • calculation of the value of insurance and participating investment contracts, focussing on the determination of mortality assumptions in UK and Canada and the allowance for future taxes included in the valuation in Canada • calculation of the fair value of complex financial instruments, including private equity investments and derivatives, and securities where a recent market price was not available • calculation of the fair value of investment properties and owner occupied buildings • calculation of the value of intangible assets and goodwill arising from the acquisition of the private client division of Newton
Management Limited and the determination of the useful lives of the intangible assets • calculation of the fair value of the UK pension scheme surplus – in particular reviewing the determination of pension scheme assumptions for mortality, discount rate, inflation and the rate of increase in salaries and pensions and the assessment of the recoverability of the surplus.
For each of the matters discussed, the Committee: • considered the information management provided to support the Committee’s review of the matter, including the strength and operation of the controls to prevent management override and management’s responses to the challenges raised by Committee members
• sought information from the external auditors as to whether/how the external auditors had considered each of these areas and how any areas of significant audit focus had been reported in the external auditors’ report
The Committee also discussed the management information provided on: • the clarity of disclosures in the Group financial statements and EEV financial information, and agreed that the Strategic report, as a whole, contained a fair, balanced and understandable view of the Group’s business, a description of the risk and uncertainties facing the business, a balanced and comprehensive analysis of the development and performance of the Group’s business during the year and the position of the Group’s business at the end of the year
• relevant external financial reporting developments and guidance, including how the Committee had supported the introduction of the Strategic report and its additional disclosures, as well as its impact on the previously issued Summary Financial Report.
External audit The Committee monitors the external auditors’ performance. This includes reviewing how independent and objective the external audit team is and how the team maintains its professional scepticism, all in the context of regulatory requirements and professional standards. The Committee assesses the effectiveness of the external audit process and approves the terms of engagement and remuneration for audit services. As part of its ongoing review of the effectiveness of the external auditors, the Committee: • assesses the team’s qualifications, independence, expertise and resources as well as its relationship with management and the executive Directors • considers the scope and planning of the external audit of the Group • reviews the audit findings with the external audit team and the overall effectiveness of the audit.
Following the 2013 effectiveness review, the Committee concluded that it was appropriate to recommend to the Board that a resolution should be proposed at the 2014 AGM to reappoint the present auditors until the conclusion of the 2015 AGM. The Committee’s recommendation is not restricted by any contractual obligations. The Committee agreed to comply with the relevant revisions to the Code and to the FRC Guidance on Audit Committees with regard to the external audit tendering timetable which came into force in October 2013. As the Committee believes that the current auditors’ performance continues to be satisfactory, the Committee will implement the relevant transitional provisions suggested by the FRC which were issued along with the revised Code.
Non-audit services The Board has approved the non-audit services from external audit policy (the “Policy”) and the Committee monitors the implementation of the Policy on behalf of the Board. The aim of the Policy, which is reviewed annually, is to support and safeguard the objectivity and independence of the external auditors. It does this by prohibiting the auditors from carrying out certain types of non-audit services to ensure that the audit services provided are not impaired. It also ensures that where fees for approved nonaudit services are significant, they are subject to the Committee’s prior approval. The services prohibited by the Policy include: • book-keeping or other services related to the accounting records or financial statements • financial information system design • appraisal or valuation services where the results would be material to the financial statements • internal audit outsourcing • actuarial calculations • management functions • legal services • forensic audit services • temporary or permanent services as a director, officer or employee or performance of any decision-making, supervisory or monitoring function • recruitment of senior management.
Depending on the level of the proposed fee, the Policy requires the approval of the Chairman or members of the Committee and/or the whole Committee before certain non-audit services are commissioned. You can find details of the fees paid to the external auditors for audit and non-audit work carried out during the year in Note 9 to the Group financial statements. Non-audit services carried out during 2013 included assurance services related to regulatory stress testing and sustainability reporting, tax advisory services relating to Austria, Germany and Canada and continuing assistance to our Foreign Account Tax Compliance Act (FATCA) compliance project. During the year, the Committee reviewed how the fees related to non-audit services were reported and agreed to extend the associated narrative to evidence as clearly as possible the nature of the service.
The Board’s review also confirmed that it was satisfied with the performance of the Committee. After each meeting, the Chairman reports to the Board, summarising the key points from the Committee’s discussions which supported the Committee’s recommendations to the Board.
Report from the Chairman of the Risk and Capital Committee “The Risk and Capital Committee supports the Board in the effective oversight and challenge of risk management and the use of capital across the Group. The Committee was formed in April 2010 and is now well established in its role of providing quality support and analysis to the Board. I am pleased to present my report on the work and operation of the Committee during the past year”. Noel Harwerth, Chairman
The Committee members are Noel Harwerth, (Chairman), David Grigson, Pierre Danon, Crawford Gillies and Martin Pike (appointed 27 September 2013) who are all considered by the Board to be independent non-executive Directors. Sheelagh Whittaker retired from the Committee on 14 May 2013. During 2013, the Committee met seven times.
The Group Chief Risk Officer attends the Committee meetings and has right of access to the Committee Chairman. Colin Ledlie stood down as Group Chief Risk Officer in March 2013 to take up a secondment with the FCA. Following approval from the Committee and the Board, Raj Singh was appointed as our Group Chief Risk Officer. Others invited to attend Committee meetings on a regular basis include the Chairman, the Chief Executive, the Chief Financial Officer, the Chief Executive of Standard Life Investments and the GCIA as well as the external auditors. The Committee has the authority to meet without management being present if the members consider this necessary.
The role of the Committee is to provide oversight and challenge of, and advice to the Board on: • the Group’s risk strategy, limits and tolerances, material risk exposures and future risk strategy and their impact on capital • the structure of the Group’s ERM framework and its suitability to react to the changing nature of risks • the risk aspects of major investments, major product developments and other corporate transactions • material risk and capital matters affecting the Heritage With Profits Fund.
In advance of completing the acquisition of the private client division of Newton Management Limited, details of the proposed transaction were presented to the Committee. The Committee discussed the key risks and mitigants associated with the transaction and the approach to due diligence that was being adopted.
In December, the Committee assessed the appropriateness of the Group’s key risk metrics and decided to focus on economic capital resources in 2014. The committee reviewed and approved the Group’s Risk Appetite Framework and reviewed the proposed quantitative risk limits to be used to manage the business during 2014.
The Committee members are Crawford Gillies (Chairman), Colin Buchan, Pierre Danon, John Paynter and Lynne Peacock – all of whom are considered by the Board to be independent non-executive Directors.
During 2013 the Committee met twelve times. The Committee’s role is to approve or make recommendations to the Board in respect of the overarching Group-wide remuneration policy, including: • rewards for the executive Directors, senior executives and the Chairman • the design and targets related to any employee share plan • the design and targets for annual cash bonus plans below the executive level • changes to employee benefits structures (including pensions) throughout the Group.
The Chairman, Chief Executive and Group Operations Officer (who has overall responsibility for the Group's People function) are invited to attend Committee meetings on a regular basis. The Director of Group Reward and Employment Policy attends all meetings in his capacity as secretary to the Committee.
You can find details of the Group’s current remuneration policies for the Directors and senior executives as well as more information on all of the Committee’s activities during the year in the Directors’ remuneration report.
Report from the Chairman of the Investment Committee “The Investment Committee oversees the high-level asset allocation strategy (including benchmarks) within the Heritage With Profits Fund and Insured Funds as well as the investment activities and stewardship role of the Group as an investor and a fund manager and reports its findings and recommendations to the Board. I am pleased to present my report on the work and operation of the Committee during the year”. Colin Buchan, Chairman
Following the 2013 review of its effectiveness, which considered that the Committee had performed well, the Committee discussed how to strengthen further investment insight throughout the Group. It concluded that this could best be done by relevant Boards and other committees taking on the responsibilities presently exercised by the Committee and expanding them. On this basis, the Board accepted the Committee’s recommendation that the Committee should stand down and thanked Colin Buchan for his leadership of the Committee. Our amended governance framework will ensure full oversight of matters relevant to the investment activities and stewardship role of the Group as an investor and fund manager.
Report from the Chairman of the Corporate Responsibility Committee “The Corporate Responsibility Committee provides oversight over sustainability issues and reports its findings and recommendations to the Board. I am pleased to present my report on the work and operation of the Committee during the year”. Gerry Grimstone, Chairman
During the year the Committee met five times. The Committee oversees and provides guidance and direction on the Group’s sustainability programme. It also supports the Board’s role in providing leadership on environmental and social issues. The Committee’s duties include keeping under review the Group’s sustainability strategy and policies and making recommendations to the Board on sustainability issues. This links our responsibilities to our stakeholders more closely to our long-term business objectives. During 2013, the Committee oversaw donations to charities involved with employability and financial capability - a key focus for the Group’s sustainability strategy.
You can find more details about the Group’s sustainability activities in Section 1.8 of the Strategic report – Our sustainability strategy and on the Group’s website at www.standardlife.com/sustainability
Report from the Chairman of the With Profits Committee of Standard Life Assurance Limited “Whilst the management of its with-profits business is the direct responsibility of the Board of Standard Life Assurance Limited (SLAL), FCA regulations require that a with-profits firm’s governance arrangements should make provision for independent judgement and advice. The SLAL Board has established a With Profits Committee (WPC) for this purpose. I am pleased to present my report on the work and operation of the Committee during 2013”. Niall Franklin, Chairman
SLAL has had a WPC since demutualisation. Its role is to monitor and advise the SLAL Board on the management of with-profits business, providing independent judgement on the fair treatment of with-profits policyholders, and to take a proactive role in raising any issues that merit further consideration. The Committee reviews all proposals that are material to the interests of SLAL’s withprofits policyholders. The Committee has the authority to engage external advisers, when appropriate, and has engaged an actuary from Milliman LLP to routinely provide the members with advice. The Committee’s routine formal interaction with the SLAL Board is by the minutes of its meetings and by an annual report to the SLAL Board in which it reviews the management of with-profits business having regard to SLAL’s duty to treat its with-profits policyholders fairly and to meet their reasonable benefit expectations. The Committee has authority to make a report to the withprofits policyholders. It did not do so during 2013 and would not expect to do so unless it disagreed materially with SLAL’s own annual report to its with-profits policyholders (which is required by FCA regulations) on the management of the with-profits business. The Directors of SLAL and of the Company have an open invitation to attend any of the Committee meetings. Minutes of the Committee meetings are submitted to the Board and in May 2013 the Committee Chairman attended a meeting of the Board at which with-profits matters were discussed.
The Committee has a web page which provides information on its main activities, including how the Committee protects the interests of policyholders and makes its views known.
The Board is equally committed to the interests of the Company’s 1.3 million individual shareholders who hold approximately 55% of the Company’s issued shares. Given this large shareholder base, it is impractical to communicate with all shareholders using the same direct engagement model we follow for our institutional shareholders. The Company has continued to gather and respond to shareholders’ views on the services and means of communication available to them, mainly via the Shareholder Questions mailbox and surveys conducted with shareholders contacting the shareholder helpline. Their input has informed how the Company communicates with them - particularly online - and how the ARA, the new Strategic report and the AGM guide 2014 are produced. We believe that communicating electronically with our shareholders supports our sustainability strategy, and around 500,000 shareholders receive all communications electronically. We encourage shareholders to use our share portal to access information relating to their personal shareholding and dividend history and around 300,000 have signed up to this service. Share portal participants can also change their details and dividend mandates online and receive dividend tax vouchers electronically. We also encourage our individual shareholders to hold their shares in the Standard Life Share Account where shares are held electronically in a secure environment.
To give all shareholders access to the Company’s announcements, all material information reported via the London Stock Exchange’s regulatory news service is published on the Company’s website. During 2013 we expanded our online investor communication tools. We have continued to host formal presentations to support the release of both the Full-Year and Half-Year financial results together with conference calls for our two Interim Management Statements. These results-related events are also made available live on the Group’s website, with the facility for all listeners to ask questions, as well as having a permanent replay facility.
The 2013 AGM was held at the Edinburgh International Conference Centre on 14 May 2013. Directors were available to answer shareholders’ questions. In accordance with best practice, all resolutions were considered on a poll which was conducted by our registrars and monitored by independent scrutineers. The results, along with proxy votes lodged prior to the meeting, were made available on our website the same day. 40% of the shares in issue were voted and all resolutions were passed.
Other information You can find details of the following, as required by DTR 7.2.6, in the Directors’ report and in the Directors’ remuneration report: Share capital • significant direct or indirect holdings of the Company’s securities • confirmation that there are no securities carrying special rights with regard to control of the Company • confirmation that there are no restrictions on voting rights in normal circumstances • how the Articles can be amended • the powers of the Directors, including when they can issue or buy back shares. Directors • how the Company appoints and replaces Directors • Directors’ interests in shares.
Annual review of internal control The Directors have overall responsibility for the Group’s ERM framework and system of internal control and for the ongoing review of their effectiveness. The framework is designed to manage, rather than eliminate, risk and can only provide reasonable, not absolute, assurance against material misstatement or loss. The framework covers all of the Group’s risks as set out in the ERM Framework section below. GIA regularly reviews the effectiveness of internal control and the ERM framework, and reports its findings to the Audit Committee and the Risk and Capital Committee. In particular, with regard to regular financial reporting and preparing consolidated accounts, Group Finance participates in the control self-assessment and policy compliance elements of the ERM framework. Group Finance maintains an up-to-date Group Accounting Manual and sets formal requirements with business unit finance functions which specify the reports and approvals needed. Group Finance then reviews and challenges these as part of the consolidation process. The consolidation team which sits within Group Finance defines the process and detailed controls for the IFRS consolidation. In addition, Group Finance runs the Technical Review Committee (TRC), which is made up of senior finance managers. The TRC reviews external technical developments and detailed reporting and accounting policy issues to support the consistent interpretation and application of the Group accounting policies and practices. This is done in conjunction with the Group's other management committees with external reporting responsibilities: the Financial Reporting Executive Review Group and the EEV Basis Group.
• that the scheme of delegation was reviewed and approved by relevant committees • that the system of governance had been reviewed and was documented • that the system of internal control was also regularly reviewed and results reported to relevant Enterprise Risk Management
Committees (ERMCs) • that the external auditors had been made aware of relevant information.
In order to support these statements, the most significant control issues which arose throughout the year were documented and reviewed. Business unit risk functions were also asked to produce a report detailing the assurance activity which had been conducted throughout the year in relation to the system of internal control. The certification, documented control issues and assurance reports were reviewed by each business unit and/or the Group Chief Risk Officer as appropriate, with challenge provided by Group Risk, before being presented for certification. A certificate was then prepared by Group Risk for the Chief Executive together with a report combining the output from the business unit and Group function executive certifications. Completed certifications and supporting documentation were presented to the business unit and the Group ERMCs. The results of the output from this review were presented to the Audit Committee which subsequently reported its conclusions to the Board.
The Group’s Enterprise Risk Management framework The Group has an ERM framework that enables risks to the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically. We have operated our ERM framework for a number of years and we continue to seek opportunities to strengthen the framework and to ensure that it is aligned with external best practice.
During the year we have further developed and embedded our ORSA process. This has been built on our ERM framework which provides a good foundation for this in terms of identifying, assessing, controlling and monitoring risks.
Our experience of operating and improving our ERM framework over a number of years means that we are well placed to meet the future requirements of Solvency 2 which we anticipate will support the further embedding of risk management within the Group.
Risk governance structure The risk governance structure we use in defining our risk culture includes the Risk and Capital Committee (the”RCC”) which is made up of non-executive Directors as detailed in the Report from the Chairman of the RCC above. The Group Chief Risk Officer also attends meetings of the RCC. The main role of the RCC is to provide oversight and challenge of, and advice to the Board on: • the Group’s risk strategy, limits and tolerances, material risk exposures and future risk strategy and their impact on capital • the structure of the Group’s ERM framework and its suitability to react to the changing nature of risks • the risk aspects of major investments, major product developments and other corporate transactions • material risk and capital matters affecting the Heritage With Profits Fund.
Third line: independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by the Audit Committee, which is supported by the GIA function, and the RCC.
Qualitative risk appetites The Group has defined qualitative risk appetite principles and statements to provide guidance to our businesses and help to drive our strategy in line with the Group’s appetite for risk. The general principles are: • the Group has no appetite for unrewarded risk • the Group has no appetite for any risk that is not consistent with the delivery of our strategic objectives • the Group’s appetite for accepting risk is dependent on the expected return exceeding the cost of capital • the price charged for accepting risk should seek to maximise the risk/reward profile; prices charged for our products should fully reflect all risks.
Quantitative risk limits Quantitative risk limits are used to support the qualitative risk appetite statements and allow regular objective reporting of exposures against risk limits. The quantitative risk limits used during 2013 have been based on the following key risk metrics which are a focus of our risk management activity: • excess working capital • economic capital resources.
Economic capital resources are a quantification of the capital available within the Group. They are a measure, based on an internal economic capital methodology, of the value of the Group's assets less liabilities. This metric supports management of the financial strength of the Group and delivery of long-term shareholder value. Under this metric, risk exposures are measured as the amount of capital that is needed to cover the risks taken by the Group, calibrated to withstand a defined risk event.
Excess working capital is shareholder cash that is in excess of regulatory requirements, target solvency requirements and any further operational constraints. This metric supports management of the primary source of funding for the business, the strategic activities of the Group and distributions to shareholders. Under this metric, risk exposures are measured as the reduction in excess shareholder cash that a business might expect to see as a consequence of a defined risk event.
For 2014, the Group is transitioning away from excess working capital as a key risk metric. Economic capital resources will be the key risk metric for managing risk exposures against quantitative risk appetites across the group. Although excess working capital will be not be used for the purposes of the risk appetite framework, we will continue to track and manage the business through a wide range of risk, capital and profit metrics.
You can find out more about our approach to assessing risk exposures and establishing risk limits in the Risk and capital model detailed below.
ERM reporting Group Risk continues to review and challenge risk reporting from the risk functions across the Group to ensure that accurate and adequate information is delivered to the risk committees (as detailed above) to support their risk management mandates. To support this, during 2013, the RCC and Group ERMC risk reporting content and style were refreshed.
Key risk control processes Risk control processes are the practices by which we manage financial and non-financial risks within the Group. Risk control processes are used to identify, assess, control and monitor risk. They are defined in, and implemented through, the Group’s policy framework.
Internal/external events and loss monitoring Risk register and policies Risk profile and ownership Key processes and ownership Risk metrics/indicators Gross and net risk assessment Key controls Benchmarks
Monitor Current exposure to identified risks is monitored and reported as required.
Policy framework The policy framework supports the Group’s corporate purpose by providing a consistent, high-level approach to managing the key risks faced by the Group and operates on five levels: The five levels of the policy framework interact as follows: • Governing principles: articulate the Group’s approach to managing our key risks at the highest level, and assist the Group’s businesses to operate effectively, efficiently and in compliance with applicable laws and regulations • Risk appetite framework: defines the key principles under which the Group should seek to take risks • Policies: state the standards that business units must comply with in managing the key risks that threaten the achievement of our strategy and business objectives • Benchmarks: state how each business unit will demonstrate policy compliance through providing appropriate evidence for each policy standard, in terms of processes, controls and communications
• Processes, procedures and controls: designed and implemented by business units to help ensure compliance with the standards set out in the policy.
The policy framework helps ensure that all businesses operate effectively, efficiently and comply with all applicable laws and regulations.
Tax policy and risk management As part of the policy framework, the Group operates the Tax Risk and Transfer Pricing Policy which supports the delivery of the Group’s business objectives. The key principles of this policy are: • the principles apply to all taxes and levies payable by the Group or operated/collected by the Group on behalf of governmental authorities • we will be compliant with all legally required reporting, disclosures and approvals and will pay all tax that we consider to be legally due in any territory acting in an open, honest and transparent manner with tax authorities and other relevant bodies • we shall act in a transparent manner with revenue and governmental authorities at all times • tax shall be managed and controlled within a commercial context so that all transactions and arrangements must have a business purpose and commercial rationale • we shall lobby and seek to influence applicable industry bodies or associations, governments and other external bodies (such as the Organisation for Economic Co-operation and Development and the EU) in the interests of all our stakeholders including customers, shareholders and employees.
In addition, the Group participates in the development of tax policy and legislation through engagement with tax authorities on tax consultations and involvement with representative bodies such as the Association of British Insurers and the Investment Management Association in alignment with our business strategy and to promote a stable environment for long term savings and investments.
Environmental, social and governance risks We have a sustainability strategy which, taken together, helps us ensure that we manage our environmental, social and governance risks effectively. The strategy has five material themes: 1. Listening and responding to customers 2. Operating and growing responsibly 3. Developing and engaging our people 4. Protecting our environment 5. Contributing to our communities.
The strategy is underpinned by our Code of Business Conduct and policy framework. In particular, the Environment Policy and the Group Community Investment Policy directly support the sustainability strategy. The standards in the Environment Policy require business units to identify applicable environmental legislation and, together with our sustainability team, establish annual environmental targets and environmental management programmes to achieve these targets.
Strategic risk management Our approach: • putting risk at the heart of our business planning • identifying and understanding our risks and strategy and making the right decisions • effective strategic control and allocation of capital.
Strategic risk management forms an integral part of the strategic planning process and is directly linked to the Group’s corporate objectives. This process enhances the Group’s capability to assess strategic allocation of capital and the ability to identify, monitor and manage emerging risks.
As part of this process, we have been monitoring the Scottish independence debate very closely. Our main priority, regardless of any constitutional change which may take place in the future, is to continue serving our customers across the UK and around the world and maintain our competitive position in the markets in which we operate. More details on this are included in Section 1.1 of the Strategic report. Where there are areas that need further clarity, these will remain areas of focus within the strategic risk management process.
Directors’ remuneration report This report sets out the policies that will govern what and how we pay the Directors of Standard Life plc in the future and what we paid them in 2013. Where tables and charts in this report have been audited by PricewaterhouseCoopers LLP we have marked them as ‘audited’ for clarity.
We are also proposing a new long-term incentive plan. These proposals have been supported by a number of our institutional investors and will further strengthen the alignment of awards with the interests of our customers, shareholders and our focus on delivering sustainable business growth.
Remuneration policy Our remuneration policy report is set out on pages 72 to 83 and we propose that, subject to shareholder approval, the policy is effective from 13 May 2014 – the date of the 2014 Annual General Meeting (AGM).
• The basis of awards should be transparent for both shareholders and participants through the use of relevant and measureable performance targets that are clearly linked to driving shareholder value through our customer focus 70 Standard Life
The objective of the review was to ensure that our long-term incentive arrangements continue to support our overall strategic objectives of driving customer and shareholder value and delivering sustainable business growth.
The key features of the proposed new Group LTIP for executive Directors from 2014 are summarised below: • Delivers shares based on performance against Group targets • Maximum awards as a percentage of salary will be maintained at existing levels for 2014 for current executive Directors • Three-year performance period with an additional two-year holding period making it a five-year plan from grant to vest • Awards are based on cumulative Group operating profit before tax and cumulative Group net flows performance • The assessment of performance against the targets set is subject to robust underpins with Remuneration Committee discretion to adjust downwards (to zero) if considered appropriate • Provisions apply which allow the Remuneration Committee to reduce unvested awards if considered appropriate. We will disclose the performance target ranges for the new Group LTIP awards at the beginning of the performance period and performance against the targets will be disclosed at the end of the performance period.
In support of the new Group LTIP and to help ensure that executive wealth, as well as income, is linked to Group performance we will be replacing the existing shareholding guidelines for executive Directors with an increased shareholding requirement. To promote stewardship, we are also introducing a requirement that Standard Life plc shares earned from incentive arrangements, to the value of the shareholding requirement, must be held for at least 12 months following cessation of employment.
During the consultation, investors were supportive of the proposed design and operation of the new Group LTIP. They were particularly positive about the simplicity of the plan, the strong link between the performance measures and the Group’s strategy and the longer holding period. We believe that this plan and the associated shareholding requirements are consistent with and will support our strategic objective of delivering customer and shareholder value and sustainable profitable growth over time, and are in line with the best interests of our shareholders.
Agenda for 2014 We believe it is appropriate to review the remuneration arrangements for the Chief Executive, Standard Life Investments (CE, SLI), but delayed doing that during 2013 due to the uncertainty surrounding regulatory changes affecting the asset management sector. Once that uncertainty is resolved, we will conduct a review and will consult major institutional investors as part of this process.
Base salary To provide a core reward for undertaking the role positioned at a level needed to recruit and retain the talent required to develop and deliver the business strategy.
Salaries for executive Directors are set at an appropriate level to attract and incentivise individuals of the calibre and with the experience required.
The Remuneration Committee may award increases above this level in certain circumstances, such as: • where a new recruit or promoted employee’s salary has been set lower than the market level for such a role and larger increases are justified as the individual becomes established in the role
• where there is a significant increase in the size and responsibilities of the executive Director’s role.
Benefits Provide market competitive monetary and nonmonetary benefits, in a cost effective manner, to assist employees in carrying out their duties efficiently.
In the event of recruitment or relocation additional benefits may be provided, such as: • housing rental costs • education allowance • travel and accommodation costs • relocation costs
Pension Provide a competitive, flexible retirement benefit in a way that does not create an unacceptable level of financial risk or cost to the Group.
Executive Directors are auto-enrolled into the Company’s defined contribution pension plan and are offered the alternative of a cash allowance.
We would continue to honour defined benefit pension arrangements in the event of an individual being promoted to an executive Director role who retains a contractual entitlement to such a pension benefit.
Designed to support the delivery of our annual business plan. Focus is on the delivery of the annual financial, strategic, customer and people objectives.
Awards are based on a balanced Group scorecard combining annual financial and non-financial performance targets.
The Remuneration Committee exercises its judgement to determine awards at the end of the year to ensure that the outcome of the scorecard is fair in the context of our overall Group performance, taking into account actual performance against Group scorecard targets, business performance and performance against personal goals. Normally, 50% of any bonus above 25% of salary is deferred into shares which vest after two years from the date of award (subject to the deferred amount being at least 10% of salary).
The performance scorecard is weighted with at least 50% of bonus based on financial performance and no less than 30% based on non-financial performance. The non-financial targets are split between strategic, customer and people measures.
The split between financial and non-financial targets is set annually by the Remuneration Committee.
The award opportunity for bonus at threshold performance is zero with up to 50% of the award normally payable for target performance. 100% of the award is payable for maximum performance.
The award for the CE, SLI is determined by the Remuneration Committee.
Individual awards are then based on personal performance objectives set at the start of the year against Standard Life Investments’ business scorecard objectives.
Rewards participants for the delivery of our goals of driving shareholder value through customer experience with a focus on measures such as cumulative Group operating profit and cumulative Group net flows.
The Remuneration Committee has the discretion to amend the final vesting level of awards if it does not consider that it reflects the performance of the Group.
The maximum award opportunity under the plan is 300% of salary.
The Remuneration Committee’s current intention is that award levels will be based on role and will be up to a maximum of 200% of salary.
The Remuneration Committee will normally consult with the Group’s largest shareholders in advance of increasing award levels above the current grant levels.
• Cumulative Group net flows weighted at no more than 50% of the award.
The weighting of measures for awards to be made in 2014 will be: • Cumulative Group operating profit (excluding life joint ventures) before tax - 70%
• Cumulative Group net flows performance (excluding life joint ventures) - 30%.
The Remuneration Committee has the discretion to amend the final vesting level of awards if it does not consider that it reflects the performance of Standard Life Investments.
Dividend-equivalents accrue over the three-year period. These will normally be paid in shares on a reinvested basis.
The Remuneration Committee may adjust and amend awards in accordance with the SLI LTIP rules.
The maximum award opportunity for the CE, SLI is 200% of salary.
Vesting of the award is based on Standard Life Investments’ consolidated cumulative three-year third party earnings before interest and tax.
The award opportunity at threshold performance is zero, with normally up to 50% of the award vesting for target performance. 100% of the award vests for maximum performance.
For these purposes ‘payments’ include the Remuneration Committee satisfying awards of variable remuneration and, in relation to an award over shares (including awards granted in 2011, 2012 and 2013 under the current Group LTIP, the SLI LTIP and any other share based plan operated by the Group), in line with the terms of the payment that were agreed at the time the award was granted.
The Remuneration Committee retains the discretion to amend the performance target in exceptional business or regulatory circumstances. If discretion is exercised in this way the Remuneration Committee will consult with major shareholders as appropriate.
All awards are subject to Remuneration Committee discretion and may be adjusted (or reduced to nil) where it determines that the overall level of the Company or Group performance does not warrant payment of variable remuneration, or it considers that risks (such as financial, regulatory, compliance or brand risk) have not adequately been reflected in awards.
Performance targets for our incentive arrangements are set on an annual basis by the Remuneration Committee. The Remuneration Committee takes into account a range of factors including internal business forecasts, prior year performance, and degree of stretch against the performance targets in the business plan as well as the economic environment, market conditions and expectations.
We aim to deliver target awards for ‘good’ performance. By this we mean business outcomes are delivered consistently against agreed requirements and performance expectations in terms of both ‘what’ has been delivered and ‘how’ this level of performance has been achieved. Maximum awards will only be earned where the performance in the Group or Standard Life Investments has significantly exceeded expectations.
Focuses management on growing our customer volumes through winning new customers and growing revenue from our existing customers which will ultimately lead, through growth in assets under management and quality revenue flows, to increasing profitability and increased shareholder value.
Develops our organisational capability by building the resources for the future, and encouraging the desired behaviours.
The table below sets out why the performance conditions for the new Group LTIP were chosen.
Rationale Chosen measure of profitability and closely linked to cash generation. A key measure of the profit we make that provides an indication of the long-term operating performance. It excludes items which create short-term volatility and that are not within management control. Targets our ability to deliver returns to our shareholders and provides an indication of our dividend paying capability.
Awards under the SLI LTIP are also subject to an investment performance gateway which requires Standard Life Investments’ investment performance to be above the lower quartile of the money-weighted average of all assets under management (captive and third party assets) compared to other asset managers before the award vests. This benchmarks performance relative to other asset managers and prevents vesting for relative underperformance.
The scorecard used to determine annual bonuses for executive Directors is used in the determination of annual bonuses for all employees.
Although the above principles apply throughout the Group, given the size of the Group and the scale of its operations, the way in which the remuneration policy is implemented varies by jurisdiction and seniority. For example participation in the current Group LTIP is at the Remuneration Committee’s discretion and is normally limited to senior management, and the Group’s defined contribution pension provision is graduated based on seniority.
Embeds a culture that places the customer at the heart of our business.
Scenario charts The chart below illustrates how much the current executive Directors could earn under different scenarios for 2014. This is based on the following assumptions: • Below threshold is based on fixed pay only which includes salary, pension allowance and taxable benefits • Target includes the potential value of annual and long-term incentives which would be payable for target performance (being 50% of maximum) • Maximum shows the total remuneration receivable for maximum performance under all incentive plans • A constant share price is assumed and dividend equivalents have been ignored.
Remuneration Policy for new appointments Principles In determining remuneration arrangements for new appointments to the Board (including internal promotions), the Remuneration Committee applies the following principles: Approach to fees Operation Other items
Board membership fees are subject to a maximum cap which is stated in the Company’s Articles of Association. Any changes in this would be subject to shareholder approval.
The Chairman receives an aggregate fee which takes into account their role in all Board committees.
Buyouts To facilitate recruitment, the Remuneration Committee may make an award to ‘buy out’ remuneration terms forfeited on leaving a previous employer. In doing so, the Remuneration Committee will adhere to the FCA guidance in relation to the practice of buyout awards to new recruits and, in particular, the requirements for Code Staff (as defined by our regulators). In considering buyout levels and conditions, the Remuneration Committee will take into account such factors as the type of award and performance measures and the likelihood of performance conditions being met. The buyout award will reflect the foregone award in amount and terms (including any deferral or retention period and performance conditions) as closely as possible but within the structures and timing of equivalent Group plans. Where appropriate, the Remuneration Committee retains the discretion to utilise Listing Rule 9.4.2 (a rule, set by the United Kingdom Listing Authority, which permits an arrangement to be made without shareholder approval, specifically to facilitate, in unusual circumstances, the recruitment or retention of the relevant individual) for the purpose of making an award to ‘buy out’ remuneration terms forfeited on leaving a previous employer or to utilise any other incentive plan operated by the Group.
Service Contracts Executive Directors: The executive Directors' terms and conditions of employment are detailed in individuals’ executive service contracts. In these contracts, the Remuneration Committee aims to strike the right balance between the Company's interests and those of the executive Directors, while ensuring that they comply with best practice, legislation and the agreed remuneration principles. Contracts are not for a fixed term, but set out notice periods in line with the executive's role.
Up to 12 months by the Company to the executive Director. A payment in lieu of notice can be made.
Remuneration Salary, pension and core benefits are specified in the contracts and are treated as described above. There is no contractual entitlement to participate in the annual bonus plan or receive long-term incentive awards. Individuals are notified of these discretionary schemes at the beginning of each year.
Contract dates David Nish 31 October 20061 Keith Skeoch 3 April 2006 1 David Nish signed a new contract in October 2009, reflecting his appointment to Chief Executive from 1 January 2010.
Non-executive Directors: The non-executive Directors, including the Chairman, have letters of appointment that set out their duties and responsibilities. The key terms are: Provision Policy Period of appointment
The service agreements / letters of appointment for Directors are available to shareholders to view on request from the Group Company Secretary and General Counsel at our registered address (details of which can be found in the Contact details on page 289 and at the 2014 AGM.
Loss of office remuneration The Remuneration Committee will consider the following factors when considering remuneration for loss of office: • The individual’s service contract and the rules of the relevant incentive plans • Circumstances of the loss of office • Performance during office • The commercial justification for any payments.
• In all plans, the Remuneration Committee retains the discretion to disapply time pro-rating for good leavers (see below) and, in the case of the current Group LTIP, performance pro-rating
• Typically, for other leavers, rights to annual bonus and outstanding long-term incentive awards will be forfeited • Other payments such as legal fees or outplacement costs may be paid if considered commercially appropriate.
Considering conditions elsewhere in the Group When setting the policy for executive Directors’ remuneration, the Committee has regard to the pay and employment conditions elsewhere within the Group, recognising international variance and jurisdictional differences, where appropriate. The Remuneration Committee is informed about the approach on salary increases, Group-wide benefit offerings including pensions, the structure of incentive arrangements and distribution of outcomes throughout the wider organisation, as well as the take-up of all-employee share ownership plans, employee engagement survey results and staff morale.
The Remuneration Committee does not consider it appropriate to consult employees in the Group on the remuneration policy for executive Directors. However, the Group engages with its employee associations from an early stage in the annual remuneration cycle. The areas discussed include: external relativities, economic factors, employee expectations and congruence of executive pay with that of the wider workforce in terms of overall pay budgets and approach.
Consideration of shareholder views The Remuneration Committee values the opportunity to listen to our shareholders. As explained in the Remuneration Committee Chairman’s statement major institutional shareholders were consulted as part of the approach to designing the new long-term incentive plan. The overall reaction from shareholders with whom we met and from those who expressed views on the proposed plan has been positive.
Annual remuneration report - what we did in 2013 This section sets out the annual remuneration report and is subject to an advisory vote of shareholders at the Annual General Meeting.
2 The figure reported for long-term incentives in 2013 is the market value of Group LTIP and SLI LTIP awards that will vest in 2014. The share price at the date of vesting was not known at the date of publication of this report and therefore the number of Standard Life plc shares that will vest has been multiplied by the average share price over the quarter ending 31 December 2013 (£3.49). This amount includes additional Standard Life plc shares received in respect of accrued dividends from grant through to 31 December 2013.
3 David Nish participates in the Standard Life Sharesave Plan – his option is not yet exercisable. Both David Nish and Keith Skeoch participate in the Standard Life Employee Share Plan – the maximum annual award of matching shares is currently £300.
4 Jackie Hunt resigned from the Board on 26 April 2013 and ceased to be a Standard Life employee on 4 September 2013. The table includes figures for the period from 1 January 2013 to the date Jackie Hunt resigned as a Director.
Jackie Hunt1 £537,500 £565,000 £178,323 1 Jackie Hunt resigned from the Board on 26 April 2013 and ceased to be a Standard Life employee on 4 September 2013 at which date payment of salary ceased.
Pension (audited) No Directors are members of, or have benefits in, the Standard Life Staff Pension Scheme. Executive Directors received a cash allowance in lieu of pension as follows: Cash allowances in lieu of pension contribution as a % of salary Paid in 2013
Officer and the Risk and Capital Committee on the level of underlying risk within the business • The actual financial performance targets and the detailed non-financial measures used for the determination of the annual bonus plans have not been disclosed in this Directors’ remuneration report as the Board deem that, given the annual bonus rewards the achievement of the Group’s business plan, the disclosure of these could seriously prejudice the Group’s business. The financial targets will be disclosed at the earliest in the Directors’ remuneration report published for the financial year following the year in which the bonus is paid.
Strong financial performance across the Group against challenging targets demonstrated by: • Group operating profit before tax (excluding life joint ventures)1 of £746m exceeding maximum targets • EVOP (excluding joint ventures)1 of £892m between threshold and target • Group operating RoE (excluding joint ventures) was 15%
exceeding maximum targets • Group assets under administration including joint ventures increased by 12% from 2012 to £244.2bn • Group net flows including joint ventures of £9.6bn.
Management of the Group’s strategy and its deployment in each Business Unit including the annual investment programme, any corporate actions and the efficiency of the Group’s balance sheet.
• Proactive Board review, challenge and approval of strategy at Group level and in each business unit, including update and ongoing monitoring of strategic risks
• Good delivery progress across all change portfolios. • All planned balance sheet actions successfully completed and financial strength maintained, allowing for special dividend to be paid.
Drive customer focus within the organisation and build advocacy for the Standard Life brand.
• Evolved customer engagement through bespoke and rolling campaigns, with 200,000 customers now receiving monthly online communications
• Delivered key thought leadership campaigns boosting customer financial awareness and encouraging action on savings, including ‘Saving in Mind’ and ‘Family Financial Tree’ in the UK and a programme to tackle financial inertia in Canada
• Achieved our highest ever score and retained our position in the Dow Jones Sustainability Index (DJSI) for a third consecutive year, putting us in the top 10% of listed companies.
• We launched another cohort of each of our award-winning talent programmes and benchmarked some of our top leaders against the best externally to continue to create a strong succession pipeline
• To strengthen our global graduate capability, we began recruitment activity in Montreal, Boston and Hong Kong
Strong individual performance by each of our executive Directors against their own individual objectives.
Based on performance against each of the four Group performance elements and considering the performance of the Group as a whole, the Remuneration Committee approved a rating of 4.1 out of 5 for performance against the Group scorecard during 2013.
1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited 86 Standard Life
Standard Life Investments bonuses As well as participating in the Group annual bonus in 2013, Keith Skeoch also participated in the Standard Life Investments’ discretionary annual cash bonus plans: • These plans reward participants based on Standard Life Investments’ corporate and investment performance. Consistent with fund management practice the amount of the bonus pool is determined by reference to Standard Life Investments’ financial performance and having regard to the total remuneration spend.
• Keith Skeoch’s company bonus opportunity for 2013 was equal to 200% of salary, if Standard Life Investments met its stretch targets. In the event that these stretch targets were exceeded, a higher Standard Life Investments company bonus could have been awarded by the Remuneration Committee provided that it was in line with its principles on total remuneration (details are provided in the future policy report).
Based on Keith Skeoch’s and Standard Life Investments’ performance in 2013 the Remuneration Committee approved personal bonus award of 105% of salary and a company bonus award of 200% of salary. Although Standard Life Investments exceeded its stretch targets in 2013 it was decided, in agreement with Keith Skeoch, that no additional company bonus payment would be considered this year.
Long-term incentives Standard Life Long-Term Incentive Plan (current Group LTIP) The current Group LTIP is due to expire at the end of 2014 and shareholder approval is being sought at the 2014 AGM for a new plan (the Standard Life plc Executive Long Term Incentive Plan) which will be used to grant awards for 2014 onwards.
The LTIP awards currently in existence have a performance condition based on Group operating profit before tax (excluding profits of the life joint ventures – HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited). The current Group LTIP awards are also subject to two underpins when assessing the Group performance. The first requires the Group Risk and Capital Committee to be satisfied that performance obtained has been achieved within acceptable defined risk parameters. The second requires the Remuneration Committee to be satisfied that Group operating profit performance reflects overall Group performance.
Actual performance £746m 1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited.
In line with the above results, the Remuneration Committee determined that 64% of awards granted to David Nish and Keith Skeoch in 2011 should vest in 2014. The 2011 award granted to Jackie Hunt lapsed on the cessation of her employment.
Performance Consolidated cumulative three-year third party EBIT % of target award of shares that vest1
Maximum 140% of target 200% 1 Vesting takes place on a straight-line basis between 60% of target cumulative three-year third party EBIT and 140% of target cumulative three-year third party third party EBIT.
2011 awards vesting in respect of performance periods ending in 2013 In line with the above, Keith Skeoch received an award under this plan in March 2011 equivalent to 200% of salary (at maximum vesting). No other executive Director received an award under this plan.
Performance criteria % of award vesting at threshold and threshold performance level
Maximum: £875m 2013 SLI LTIP award, vests in March 2016 Nil-cost option
All of the above awards are subject to an additional personal performance underpin whereby if an executive performs at an unsatisfactory level in any year during the three-year performance period, their original award would be reduced by one-third, unless the Chief Executive, or the Remuneration Committee in the case of the Chief Executive, recommends otherwise.
Awards are also subject to clawback. This allows the Remuneration Committee to ask for awards to be repaid for up to two years from the date they vest, where misconduct by the executive during the performance period is subsequently discovered, or if the Group's financial statements for the year ended 31 December 2015 (in the case of the 2013 award) are restated.
Share ownership We operated a set of share ownership guidelines during 2013. The purpose of these guidelines was to encourage our executives, and the Chairman, to hold a substantial element of their personal wealth in Standard Life plc shares to align their interests with those of Standard Life’s shareholders. The shareholding guideline targets were to be achieved within five years of their appointment as an executive Director (or from 10 July 2006 for those in role at the time of flotation).
These guidelines will be strengthened from 2014. David Nish and Keith Skeoch will now be required to hold 300% of their base salary in the form of Standard Life plc shares (under the previous guideline it was expected they would hold 150% and 100% respectively). The Chief Financial Officer when appointed will be required to hold 200% (Jackie Hunt, as CFO, was expected to attain a 100% holding).
The shares which the executive Directors will be required to hold to reach their respective shareholding requirement are based on the net vested shares arising from the exercise of an award. Net vested shares are those shares which the executive Director could retain after selling sufficient shares to cover the costs of the income tax and employee national insurance payable when the award is exercised. Executive Directors will be required to hold shares arising from the following awards: • 100% of the net vested shares that could be acquired from the exercise of awards granted from 2014 onwards (this includes the awards arising from the deferral of annual bonus and awards granted under the new Group LTIP and the SLI LTIP)
• 50% of the net vested shares that could be acquired from the exercise of awards granted prior to the introduction of the new requirement (this includes awards arising from the deferral of annual bonus and awards granted under the current Group LTIP and the SLI LTIP)
Executive Directors will be required to retain shares held in respect of the requirement for a period of one year following their departure from the Group.
Directors’ interests in shares (audited) The following table shows the actual number of Standard Life plc shares held by the executive Directors.
Total value2 of shares owned at 31 December 2013 as a % of salary at 31 December 2013
Jackie Hunt 128,022 50,271 178,293 122% - 1 Includes shares held by the Director and by their connected persons. 2 Closing share price at 31 December 2013 was 359.6p. 3 Calculation based on numbers of shares held at date of resignation (26 April 2013) and the share price on that date (387.3p).
As is shown from the table David Nish and Keith Skeoch met the share ownership guidelines in place in 2013 and Jackie Hunt was on target to do so at the date of her resignation.
Jackie Hunt - - - 486,656 1 This comprises awards made under the Group and SLI LTIPs in 2011, 2012 and 2013 excluding shares to be awarded in lieu of dividend equivalents. 2 This comprises deferred bonus awards made in 2012 and 2013 and Sharesave options excluding shares to be awarded in lieu of dividend equivalents. 3 This comprises exercises of awards made under the 2010 Group and SLI LTIPs and deferred share awards from the 2010 Group bonus plan including dividend equivalents.
The closing market price of Standard Life plc shares at 31 December 2013 was 359.6p and the range for the year was 326.1p to 421.7p.
Total value on exercise date David Nish 25/06/10 25/06/13 778,983 - 177,329 956,312 - - £1.8614 £3.471 28/06/13 £3,319,129 31/03/11 31/03/14 752,573 - 127,965 - - 880,538 £2.0596 - - - 29/03/12 29/03/15 665,750 - 67,301 - - 733,051 £2.3282 - - - 25/03/13 25/03/16 - 427,050 34,755 - - 461,805 £3.6998 - - - 2,197,306 427,050 407,350 956,312 - 2,075,394 Keith Skeoch 16/06/105 16/06/13 383,057 - 87,193 326,823 143,427 - £1.8274 £3.511 28/06/13 £1,147,335 25/06/10 25/06/13 376,061 - 85,606 461,667 - - £1.8614 £3.511 28/06/13 £1,620,714 31/03/115 31/03/14 412,701 - 70,173 - - 482,874 £2.0596 - - - 31/03/11 31/03/14 412,701 - 70,173 - - 482,874 £2.0596 - - - 29/03/125 29/03/15 365,088 - 36,906 - - 401,994 £2.3282 - - - 29/03/12 29/03/15 365,088 - 36,906 - - 401,994 £2.3282 - - - 25/03/13 25/03/16 - 236,634 19,258 - - 255,892 £3.6998 - - - 25/03/13 25/03/16 - 236,634 19,258 - - 255,892 £3.6998 - - - 2,314,696 473,268 425,473 788,490 143,427 2,281,520 Jackie Hunt 25/06/10 25/06/13 318,980 - 72,612 391,592 - - £1.8614 £3.441 25/06/13 £1,347,311 31/03/11 31/03/14 303,456 - - - 303,456 - £2.0596 - - - 29/03/12 29/03/15 288,581 - - - 288,581 - £2.3282 - - - 25/03/13 25/03/16 - 190,888 - - 190,888 - £3.6998 - - - 911,017 190,888 72,612 391,592 782,925 1 All current Group LTIP and SLI LTIP options lapse six months after the expected first date of exercise. 2 The Remuneration Committee has invoked the power within the LTIP rules in relation to the 2010, 2011, 2012 and 2013 awards for the awards to carry a right to receive rolled-up dividends, but only to the extent that the awards vest. As such, these awards include shares equivalent to the level of dividends announced between June 2010 and December 2013 which fall within the relevant vesting periods. All awards were made under the current Group LTIP unless otherwise stated.
Bonus awards–deferred shares These awards are the deferred share elements of the 2009, 2010 and 2011 bonus awards. The value of the bonus deferred into share awards is reported within the annual bonus figures shown in the Directors’ remuneration for the year for which the bonus is payable.
The exercise price for these options is £1.5746. No Sharesave option grants were made to executive Directors during 2012 or 2013. Sharesave options lapse six months from the date of exercise.
Loss of office payments in 2013 (audited) No loss of office payments were made in 2013. Jackie Hunt resigned as Chief Financial Officer and Director on 26 April 2013. She had a six month notice period and, therefore, would have ceased to be a Standard Life employee on 26 October 2013. By mutual agreement this was brought forward to 4 September 2013. She continued to receive salary, benefits and pension contributions while she remained an employee. Jackie Hunt did not receive an annual bonus in respect of the 2013 financial year. The deferred share awards granted in 2012 and 2013 (in respect of performance in 2011 and 2012) have lapsed as have the LTIP awards made in 2011, 2012 and 2013. The qualifying conditions for exercise of the deferred bonus award made in 2011 and the LTIP award made in 2010 were met and both awards were exercised. Details of the exercise of those awards are set out above.
Payments made to former directors during the year (if not reported elsewhere) will in future be reported here if they are in excess of £20,000. No such payments were made in 2013.
Long-term incentive plan vesting rates against maximum opportunity (%) 2013 David Nish 4,049 75 64 2012 David Nish 5,5641 88 100 2011 David Nish 2,601 77 63.5 2010 David Nish 1,971 83 02 2009 Sir Sandy Crombie3 2,175 67 49.67 1 The key drivers behind the increase in the CE single figure for 2012 reflects David Nish’s promotion to Chief Executive in 2010 and the correspondingly higher Group
2 The Group LTIP targets for the award granted in 2008 were not met and therefore no Group LTIP award vested for the year ended 31 December 2010. 3 Sir Sandy Crombie stepped down from the role of Chief Executive on 31 December 2009.
Percentage change in remuneration of the director in the position of Chief Executive The table below shows the percentage year-on-year change in salary, benefits and annual bonus earned between the year ended 31 December 2012 and the year ended 31 December 2013 for the CE compared to the average UK based Group employee: % change in base salary % change in bonus 2012 to 2013 % change in benefits2 CE 1.02% (1.46%)1 0% UK based employees of the Group 1.97% 1.17 0% 1 The CE’s bonus for 2013 was less than that for 2012 2 There was no change to core benefits in 2013
The financial performance targets and the detailed non-financial measures used for the determination of the Group and Standard Life Investments’ annual bonus plans, and our financial and non-financial performance against these, will not generally be disclosed. The Board and the Remuneration Committee believe that, given the annual bonus rewards the achievement of our business plans, the disclosure of these could seriously prejudice the Group’s business. In evaluating the non-financial metrics, the Remuneration Committee will reference, where possible, objective data and will exercise judgement in determining achievement of objectives when assessing performance. Disclosure on performance and how performance has been evaluated by the Remuneration Committee will be provided in the Directors’ remuneration report at the end of the performance period. The Group financial targets will be disclosed at the earliest in the Directors’ remuneration reports published for the financial year following the year in which the bonus is paid. This will allow shareholders to assess whether awards are appropriate in the context of the performance and progress made at the end of the year.
Pension Cash allowances are paid in lieu of pension as follows: • David Nish – 30% of salary • Keith Skeoch – 25% of salary
2014 new Group LTIP award, to vest in June 2019 Nil-cost option
Maximum: £33.4bn 1 Cumulative Group operating profit before tax excluding life joint ventures which refer to HDFC Standard Life Insurance Company Limited and Heng An Standard Life
Keith Skeoch will also be granted an award, in the form of a nil-cost option equivalent to 200% of salary under the SLI LTIP. This award will vest in 2017 subject to performance in the period to 31 December 2016. The award will vest provided the investment gateway is passed. The level of vesting is based on the cumulative three-year third party EBIT achieved in the three years to 31 December 2016. The performance targets will not generally be disclosed as the Board and the Remuneration Committee deem that, given the vesting of the SLI LTIP rewards the achievement of our business plans, the disclosure of these could seriously prejudice the Group’s business.
Single total figure of remuneration – non-executive Directors (audited) The following table sets out the single total figure of remuneration for each of the non-executive Directors who served as director at any time during the financial year ending 31 December 2013. Non-executive Directors do not participate in bonus or long-term incentive plans and do not receive pension funding.
Total remuneration for the year ended 31 December £000s Gerry Grimstone 2013 350 26 376 2012 350 34 384 Colin Buchan 2013 86 4 90 2012 86 1 87 Pierre Danon 2013 71 20 91 2012 70 15 85 Crawford Gillies 2013 97 8 105 2012 95 5 100 David Grigson 2013 97 15 112 2012 95 6 101 Noel Harwerth 2013 97 10 107 2012 43 1 44 John Paynter 2013 127 16 143 2012 115 12 127 Lynne Peacock 2013 71 14 85 2012 52 4 56 Sheelagh Whittaker2 2013 27 7 34 2012 70 6 76 Martin Pike3 2013 19 2 21 2012 - - - Lord Blackwell4 2013 - - 2012 28 1 29 1 Gerry Grimstone received an allowance of £15,000 towards his business related accommodation costs in Edinburgh in addition to his Chairman’s fees. Other amounts reported relate to expenses such as travel and accommodation expenditure incurred on Group business. While these payments are the reimbursement of expenses and not benefits they are included as being a payment which is subject to tax.
Total number of shares owned at 31 December 20131or date of resignation
Non-executive Director fees: Following a review of non-executive Director fees in 2013, the Board (and the Remuneration Committee in respect of the Chairman) considered it appropriate to make no changes to non-executive Director fees: Role 2014 fees1 2013 fees
2 The Chairman’s fee is inclusive of the non-executive Directors core fee and no additional fees are paid to the Chairman where he chairs, or is a member of, other committees/boards. In 2014 the Chairman will also receive £15,000 (2013: £15,000) as an allowance towards his business related accommodation costs in Edinburgh. The Chairman elected to receive no increase in fees in 2014.
External advisers: The Remuneration Committee received information on comparative pay data from Towers Watson. Pinsent Masons LLP provided legal interpretation of remuneration related regulations to the Remuneration Committee.
During the year, the Remuneration Committee also took advice from Deloitte LLP, who were appointed as external advisors to the Remuneration Committee from October 2011 until June 2014.
A representative from Deloitte LLP attends, by invitation, all Remuneration Committee meetings to provide information and updates on external developments affecting remuneration as well as specific matters raised by the Remuneration Committee. Deloitte LLP also drafted the plan rules and ancillary documentation for the new Group LTIP. Outside of the meetings, the Remuneration Committee's Chairman seeks advice on remuneration matters on an ongoing basis. As well as advising the Remuneration Committee, Deloitte LLP also provided tax, risk, data and real estate advice to the Group during the year. Deloitte LLP is an investment adviser to the trustees of the Standard Life Staff Pension Scheme. As well as providing these services, the Group is the current appointed provider for the defined contribution pension plan that Deloitte LLP provides for its employees and Deloitte LLP is one of the employee benefit consultants through which Standard Life has been appointed to provide defined contribution arrangements for Deloitte’s clients through competitive tender.
Shareholder voting: We remain committed to on-going shareholder dialogue and take an active interest in voting outcomes. Where there are substantial votes against resolutions in relation to Directors’ remuneration, we seek to understand the reasons for any such vote, and will detail here any actions in response to it.
Promoting all-employee share ownership: We believe that share ownership by our employees helps them to understand the interests of our shareholders. On 31 December 2013, 64% of our employees were Standard Life shareholders through participation in our share plans. We promote employee share ownership with a range of initiatives: • The Standard Life (Employee) Share Plan which allows employees to buy Standard Life plc shares directly from their earnings.
On 31 December 2013, 3657 employees (65% of those eligible in the UK) were making a monthly average contribution of £42. A similar tax-approved plan is used in Ireland and has a 47% take-up. Even though the plan cannot be structured on a taxfavourable basis in Canada, Germany and Austria, more than 640 employees in these countries are buying shares each month.
• The Sharesave Plan which allows UK tax resident employees to save towards the exercise of options over Standard Life plc shares with the option price set at the beginning of the savings period at a discount of up to 20% of the market price. Sharesave invitations were made in August 2011, August 2012 and September 2013 to UK employees and at December 2013, 2918 employees in the UK had accepted one or more of the Sharesave offers.
• The Standard Life Ireland Sharesave plan which launched in August 2012. A further invitation was made in September 2013. As at 31 December 2013, 85 employees in Ireland had accepted one or more of the Sharesave Ireland invitations.
Share dilution limits: The current Group LTIP, the new Group LTIP, the SLI LTIP, the Standard Life (Employee) Share Plan, the Sharesave Plan and the Standard Life Ireland Sharesave Plan contain dilution limits that comply with the guidelines produced by the Association of British Insurers (ABI). On 31 December 2013, the Company’s standing against these dilution limits was: • 3.05% against 5% in any 10 years under all executive share plans (current Group LTIP and SLI LTIP) • 3.67% against 10% in any 10 years under all share plans (current Group LTIP, SLI LTIP Standard Life (Employee) Share Plan, the Sharesave Plan and Sharesave Ireland Plan). As is normal practice, there are employee trusts that operate in conjunction with the Group and SLI LTIPs and the Standard Life (Employee) Share Plan. On 31 December 2013, the number of unallocated shares held within these trusts was 11,610 in respect of the Standard Life (Employee) Share Plan. In addition, the trusts held 3,112,350 shares acquired to satisfy deferred bonus awards, Group LTIP and SLI LTIP awards and other share plan awards. Of these shares 111,720 are committed to satisfying vested but unexercised awards. The percentage of share capital held by the employee trusts is comfortably less than the 5% best practice limit endorsed by the Association of British Insurers.
This report was approved by the Board on 27 February 2014 and signed on its behalf by: Crawford Gillies, Chairman, Remuneration Committee 98 Standard Life
Our opinion In our opinion the Group financial statements, defined below: • give a true and fair view of the state of the Group’s affairs as at 31 December 2013 and of the Group’s profit and cash flows for the year then ended • have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
What we have audited The Group financial statements, which are prepared by Standard Life plc, comprise: • the Consolidated statement of financial position as at 31 December 2013 • the Consolidated income statement and statement of comprehensive income for the year then ended • the Consolidated statement of changes in equity and statement of cash flows for the year then ended • the Group accounting policies and the notes to the Group financial statements, which include other explanatory information.
Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts 2013 (the ‘Annual Report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed • the reasonableness of significant accounting estimates made by the directors • the overall presentation of the financial statements.
We agreed with the Audit Committee that we would report to the Committee those misstatements identified during the audit above £2 million, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
In determining our materiality, we have considered financial metrics which we believe to be relevant and concluded that operating profit before tax was a relevant benchmark because it is a performance measure used by management to reflect the underlying profit of the business.
The Group is reported in five reportable segments being UK and Europe, Standard Life Investments, Canada, Asia and Emerging Markets and Other. These segments are disaggregated into reporting units. The Group’s financial statements are a consolidation of these reporting units. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the group engagement team, or component auditors within PricewaterhouseCoopers LLP (PwC) and from other PricewaterhouseCoopers network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole.
Areas of particular audit focus In preparing the Group financial statements, the directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considered future events that are inherently uncertain. We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own independent judgements, and evaluating the disclosures in the financial statements.
We focused on this area due to the significance of these liabilities to the Group’s balance sheet and the inherent judgements in determining the assumptions applied in the methodology for calculating those liabilities.
We tested the design and operating effectiveness of key controls over critical actuarial models, data collection and analysis and the assumption setting processes.
We focussed on this area as the valuation of investments remains a complex area which requires the use of director judgement and/or the involvement of valuation specialists.
We tested key controls over asset valuation processes and techniques in respect of derivatives and real estate investments.
We evaluated the methodology, inputs and assumptions used in a sample of investment property valuations comparing the yields and market rents used by third party valuers against benchmarked industry data ranges for the appropriate sectors. We also compared year on year capital movements and assessed these against relevant industries for the period.
We tested a further sample of derivative valuations to independent third party sources for a range of financial instruments where an active market price was available.
ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition due to the pressure management may feel to achieve the planned results.
We focused on this area due to the judgement involved in the recognition of revenue in premium, fee and investment income.
Regarding the premium, fee and investment income revenue recognised during the year, we evaluated the relevant IT systems and tested the internal controls over the completeness, accuracy and timing of premium, fee and investment income revenue recognised in the financial statements.
We focussed on this area due to the significance of estimates and judgements made by management relevant to the financial statements, the importance of the presentation and disclosure of key earnings measures in the financial statements and because there is always a risk that any system of internal control will be overridden.
We examined the significant accounting estimates and judgements relevant to the financial statements for evidence of bias by the directors that may represent a risk of material misstatement due to fraud. We also tested key reconciliations and journal entries.
We assessed the application of accounting policies and methodologies for the reporting of key earnings measures by obtaining an understanding from management including details of changes that occurred in the year. Adjustments were tested to obtain evidence in respect of the adjustments made and whether they were permitted under the methodology approved by the Board of Directors.
In our opinion: • the information given in the Strategic report and the Directors’ report for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements • the information given in the Corporate governance statement set out on pages 49 to 69 in the Annual Report with respect to internal control and risk management systems and about share capital structures is consistent with the Group financial statements.
On page 48 of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. On page 56, as required by C.3.8 of the Code, the Group Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • the statement given by the directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or • the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
Our responsibilities and those of the directors As explained more fully in the Directors’ responsibilities statement set out on page 48, the directors are responsible for the preparation of the Group 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 Group financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
(a) The financial statements are published on the website of Standard Life plc. The maintenance and integrity of the website is the responsibility of the Directors, the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Consolidated income statement For the year ended 31 December 2013 restated1 Notes £m £m
Expenses Claims and benefits paid 6,278 6,562 Claim recoveries from reinsurers (583) (590) Net insurance benefits and claims 5,695 5,972 Change in reinsurance assets and liabilities 33 683 44 Change in insurance and participating contract liabilities 33 (1,320) 1,339 Change in unallocated divisible surplus 33 (40) (39) Change in non-participating investment contract liabilities 33 11,892 7,718 Expenses under arrangements with reinsurers 6 61 656 Administrative expenses
Restructuring and corporate transaction expenses 10 75 114 Other administrative expenses 7 1,750 1,607
Share of profit from associates and joint ventures 17 25 48
Earnings per share Basic (pence per share) 12 19.7 28.3 Diluted (pence per share) 12 19.6 28.1 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation.
Items that will not be reclassified subsequently to profit or loss: Remeasurement gains/(losses) on defined benefit pension plans 30 101 (37)
Total items that may be reclassified subsequently to profit or loss (81) (35)
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes (92) (29)
Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters (15) -
Profit for the year 496 694 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation. 2 The split of operating profit before tax for the year ended 31 December 2013 has been updated to reflect changes in segmental reporting. Refer to Note 2 –
Segmental analysis (b) Reportable segments – Group operating profit, revenue and asset information.
Other comprehensive income for the year - - - 90 (63) 27 - 27
Shares distributed by employee trusts - 12 - (12) - - - - Other movements in non-controlling interests in the year - - - - - - (38) (38) Aggregate tax effect of items recognised directly in equity 11 - - - 9 (1) 8 - 8
interests Total equity 2012 (restated)1 Notes £m £m £m £m £m £m £m £m
Other comprehensive income for the year - - - 65 (32) 33 - 33
Shares acquired by employee trusts - (5) - - - (5) - (5)
Purchase of intangible assets not acquired through business combinations (47) (38)
Capital flows from third party interest in consolidated funds and non-controlling interests 2,492 2,983
Cash and cash equivalents at the beginning of the year 27 9,898 9,125
Cash and cash equivalents at the end of the year 27 9,035 9,898
The Notes on pages 127 to 216 are an integral part of these consolidated financial statements.
All other revisions in the amendment have had no impact on the Group’s consolidated financial statements.
Amendment to IFRS 7 Financial Instruments: Disclosures The amendment to IFRS 7 requires additional disclosures for financial assets and liabilities which are offset in the financial statements or are subject to enforceable master netting agreements or similar arrangements. The additional disclosures are presented in Note 41 – Risk management.
IAS 27 Separate Financial Statements (2011) IAS 27 is revised to remove the requirements for consolidated financial statements which are superseded by the issue of IFRS 10.
IAS 28 Investments in Associates and Joint Ventures (2011) IAS 28 is revised to include joint ventures as well as associates. Joint ventures are required to be equity accounted following the issue of IFRS 11.
Other Amendment to IAS 32 Financial Instruments: Presentation (effective for annual periods beginning on or after 1 January 2014) The amendment to IAS 32 clarifies the circumstances in which financial assets and financial liabilities may be offset on the statement of financial position. The adoption of the amendment to IAS 32 is not expected to have a significant impact on the consolidated financial statements of the Group.
Amendment to IAS 36 Impairment of Assets (effective for annual periods beginning on or after 1 January 2014) The amendment to IAS 36 clarifies that the recoverable amount for a cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated, is only required to be disclosed when an impairment loss has been recognised or reversed. The adoption of the amendment to IAS 36 is not expected to have a significant impact on the consolidated financial statements of the Group.
Group accounting policies continued (a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group continued International Financial Reporting Interpretations Committee (IFRIC) Interpretation 21 Levies (effective for annual periods beginning on or after 1 January 2014) The interpretation clarifies that an entity recognises a liability for a levy when and only when the triggering event specified in the legislation occurs. The adoption of the interpretation is not expected to have a significant impact on the consolidated financial statements of the Group. The interpretation has not yet been endorsed by the EU.
Amendments to IAS 39 Financial Instruments: Recognition and Measurement (effective for annual periods beginning on or after 1 January 2014) The amendments to IAS 39 provide relief in certain circumstances from having to discontinue hedge accounting when a derivatives contract is novated as a result of a change in law or regulation and the new counterparty is a clearing counterparty. The adoption of the amendments to IAS 39 are not expected to have a significant impact on the consolidated financial statements of the Group.
IFRS 9 Financial Instruments and subsequent amendments (amendments to IFRS 9 and IFRS 7: Mandatory Effective Date and Transition Disclosures and Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (no stated mandatory effective date) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows only two measurement categories for financial assets: amortised cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at fair value through profit or loss (FVTPL). Financial liabilities may be designated as at FVTPL. The amortised cost measurement basis is applied to most other financial liabilities. For financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability’s credit risk are recognised directly in other comprehensive income.
Annual improvements 2010-2012 cycle and Annual improvements 2011-2013 cycle (effective for annual periods beginning on or after 1 July 2014) These annual improvement cycles make 10 minor amendments to existing standards. The adoption of these amendments is not expected to have a significant impact on the consolidated financial statements of the Group. The annual improvement amendments have not yet been endorsed by the EU.
Determination of the valuation interest rates Determination of longevity and mortality assumptions Determination of persistency assumptions Determination of expense assumptions
Determination of the acquisition costs to be deferred on insurance contracts and investment contracts Determination of the amortisation pattern to be applied to deferred acquisition costs
Determination of the fair value of investment property and owner occupied property
Determination of the recoverable amount (i),(j), (k), (o),(p) and Notes 15, 16, 17, 19, 22 and 41
Intangible assets Determination of useful lives of intangible assets j(ii) and Note 15
(b) Basis of consolidation The Group’s financial statements consolidate the financial statements of the Company and its subsidiary undertakings. Associate and joint venture undertakings are accounted for either using the equity method from the date that significant influence or joint control, respectively, commences until the date this ceases, or at fair value through profit or loss.
(b)(ii) Associates and joint ventures Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity, which is subject to joint control arising from contractual agreement.
(c)(ii) Group reconstructions The Group uses merger accounting principles to account for group reconstructions which are not business combinations within the scope of IFRS 3 Business Combinations (revised). Under the principles of merger accounting, assets and liabilities transferred to a new entity are recorded in the new entity at the carrying value they were measured at by the transferor. No goodwill is recognised as a result of such transactions
(d) Foreign currency translation The consolidated financial statements are presented in millions pounds Sterling.
The statements of financial position of Group entities that have a different functional currency than the Group’s presentation currency are translated into the presentation currency at the year end exchange rate and their income statements and cash flows are translated at average exchange rates for the year. All resulting exchange differences arising are recognised in the foreign currency translation reserve in equity. Where the unallocated divisible surplus changes as a result of such exchange differences which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the consolidated income statement but is recognised in equity (refer also to (h)(v)).
The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts. A contract is classified as insurance only if it transfers significant insurance risk. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred, excluding scenarios that lack commercial substance. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. When a policyholder exercises an option within an investment contract to utilise withdrawal proceeds from the investment contract to secure future benefits which contain significant insurance risk, the related investment contract liability is derecognised and an insurance contract liability is recognised. The withdrawal proceeds which are used to secure the insurance contract are recognised as premium income in accordance with accounting policy (g)(ii). Life and pensions business contracts that are not considered to be insurance contracts are classified as investment contracts.
The Group has written insurance and investment contracts which contain discretionary participating features (e.g. with profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These additional benefits are based on the performance of with profits funds and their amount and timing is at the discretion of the Group. These contracts are referred to as participating contracts.
Dividend income is recognised in the consolidated income statement when the right to receive payment is established.
Group accounting policies continued (g) Revenue recognition continued (g)(iv) Fee and commission income All fees related to unit linked non-participating investment contracts are deemed to be associated with the provision of investment management services. Fees related to the provision of investment management services and administration services are recognised as the services are provided. Front-end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the expected life of the contract. Ongoing fees that are charged periodically, either directly or by making a deduction from invested funds, are recognised as received, which corresponds to when the services are provided.
Claims paid on insurance contracts and participating investment contracts are recognised as expenses in the consolidated income statement.
Maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the insurance liability. Death claims and all other claims are accounted for when notified.
(h)(iii) Change in insurance and participating investment contract liabilities The change in insurance and participating investment contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the consolidated income statement. This also includes the movement in unallocated divisible surplus (UDS) in the period. However, where movements in assets and liabilities which are attributable to participating policyholders are taken directly to equity, the change in UDS arising from these movements is not recognised in the consolidated income statement as it is also recognised in equity.