Standard Life plc is registered in Scotland (SC286832) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH.
• Including fee based revenue up 8% to £1,223m (2010: £1,131m)
• Lower unit costs with acquisition expenses of 140bps (2010: 149bps) and maintenance expenses of 41bps (2010: 42bps)
• Operating profit before tax from continuing operations up 28% to £544m (2010: £425m)
Capital and cash generation increased by 53%, dividend up 6.2% and strong capital position
• Now over 1,000 adviser firms on Wrap with platform assets reaching £11.4bn
• HDFC Asset Management Company is the largest mutual fund company in India with AUM of £9.8bn
“While the economic backdrop remains uncertain, we are confident that the strong capital position of the Group, the demand for our attractive customer propositions and the continued improvements in operational and capital efficiency mean that we are well on track to achieve an ongoing improvement in financial performance.”
Unless otherwise stated, all comparisons are in Sterling and are for the 12 months ended 31 December 2010.
We have a simple business model: increasing assets, maximising revenues, reducing unit costs and driving increased cash profitability. Assets under administration grew to £198.4bn and fee based revenue increased by 8%. We continued to invest to transform and grow our business while increasing operating profit. We have delivered a further £45m of cost efficiencies in the period and continue to drive operational efficiency in all our businesses. Operating profit before tax increased by 28% to £544m (2010: £425m) driven by significant profit improvements across the Group and in our newer UK fee based business. The result benefited from the remaining £64m gain (2010: £59m) resulting from the change in the basis of future pension increases in the UK staff pension scheme.
Assets under administration 1 Jan 2011 Gross inflows Redemptions Net inflows Market and other movements
Acquisition expenses, the costs we incur in writing new business, were up 1% to £270m largely driven by higher costs in our International business. However, as a proportion of sales, acquisition expenses fell from 149bps to 140bps for Group, and from 133bps to 120bps in the UK. Maintenance expenses, the ongoing costs we incur in servicing and administering customer policies, were 7% higher at £723m largely due to growth in our global investment management business and the acquisition of Focus Solutions. Maintenance expenses expressed as a proportion of average AUA were down to 41bps (2010: 42bps) at Group level and 33bps (2010: 34bps) in the UK. This continues the positive trend and demonstrates the scalability of our business.
IFRS profit after tax attributable to equity holders of £298m (2010: £432m) included a loss on short-term fluctuations in investment return and economic assumption changes of £139m (2010: profit £157m) largely driven by year end financial market levels.
The new business contribution (NBC) of £335m generated an NBC margin of 1.7% (2010: 1.7%) and an IRR of 15% (2010: 17%), primarily reflecting higher margins on UK institutional pensions and Canada group insurance business which have been offset by lower margins in our joint venture businesses following the impact of industry-wide regulatory changes in India.
Increased operating profit while investing for transformation and growth We have previously said that we were targeting £100m of annual margin improvement by 2012 to be achieved through greater efficiency as well as improved asset mix and higher inflows to Standard Life Investments. As at 31 December 2011, we have delivered £79m of efficiency savings, including £45m of savings in 2011, with further savings delivered since the start of 2012. In addition we continue to see increased revenues from our fee based products through strong flows into higher margin propositions and Standard Life Investments.
We continue to drive down unit costs having delivered £79m of efficiency savings towards our £100m margin improvement target which we are on track to achieve in the first half of 2012.
In the UK, we are entering a period of unprecedented change and potential for growth of our business. With the Retail Distribution Review (RDR) less than a year away, our retail business has scale and momentum and is ideally positioned to continue to drive asset growth through our leading platform propositions. The quality of our corporate pension offerings together with the 4 Standard Life
The uncertain economic backdrop and its effect on consumer confidence have impacted new business volumes since the start of the year against a strong start to last year. However, we see significant opportunities in all of our chosen markets and are confident that the investments we are making will lead to continued strong growth in assets together with further improvements in efficiency. We expect to continue to drive an ongoing improvement in financial performance.
Conventional with profits (excl. annuities) (£bn) 6.6 0.2 (1.7) (1.5) 0.2 5.3
UK fee business total AUA 98.9 13.9 (11.1) 2.8 (1.1) 100.6
Total AUA backing products (£bn) 112.3 14.4 (12.3) 2.1 0.6 115.0
Our retail business continues to be very well positioned for growth by providing IFAs and direct customers with the propositions, tools and service they value. We are focused on meeting the needs of “new model” IFAs who are best placed to prosper in the new market environment we are entering. Developing solutions for both them and their clients has allowed us to grow our intermediary market share without incurring the cost of commission on new business while maintaining our leading position. Our acquisition of Focus Solutions, along with threesixty Services, provides Standard Life with a unique ability to support advisers in developing business models compliant with RDR, and beyond, in a very efficient way. Providing further evidence of our continued progress, Standard Life, once again, won ‘Company of the Year’ and ‘Best SIPP Provider’ at the Money Marketing Financial Services Awards.
We have continued to build on our momentum, winning 167 new schemes (2010: 182 schemes) while 66,000 new employees joined schemes implemented in 2011 (2010: 46,000 employees).
Acquisition expenses fell by £3m to £169m. Maintenance expenses included revenue passed to Standard Life Investments in respect of TIP of £62m (2010: £48m) and maintenance expenses of newly acquired Focus Solutions of £15m with other maintenance expenses lower at £255m (2010: £264m).
Capital management improved due to investment of shareholder funds in higher yielding asset classes and the improved funding position of the UK staff pension scheme. Other comprises the remaining £64m (2010: £59m) benefit following the change in the basis of future pension increases in the UK staff pension scheme.
While these improving trends and opportunities demonstrate the potential for greater operational leverage, we have more to deliver as we continue to transform our business.
Global investment management Growth in net flows into higher margin products
Fee business excl. Global Liquidity Funds (£bn) 67.7 12.9 (8.6) 4.3 (0.2) 71.8
Assets under management (AUM) in our third party fee business reached a record year end level of £71.8bn (2010: £71.6bn) driven by strong net inflows which were partly offset by the transfer of £3.9bn of Global Liquidity Funds and the impact of negative market movements.
We have continued to see strong demand for Global Absolute Return Strategies (GARS) propositions, both in the UK and overseas, with AUM at 31 December 2011 in excess of £13bn. The MyFolio family of risk-based portfolios, which we have recently expanded to include two new suites of Multi Manager Income and Managed Income funds, has proved popular with UK retail clients and has now attracted over £1.0bn of assets since launch. UK wholesale net inflows and SICAV sales have remained robust at £2.1bn (2010: £2.8bn) despite a downturn in consumer confidence during the second half of the year.
Net inflows in North America have shown positive growth with Canadian sales up 33% to £553m.
The average revenue yield across our third party business has increased to 37bps (2010: 35bps), excluding the fee received from the transfer of UK money market funds, reflecting our success in attracting higher revenue margin business.
Total AUA backing products (£bn) 24.1 3.4 (3.1) 0.3 0.2 24.6
higher (2010: £420m) and included net inflows in to our core defined contribution proposition which increased by 18%
Wholly owned fee business AUA (£bn) 11.1 2.5 (1.1) 1.4 (0.2) 12.3
India and China JV businesses AUA (£bn) 1.2 0.4 (0.1) 0.3 (0.3) 1.2
Fee business AUA across our wholly owned International operations increased by 11% to £12.3bn, driven by record net inflows of £1.4bn. New business sales increased by 18% to £2.3bn, with sales growth across all of our wholly owned operations.
Operating profit/(loss) before tax from continuing operations 234 103 110 15 (37) - 425 10 Standard Life
We will hold a conference call for newswires and online publications from 07:30 (UK time) on 13 March 2012. Participants should dial +44 (0)1452 555566 and quote Standard Life Preliminary Results 2011. The conference ID number is 54886447. A replay facility will be available for seven days. To access the replay please dial +44 (0)1452 550000. The pass code is 54886447#.
Investors and Analysts A presentation for investors and analysts will take place at 9:30am at J.P. Morgan Cazenove, 20 Moorgate, London EC2R 6DA. A live webcast of the presentation and the presentation slides will be available on the Group's website. In addition a replay will be available on the website later today.
There will also be a live listen-only teleconference of the investor and analyst presentation at 9:30am. Investors and analysts should dial +44 (0)20 3059 8125. Callers should quote Standard Life Preliminary Results 2011. A replay facility will be available for fourteen days. Investors and analysts should dial +44 (0)121 260 4861. The pass code is 1182010#.
2 Adjusted to exclude the impact of the transfer of Standard Life Investments Global Liquidity Funds plc.
4 Change in pension scheme liabilities reflects a change in the basis of future pension increases in the UK staff pension scheme.
5 Standard Life Wealth has been disclosed separately for the first time in 2011 and includes some assets previously reported as ‘Other’.
6 Other assets included within AUA of £10.4bn (2010: £9.9bn) comprise assets not backing products, joint ventures, non-life assets and consolidation / elimination adjustments.
IFRS notes 58 3 European Embedded Value (EEV) 77 EEV primary statements 78
• In the UK, there has been continued momentum in our fee based propositions with technology and scalability of platforms driving efficiency
• Our strategic alliance with Chuo Mitsui Asset Trust and Banking Company, one of the largest trust banks in Japan, provides our customers with direct access to expertise in the management of Japanese equity funds
• Performance across our joint venture businesses in Asia has been strong in 2011, with net flows increasing by 8% • HDFC Life performed well, increasing market share and securing second place in the Indian private sector overall • HDFC Asset Management, in which we have a 40% share, is the largest mutual fund company in India • In China, Heng An has a new management team in place and a revamped strategy focused on driving business performance
The second year of our transformation in 2011 saw us deliver more of the changes required to prepare our business for 2012 and beyond. These changes are already delivering benefits, making our business more agile, adaptable and efficient. We remain focused on maximising the generation of cash profit to support our progressive dividend policy and to create the capacity to reinvest in growing our business.
Find out more about our financial performance in Section 1.3 – Chief Financial Officer’s overview
Our strategic objectives and our performance against them are illustrated below. Find out more on how our businesses performed in Section 1.4 – Business segment performance. Our strategic objectives and ultimately our ability to generate value for our shareholders may be subject to financial and non-financial risks. Principal risks and our risk management approach are discussed in more detail in Section 1.5 – Risk management.
Building on our strengths in our pension savings and corporate benefits markets
We are a leading corporate pensions provider in the UK and Canada, with a strong brand and competitive positioning in these markets. We remain confident that these markets provide a significant growth opportunity for us.
• Our UK business also won 167 new corporate schemes (2010: 182 new schemes) and enquiries more than doubled during 2011
• In Canada, group savings and retirement product enhancements enabled us to win 204 new defined contribution accounts, increasing members to 561,000 (2010: 537,000 members)
Driving shareholder value through being a leading, customer-centric business focused on long-term savings and investments propositions in our chosen markets.
We see many opportunities in our retail markets, where we are focusing on the savings and investments needs of individual customers in our chosen segments. We continue to build on our track record for innovation and strength in distribution.
• Our global investment management business continued its excellent record of strong and profitable growth
• The Indian joint venture has improved its market positioning and grown market share
• In China, we have a new management team in place under the leadership of a new general manager. A revamped strategic plan is currently being implemented and we will continue to extend our distribution network and enhance business quality and effectiveness.
Putting customers at the heart of our business means we need to keep listening to them, developing our understanding of their needs and challenges. We also continue to ensure that we maintain high levels of customer service and distributor support.
We continue to deliver robust long-term investment performance. Standard Life Investments is well positioned across a diversified range of asset classes.
Market conditions have been tough during 2011, however we remain confident that our future growth will be driven by our customers' demand for our propositions and the underlying demographic and regulatory trends in our key markets. In the short term, volatile conditions in global financial markets and economic uncertainty mean that operating conditions will continue to be challenging.
The financial markets in which we operate are being impacted by factors including: • The risk of sovereign debt default within the European Union member states • The downgrade of the credit ratings of a number of countries as a result of the
Other economic factors are also impacting the markets in which we operate. Some of the factors impacting our markets include: • High inflation in the UK, fuelled by increases in both the standard rate of VAT to 20% and energy prices, is putting a squeeze on households’ real incomes
• Wage inflation remains subdued and the low level of global economic growth has led to stagnation in employment markets • Sustained levels of low interest rates and the potential for further quantitative easing • Austerity measures to reduce high levels of government borrowing raise the possibility of further erosion of pension tax breaks
In the UK market, the structure of the population is changing as life expectancy rapidly increases. In 2011, 17% of the population were aged 65 and over and this is expected to increase to 23% by 2033. This emphasises the need for individuals to ensure that they have adequate pension provision to fund their retirement.
The UK Government is making changes to increase the proportion of the population saving for retirement, including auto enrolment and the introduction of the National Employment Savings Trust (NEST). We believe that these steps will increase contributions to private pensions and that we are well placed to benefit from these changes.
The Canadian Government is expected to introduce the Pooled Registered Pension Plans, opening a new market to pension providers. We are one of the largest defined contribution pension providers in Canada and are developing our plans for this new market.
The current economic climate presents many challenges. Yet our research found that the majority of people are still keen to prioritise saving, particularly when they are helped to understand what it means to them, both now and in the future. We believe that, working together, employers, the long-term savings industry and the government can realise the full potential of auto enrolment.
There are currently a number of legislative and regulatory changes that will affect financial services companies. The key initiatives and their potential impact on Standard Life are set out below: Description Potential impact on Standard Life
The Retail Distribution Review (RDR) is designed to increase transparency in retail financial services and to raise professional standards in the UK. The regulations from the RDR come into effect at the start of 2013. This affects distribution of both retail investment products and corporate pensions, in areas such as advice provision, professionalism, adviser charging and platform rules.
Auto enrolment will become mandatory from October 2012 and will require all eligible workers to be automatically enrolled into a qualifying pension scheme. At the same time, the UK Government is putting in place the National Employment Savings Trust (NEST). This is an entry-level company sponsored defined contribution pension scheme and will require a minimum level of contributions.
These combined changes are expected to bring an extra seven million adults into pension savings for the first time, with an estimated £6bn of additional annual contributions.
As a provider of quality corporate pension schemes, we welcome the introduction of auto enrolment in 2012. We expect to benefit from auto enrolment from both more scheme wins, as employers look to offer their employees a tailored solution and also through increased participation in our current schemes as employees decide not to opt out.
We are one of the largest defined contribution (DC) pension providers in Canada and are already developing our plans for this new and potentially very large market.
All firms will have to calculate their capital requirements based on the risks they manage and disclose this to regulators and the market. Taking on risk enables insurance companies to offer valuable customer propositions and deliver good shareholder returns.
From 1 January 2013, the basis of the regime will move from the FSA regulatory return to the statutory accounts. The draft Finance Bill 2012 was issued by HMRC on 6 December 2011 for consultation and is expected to be enacted during the summer of 2012.
We currently use gender as a risk factor in calculating premiums and benefits for a number of our products.
Our customers are at the very core of everything we do, so we’ll continue to concentrate on bringing our transformation to life for them and giving them the services and support they need to make it easier to deal with us.
New technologies play an increasingly important role in the way we operate and grow our business. We’re continuing to invest in our technology to ensure we deliver a competitive advantage through a scalable model that lowers the cost of attracting and serving customers. We have recently developed a new online ISA and re-launched our Adviserzone platform to give our customers more control over their finances.
Our repositioned brand and visual identity will continue to enhance the way that we communicate with our customers. They are also a major part of delivering even clearer communications to our customers so that they can plan for their financial future with confidence and optimism. The feedback from our customers and the industry has been very positive.
Our confidence in our ability to deliver sustainable growth is underpinned by the results we have delivered in 2011. We also remain confident that the underlying demographic and regulatory trends in our key markets, and our customers' demand for our propositions, will drive our future growth.
In the UK, we are entering a period of unprecedented change and potential for growth of our business. With the RDR less than a year away, our retail business has scale and momentum and is ideally positioned to continue to drive asset growth through our leading platform propositions. The quality of our corporate pension offerings together with the opportunities created by the RDR and pensions reform for increased individual savings will provide us with an increased flow of new business over the medium to long term.
Our business in Canada is well positioned to benefit from the ongoing shift from defined benefit to defined contribution pension provision. Our International business will continue to benefit from the strength of our offshore bond proposition and ongoing progress in our joint ventures but may continue to be affected by the impact of economic uncertainty in Europe.
Group operating profit demonstrates our ability to deliver returns for our shareholders and provides an indication of our long-term dividend paying capability.
• Acquisition expenses expressed as a proportion of sales and maintenance expenses as a proportion of average AUA improved to 140bps and 41bps respectively, demonstrating the scalability of our business
• EEV operating profit before tax rose by 26% to £989m • This included a 16% increase in core EEV operating profit, which was due to increased new business profitability and expected returns on existing business. There was also higher profits from global investment management.
EEV operating capital and cash generation reflects our ability to generate capital and cash from our business. This enables further investment in the business and the payment of dividends to our shareholders.
As a long-term savings and investments business, AUA and net flows are key drivers of shareholder value. We aim to grow AUA by focusing on our customers and meeting their needs with innovative propositions.
• Spread/risk margin mainly relates to the margin on our UK annuity business and the annuity and universal life business in Canada. Overall spread/risk margin reduced by £14m, impacted by losses from operating assumptions and one-off reserving changes of £70m (2010: profit £17m). This was partially offset by management actions in Canada of £88m (2010: £32m).
Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumptions, restructuring costs (including the Solvency 2 programme), impairment of intangible assets, amortisation of intangible assets acquired in business combinations, profit or loss on the disposal of a subsidiary, joint venture or associate and other significant one-off items outside the control of management.
• Investment for transformation and growth costs included in operating profit before tax decreased in 2011 to £137m. We have continued to invest for future growth in the business with a number of customer propositions launched during the year.
• Total group corporate centre costs including investment for transformation and growth decreased to £50m (2010: £54m). Investment for transformation and growth was £5m (2010: £4m).
• The joint ventures in Asia contributed an operating profit before tax of £2m (2010: loss £23m) to the Group, which reflects their positive progression and our ongoing investment to support their development
• Other relates to the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.
We previously said that we were targeting £100m of annual margin improvement by 2012 to be achieved through greater efficiency, improved asset mix and increasing flows to our global investment management business. In 2011, we achieved further cost efficiencies of £45m. We have now achieved total efficiency savings of £79m in relation to this 2012 target and also increased revenues from our fee based products resulting from strong flows into higher margin propositions in global investment management. Further efforts to reduce costs continue to be implemented and we expect additional efficiency savings to be delivered in 2012.
• A number of customer propositions were launched or enhanced during the period and continued investment was made to improve operational effectiveness
• The total amount invested in 2011 was £196m (2010: £201m). This includes additional investment in the India and China joint venture businesses and also capitalised investment spend that does not impact profitability in 2011.
A key component of our business model is to optimise the use of our balance sheet. We are now including return on equity as a financial metric that measures our success in generating profitability relative to our shareholder capital. Group operating return on equity increased to 11.9% (2010: 10.0%) benefiting from the growth in operating profit. This measures Group operating profit after tax expressed as a percentage of the opening IFRS equity, adjusted for cash dividends paid. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.
Group non-operating loss was £214m compared with a profit of £85m in 2010. Short-term fluctuations in investment return and economic assumptions produced non-operating losses of £139m in 2011 compared with gains of £157m in 2010. Losses in 2011 of £139m were mainly due to the widening of credit spreads which impacted the annuity business in the UK and losses in Canada due to adverse movements in the Canadian Government bond yield curve. This was partially offset by investment returns on shareholder assets in the UK and Canada. Non-operating restructuring and corporate transaction expenses of £70m (2010: £71m) relate to a number of restructuring programmes including Solvency 2.
Closing 31 December 1.3 Chief Financial Officer’s overview continued Assets under administration and new business – Group
• Spread/risk business AUA increased by 5% to £24.7bn due to positive market movements, offsetting the £1.0bn (2010: £1.0bn) of net outflows 1 Opening Fee AUA includes an adjustment to include all Standard Life Wealth AUA for the first time.
• Present value of new business premiums (PVNBP) for the Group totalled £19,738m and was 7% higher than in 2010 • Total internal rate of return (IRR) for the Group of 15% (2010: 17%) was adversely impacted by capital and legislative changes in Canada and reduced margins in International
The closing EEV of £7,428m consists of: • £3,588m of net worth or shareholder net assets • £3,840m from the present value of in-force business
The increase in total EEV of £107m consists of: • Movement in net worth of positive £105m • Movement in the PVIF of positive £2m
• Core non-covered business produced an EEV operating profit of £13m (2010: loss £37m). This increase was mainly due to higher profit from global investment management.
• EEV operating profit from back book management of £170m included the remaining operating profit gain of £64m from the change in the UK pension scheme, in addition to the initial £59m benefit recognised in 2010. Tax variances and management actions in Canada to enhance investment yields on assets have also increased back book EEV operating profits in 2011.
Total EEV non-operating loss before tax from continuing operations of £463m (2010: profit £348m) included losses caused by increased burnthrough costs totalling £272m in the HWPF and the new German with profits funds. Other losses arose from lower than expected investment returns earned in 2011 for UK unitised business which generated a loss of £237m. Reductions in risk free rates led to losses from lower projected investment returns, partly offset by gains from lower discount rates.
EEV operating capital and cash generation from continuing operations £438m £287m
IFRS equity attributable to equity holders of Standard Life plc £3,961m £3,903m 1%
2011 based on estimated regulatory returns. 2010 based on final regulatory returns.
Capital and cash generation enables the Group to invest in new business and profitable growth opportunities. Gross EEV operating capital and cash generation before investment in new business and investment for transformation and growth spend was £749m (2010: £596m).
Gross EEV operating capital and cash generation from continuing operations 749 596
Coverage of gross EEV operating capital and cash to new business strain 3.3 2.7
Capital and cash generation from non-operating items (372) 258 (114) 93 41 134
Total EEV capital and cash generation from continuing operations 43 281 324 413 8 421
Reconciliation of Group operating profit to EEV operating capital and cash generation for the year ended 31 December 2011
As with EEV operating capital and cash generation, Group operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between Group operating profit and EEV operating capital and cash generation, there are differences which include: • £7m negative impact from the difference in the treatment of assets and actuarial reserves
During the year, we paid the final dividend for 2010 of 8.65p per share, amounting to £197m and the 2011 interim dividend amounting to £106m. The Scrip dividend scheme reduced the cash required to pay the 2010 final dividend from £197m to £105m and the 2011 interim dividend from £106m to £57m. We propose a final dividend of 9.20p per share, making a total of 13.80p (2010: 13.00p). This represents an increase of 6.2%, reflecting the solid progress made during the year. Following the removal of the scrip dividend option, a dividend reinvestment plan (DRIP) scheme has been made available for the final 2011 dividend. We will continue to apply our existing progressive dividend policy taking account of market conditions and our financial performance.
The Group capital surplus decreased by £0.7bn to £3.1bn. This is mainly due to the successful tender undertaken in September 2011 in respect of £0.6bn of Euro denominated lower tier 2 subordinated debt. Our capital surplus has remained robust despite the volatility in equity and debt markets. The quality of our capital resources remains strong with £7.0bn (2010: £6.4bn) of core tier 1 capital.
The IGD surplus remains largely insensitive to a further 30% fall in equities from the 31 December 2011 position, with the surplus estimated to reduce by approximately £0.2bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.2bn.
Liquidity management is the ongoing process of determining the correct asset mix for each business through balancing the interconnected needs of matching the liability profile with appropriate assets, maintaining sufficient cash resources to meet unexpected demands and achieving an appropriate yield on assets.
In addition to the substantial cash and readily realisable resources held within each business unit, the ultimate holding company, Standard Life plc, held £0.6bn of cash and short-term debt securities as at 31 December 2011, an increase of £0.2bn from the 2010 year end. The stress testing undertaken during 2011 shows that Standard Life maintains a strong liquidity position.
We undertake specific liquidity stress testing to ensure that we can withstand a scenario of significant falls in asset values combined with unprecedented levels of surrenders and claims. The stress testing methodology has been updated for recent events in the Eurozone.
We also maintain contingency funding plans across the business to ensure that each business unit is prepared for a liquidity issue. As part of this contingency planning, Standard Life plc has a £0.5bn revolving credit facility with a maturity date of 31 December 2013 and this was undrawn as at 31 December 2011.
Our performance across the Group demonstrates our commitment to meeting our objectives and delivering on our strategy highlighted in Section 1.1 – Chief Executive’s overview.
Strategy We believe that the UK is an exciting market with great potential for our business. Our strong market position provides significant opportunities for us to drive profitable growth within long-term savings and investments.
We will continue to expand our capability in order to deliver a wide range of solutions for clients that help diversify our revenue and profitability. Changes in the market environment will continue to provide many new opportunities.
• Core retail fee business net inflows grew by 19% to £839m
• Core corporate pension net inflows increased by 46% to £2,024m reflecting strong growth
• Standard Life Wealth continues to grow with assets of approximately £1bn
• We achieved third party net inflows of £4.3bn, continuing our unbroken record of positive inflows over the last eight years
Earnings before interest and tax (EBIT) 126 106 32 Standard Life
Our performance across the Group demonstrates our commitment to meeting our objectives and delivering on our strategy highlighted in Section 1.1 – Group overview.
• Spread/risk net outflows improved from £0.4bn to £0.3bn due to higher annuity sales and lower redemptions
• Acquisition expenses increased to £40m in line with new business growth and market initiatives
Operating profit before tax £220m £222m £234m 1.4 Business segment performance continued 1.4.1 UK
“We are a major provider of long-term savings and investment solutions in the UK market. Our 2011 performance shows continued momentum in all our market segments. The enhancements to our marketleading platforms, propositions and investment solutions allied to the forthcoming pensions reform and Retail Distribution Review brings unprecedented opportunities for us to grow our business, strengthening our relationships with customers and advisers whilst also driving efficiency.” Paul Matthews, UK Chief Executive
UK operating profit before tax was £220m. The key movements from 2010 are: • Fee based revenue increased by 5% due mainly to higher AUA, with Wrap assets alone up 36% since 2010 as a result of strong growth in net inflows and the impact of recently acquired companies. The average revenue yield on fee business decreased to 73bps (2010: 77bps) mainly due to business mix.
Other 64 59 UK operating profit before tax from continuing operations 34 Standard Life
• Acquisition expenses of £169m are 2% lower than 2010, despite new business levels increasing by 8%. As a percentage of PVNBP, acquisition expenses improved significantly to 120bps (2010: 133bps).
• Maintenance expenses increased mainly because of the impact of recently acquired businesses including Focus Solutions. We are continuing to see the benefits of our scalable business model, with maintenance expenses expressed as a proportion of average AUA falling to 33bps (2010: 34bps).
• Other reflects the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.
AUA grew by £2.8bn to £122.0bn in 2011. Fee based business, which accounts for 82% of AUA, increased by 2% to £100.6bn due to strong net inflows, offset by negative market movements. As at 31 December 2011, 61% of total fee based AUA related to retail business (2010: 63%) and 39% to corporate business (2010: 37%). Spread/risk business AUA increased by 7% to £14.4bn with net outflows being offset by positive market and other movements.
Core corporate net inflows (excluding institutional pensions and CWP) increased by 46% to £2,024m. This reflects very strong growth in our corporate pensions, driven by new scheme wins.
Despite the challenging trading environment, our PVNBP sales increased by 8% to £14,035m (2010: £12,956m).
In our retail business, sales increased by 3% to £6,400m (2010: £6,197m). Individual pensions, which includes individual SIPP, rose by 2% to £3,936m (2010: £3,858m). Sales of savings and investments products increased by 8% to £2,151m (2010: £1,997m). This includes a 10% increase in mutual fund sales to £1,972m (2010: £1,795m) reflecting the significant growth in sales through our Wrap platform. Our savings and investments sales have performed strongly in 2011, with our net flows growing by 7% within the overall mutual fund market that saw a decline of 39% on 2010 levels according to the Institute of Money Advisers figures.
In our corporate business, we have grown new business volumes strongly while maintaining stable margins. Corporate pension sales have increased by 40% driven by our success in winning new schemes. In addition, our enhanced trust-based pension proposition has been successful in attracting both new and existing schemes and contributed over £725m to sales in 2011.
Our ambition is to be the leading long-term savings and investments business, delivering competitive retail and corporate propositions. This is underpinned by our brand values of being an easy, predictable, responsible and beneficial organisation to do business with.
We have put in significant work and investment over the last year, positioning ourselves more fully across the value chain to provide market-leading solutions that benefit our advisers and customers. This places us in a unique position to support retail and corporate markets, for both advised and non-advised customers, from the start of their investment journey to the end.
In the retail market our focus continues to be on embedding our wealth management platform into progressive RDR-ready advisory firms. We grow our assets by deepening and broadening our relationships with our target advisers through embedding our solutions, helping to remove complexity and risk from their businesses, allowing them time to focus on their clients. The RDR is causing significant change to many advisers’ business models. Through adopting our wealth management platform, we have partnered with a significant proportion of new model advisers who have moved to fee charging ahead of the new regulations.
We continued to build on the success of our Wrap platform in 2011 and now have approximately 1,000 firms using our platform. We delivered enhanced functionality which focused on reducing risk and costs in adviser businesses. These enhancements include improved client reporting, upgraded back office integration and the introduction of the Managed Portfolio Services – delivering a leading retail proposition and contributing to the increase of 37% in assets and 47% in customer numbers. Sales of tax wrappers remained resilient despite the tough economic conditions.
Through refreshing our adviser and customer digital propositions, including launching an online stocks and shares ISA and online mutual funds, we have seen Adviserzone user sessions increase by 14% and the number of page hits double from 4 million to 8 million.
In the corporate market our focus has been to attract large scheme employers to adopt our workplace solutions and leverage our existing employer relationships. In 2011, we added 167 new schemes (2010: 182 new schemes) and we have seen enquiries more than double over this period. The number of new members joining our existing schemes has increased by 12% over 2010 – a total of 25,067 new customers.
Our Lifelens proposition is key to our success in this corporate market for a selected number of schemes and we believe that the combined strengths of this and our Vebnet propositions will enable us to take full advantage of current and future market opportunities.
In January 2011 we acquired Focus Solutions. Combining their leading point of sale and back office expertise with the leading compliance services provided by threesixty allows us the capability to support our target advisers across the value chain.
Earnings before interest and tax £126m £80m £106m 1.4 Business segment performance continued 1.4.2 Global investment management
Standard Life Investments takes our responsibility as a long-term investor seriously. A cornerstone of our investment process is our belief that stewardship and environmental, social and governance (ESG) factors have a fundamental impact on long-term investment returns. Systematic consideration of stewardship and ESG factors at company level is firmly integrated into our investment process using proprietary indicators in the analysis. In addition, as responsible long-term investors, we engage regularly with investee companies to hold them to account and to promote high standards.
Excludes the fee received following the external transfer of the money market funds.
Earnings before interest and tax (EBIT) 126 106 38 Standard Life
Cost growth is the result of utilising opportunities in the market to accelerate the expansion of our business in our chosen markets. Lower interest expense, coupled with foreign exchange gains also contributed to the increased operating profit. A £15m subordinated loan was repaid at the end of 2010, leaving the business with no gearing. EBIT increased by 19% to £126m (2010: £106m) and resulted in an EBIT margin of 34%
Operating return on equity has increased to 42.7% (2010: 41.0%) reflecting the shift in sales towards higher margin products.
We have entered into an agreement with John Hancock Financial giving the GARS fund access to the United States market and allowing us to work with a leading distributor to help deliver potential for our global clients. We also continue to develop our strategic alliance with Chuo Mitsui Asset Trust and Banking Company, one of the largest trust banks in Japan, for reciprocal asset management services. The alliance sees Standard Life Investments provide advice on Chuo Mitsui’s Global Equity Funds and Chuo Mitsui manage and advise on Standard Life Investments’ Japanese Equity funds. We are also able to market each other’s investment strategies through our respective distribution networks.
We have achieved third party net flows of £4,280m, increasing third party assets under management to £71.8bn. We continue to grow our share of the wholesale market in the UK, with UK mutual funds AUM now exceeding £10bn. We also continue to develop our GARS product range, with assets now over £13bn, and are strengthening our alternative capabilities in areas such as private equity and real estate. We also continue to enhance our multi-manager offerings. MyFolio has proved successful since its launch, providing new business flows into Standard Life Investments’ actively managed funds and now has assets of approximately £1bn. Our pipeline of new investment initiatives is strong and we are confident that we will continue to meet the ever-changing demands of our clients through new and innovative solutions.
The majority of 2011 sales were into high margin products including UK wholesale and the GARS asset class. We continue to diversify our sources of revenue both geographically and by asset class. Geographically, we received net flows from Europe, US and Canada in 2011. The diversity of our asset class offering is evidenced by net flows in GARS, fixed income, real estate and overseas equities. EBIT has grown strongly with a compound annual growth rate over the last five years of 14%.
Operating profit before tax £187m £113m £110m 1.4 Business segment performance continued
“We have delivered many new propositions to our corporate and retail customers, addressing their retirement needs. We are poised to take advantage of market opportunities in the group pensions space and have a fastgrowing retail segregated fund offering. Our business model focused on cost and capital efficiency has enabled us to generate continued growth and increased operating profit levels, despite the challenging economic conditions. We are excited about the growth prospects in our key markets.” Charles Guay, Canada Chief Executive
• The decrease in acquisition expenses of £3m was primarily due to lower commission charges • The increase in maintenance expenses of £8m was mainly due to the rise in AUA and the associated costs incurred to service and administer these assets • We continued to invest in growing our business and delivering enhancements to our client propositions with expenditure during the period of £36m • The increase in capital management of £8m was mainly due to an increased investment return on shareholder assets
Operating return on equity increased to 14.6% (2010: 8.9%) benefiting from the growth in operating profitability. We will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.
AUA increased by £0.8bn during the year. Our fee business accounts for 55% (2010: 55%) of total AUA and has increased by 3% in constant currency to £14.3bn. The rise in fee business AUA has been driven by net inflows, partly offset by negative market movements. Spread/risk AUA increased to £10.3bn (2010: £10.1bn).
Net inflows increased by 305% in constant currency to £253m (2010: £63m). Gross inflows in our fee business were ahead of 2010. Strong sales in retail segregated funds and renewal premiums in group segregated funds were partly offset by a fall in mutual funds sales.
PVNBP sales decreased by 5% in constant currency to £2,928m (2010: £3,048m). Excluding large wins in 2010 for group savings and retirement, total sales increased by 12% in constant currency.
Group savings and retirement sales decreased by 26% in constant currency. Excluding large wins in 2010, sales in this product line increased by 8% in constant currency and our core defined contribution sales increased by 16%. Group insurance and disability management business was successful, with strong growth in market share.
Our strategy is to differentiate our business by providing innovative retirement and investment solutions combined with a world-class customer experience.
We continue to see the benefits of our scalable business model with maintenance expenses compared to average AUA falling to 85bps (2010: 86ps).
Operating profit before tax £40m £23m £15m 1.4 Business segment performance continued
“Our International business operates in markets and market segments which offer significant growth potential. The propositions we offer are centred on flexible investment solutions, innovative life assurance wrappers and digital capabilities. This approach proved successful in 2011, delivering growth despite difficult market conditions.” Nathan Parnaby, International Chief Executive
Operating profit before tax increased to £40m from £15m. The key highlights are: • Fee based revenue increased by 4% to £221m (2010: £212m) driven by the increase in AUA • Acquisition expenses increased to £40m (2010: £31m) in line with the higher new business and market initiatives • Maintenance expenses were broadly stable reflecting the scalable business model. The increase to £132m (2010: £129m) was driven by commission paid on existing business and higher investment fees in line with the growing AUA and back book • Operating profit before tax of the wholly owned businesses was maintained at £38m, despite difficult market conditions • The joint ventures contributed an operating profit before tax of £2m (2010: loss £23m) to the Group, which reflects their positive progression and our ongoing investment to support their development 42 Standard Life
Operating return on equity for total International increased to 8.2% (2010: 1.7%) driven by the strong improvement in operating profits, predominantly from the joint ventures. The total International operating return on equity consists of 9.9% for the wholly owned businesses and 2.8% for the joint ventures.
AUA in the wholly owned businesses grew by £1.2bn to £12.3bn (2010: £11.1bn) due to high net inflows in the year. Net flows of the wholly owned businesses increased by 3% to £1,448m (2010: £1,412m). This was mainly due to strong retail business inflows into our offshore bonds where net flows increased to £627m (2010: £496m). Net flows in Hong Kong rose to £63m (2010: £35m) due to new business sales and regular premium flows. In Ireland domestic business, net inflows fell to £194m (2010: £215m) with outflows driven by the economic situation and austerity measures. Net flows in the joint ventures increased by 8% to £275m (2010: £254m) with AUA of £1.2bn at the year end.
PVNBP sales in the wholly owned businesses increased by 18% in constant currency to £2,275m (2010: £1,929m). Ireland offshore bonds sales were 26% higher due to an improved proposition and better positioning in the wealth market. In Ireland domestic business, sales increased by 7% in constant currency. This was due to our strong investment proposition and high sales in the first half of the year as a reaction to legislative changes. In Germany, sales of £424m (2010: £337m) were 25% higher in constant currency driven by the launch of new propositions to revitalise our market presence. Hong Kong performed very well with sales of £320m (2010: £294m), up 13% in constant currency and leading to an increased market share. In India, sales were £414m (2010: £444m), down 1% in constant currency due to regulatory changes which have impacted the whole industry. Effective management of the recent market changes in India helped to increase our market share in the private market to 15% (2010: 12%). In China, sales decreased by 20% in constant currency to £86m (2010: £106m) due to refocusing the business on more profitable market segments and distribution channels.
Our strategy is to deliver profitable growth, expanding our businesses in attractive international and offshore wealth management markets (offshore bonds, Hong Kong and new markets), developing the joint venture businesses whilst maximising the value of our existing domestic businesses. 2011 saw us making good progress with strong growth in offshore bonds and Hong Kong from new proposition launches together with the development of our international offshore business. In Germany, we have introduced new propositions and are developing new product lines to reduce the reliance on with profits products. In China, we have a new management team in place under the leadership of a new general manager. We have produced a strategic plan to develop the business and are working closely with our joint venture partner to implement this.
Market share in Hong Kong grew with targeted sales and marketing activity and market-leading propositions, like Harvest Supreme and the launch of new propositions such as Aspire. In Germany, a series of propositions were launched to refresh our market presence and emphasise our expertise in the unit linked market. We are actively targeting to diversify away from with profits business and emphasise our investment expertise. Ireland saw a focus on our digital propositions and the offshore business launched a recurring single premium variant of the offshore bond which was rated ‘Best Regular Premium Investment Product’ by the monthly publication, International Adviser.
The average revenue yield on fee based business decreased to 186bps (2010: 212bps) reflecting the change in asset mix across the International territories and also the charging structure of legacy business. Our market development activity remains focused on driving growth in attractive markets, offering high value propositions and promoting high value Standard Life Investment propositions such as GARS.
Maintenance expenses expressed as a proportion of average AUA fell from 129bps to 111bps in 2011 with continued efforts to drive efficiencies across all territories.
The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group riskadjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and maintains robust risk limits which Group companies must adhere to.
• 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
• Guarantees on segregated fund business in Canada Fixed interest risk
• Insufficient long-dated fixed income assets to match the longest dated liabilities in Canada
• Changes in the value of future profits on unit linked funds and collective investment schemes where the underlying funds are invested in overseas assets
The Group is exposed to credit risk through: • Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in corporate bonds
Credit risk also results from holding the following assets: • Corporate bonds held to back annuities written by
SLAL post-demutualisation • Assets held to back the subordinated debt in SLAL, a proportion of which are asset backed securities that are held for historical reasons
In response to this we have: • Increased hedging to reduce the impact of falling
Euro yields • Implemented dynamic hedging of guarantees provided for Canadian Segregated Funds • Maintained hedging arrangements in respect of the currency risk arising from our overseas operations • Monitored the level of equity and property held within the HWPF
We have responded to the Eurozone crisis by: • Proactively managing the benchmarks of our fixed interest portfolios, in particular to remove exposures to peripheral sovereign debt
• Restricting our holdings of cash and cash equivalents to banks that we assess to be of appropriate credit standing, taking into consideration both direct and indirect factors such as the potential impact of contagion risk on these banks
1.5 Risk management Risk management is an integral part of the Group’s corporate agenda. The Group’s risk strategy statement links value and risk in a concise expression of our objectives, aligned with our corporate purpose. Colin Ledlie, Chief Risk Officer
The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. This includes liabilities of insurance and investment contracts.
The risk that the Group is unable to realise investments and other assets in order to settle their financial obligations when they fall due, or can do so only at excessive cost.
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 the strategy.
The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group’s overall strategic objectives.
The Group has no appetite to fail to meet its liabilities as they fall due.
The Group has an appetite for operational risks where exposures arise due to core strategic activity. However, the Group will seek to put effective controls in place to reduce operational risk exposures, except where the costs of such controls exceed the expected benefits.
• Changes in the value of future profits earned on unit linked funds and collective investment schemes in the UK and future recourse cash flow payments from the HWPF
• Changes in the value of future profits earned in respect of Standard Life Investment’s third party AUM and segregated fund business
• Shareholder is directly exposed to risk of expenses being above expectation
• Potential liquidity issues in unit linked funds due to the underlying asset classes
A key commercial focus over the year has been to develop propositions to increase the retention of funds when insurance and savings contracts reach maturity.
We have continued to monitor emerging research into longevity, for example from the Office for National Statistics and the industry-wide Continuous Mortality Investigation, in order to inform our in-house view of likely future improvements in life expectancy.
The final judgement of the European Court of Justice in the Test-Achats case requires insurance contracts to be gender neutral in terms of pricing and benefits from 2012. Our UK and International businesses are well placed to meet the requirements.
Putting customers at the heart of our business means we need to keep listening to them and developing our understanding of their needs and challenges.
We do this in a number of ways. On a day-to-day basis there are numerous conversations between our customer service and relationship management teams. We collect more structured feedback from our customers on our performance through detailed customer questionnaires. These include the new deeper insight programmes to analyse client needs in Standard Life Investments and the real time customer feedback techniques used in our customer service operations. We undertake detailed research to understand how our customers are preparing for major events such as pensions reform and the RDR and how we develop areas of our propositions.
However, we also employ more innovative techniques. Our online customer community has now grown to almost 1,500 members with 390 active members providing regular feedback on a number of issues such as our literature, our use of social media, and the role of the adviser in advance of the RDR. Customer closeness events between our senior leaders and customers have continued during 2011, with 17 being held across the UK. These sessions allow the senior team to hear first hand customers’ views and opinions.
In 2011, we took another important step on our transformation journey when we launched our new repositioned brand across the Group. The repositioning was accompanied by investing in new propositions and capability. In the UK we relaunched our brand via an enhanced Adviserzone platform for advisers, a new www.standardlife.co.uk website and through the corporate proposition of Lifelens. New customer propositions and digital services accompanied the rollout of the new brand in Germany, Ireland and Hong Kong. In May, the Standard Life Investments brand was re-launched with a new messaging platform for institutional and wholesale clients. The results of a recent Standard Life Investments client survey indicate sustained brand loyalty and high levels of pride in association with 78% of clients stating that they would like to still be doing business with Standard Life Investments in 10 years’ time.
• Being consistent in the service experiences we offer and transparent about how our products work and how we charge
• Acting responsibly in terms of how we operate as a business, helping our customers make informed choices and recognising our broader role in the societies we serve
Consumer-focused websites in our international markets have all been redeveloped in a similar manner and we have substantially rewritten many of our brochures and standard letters to try to ensure that we communicate in a straightforward and accessible manner.
We also piloted our programme of Customer Retirement Roadshows in 2011 and are rolling them out throughout the UK in 2012. The roadshows are designed to help our customers prepare for their retirement by informing them about their retirement options and helping our customers to understand those options.
In 2011, we continued broadening and deepening our relationship with advisers, offering hands-on support in the run up to the RDR 2013 deadline. We aligned our propositions and technology to support advisers with end-to-end client solutions covering tax and retirement planning and investments. In addition in the UK, threesixty has continued to provide independent consulting and business support services, plus specific help with regulatory compliance.
Another key focus for 2011 has been to enhance our technology offering. We've continued to invest in the development of our market-leading Wrap platform, which is now being used by approximately 1,000 adviser firms. Further support is provided through Focus Solutions with their unrivalled point-of-sale and integration capabilities. Standard Life Investments launched Learning Gateway, a free online training portal to support advisers through the RDR transition and beyond, with over 2,800 advisers registered.
Based on adviser feedback, we launched our new Adviserzone.com in February 2011 to deliver more efficient new business processing and client servicing, with enhanced functionality and upgraded online tools. The objective is to enable IFAs to offer better value to their clients whilst reducing time spent on processing and administration. Later in 2011, we launched our dedicated tax planning hub on Adviserzone which offers tax planning solutions built around advisers’ clients whatever their need or income level.
In Hong Kong, we enhanced the online servicing proposition for IFAs enabling them to initiate bulk fund switching on behalf of their clients electronically. 7,500 transactions of this nature are processed every month.
Throughout 2011, we delivered a number of thought leadership white papers and events debating some of the issues facing employers and intermediaries in the corporate market. These have included the implications of regulation, pensions scheme restructures and the importance of the design of default funds.
We continued to develop and improve our investment solutions throughout 2011. The MyFolio range of governed, risk-managed funds, has been extended with additional variations launched catering for customers with an income investment preference and for the corporate pension market. Standard Life Wealth also launched a Managed Portfolio Service which brings its unique investment approach to a wider range of potential customers.
We keep close tabs on our customers’ thoughts and views of the service we give, a key measure being ‘real-time customer feedback’ – gaining feedback on our service levels straight after a service interaction. Our average rating for 2011 for customer satisfaction is 4.85 out of 5 (2010: 4.83) and for intermediary satisfaction it’s 4.74 out of 5 (2010: 4.70).
In 2011 our UK business was recognised with awards, including: • ‘Life and pensions five star provider award’ at the Financial Adviser Service Awards
Our business is underpinned by strong investment performance achieved by rigorously applying our ‘focus on change’ investment philosophy. High quality support by our client service teams – combined with this strong investment performance – won us a number of awards in 2011 including: • Standard Life Investments’ UK Smaller Companies Trust won ‘Best Shareholder Value’ category at the Investment Trust of the Year Awards. The Trust also won, for the third year out of the past four years, the ‘UK Smaller Companies’ category.
High quality customer service is the basis of our growth strategy. We focus on building retention and strong customer relationships. In 2011, our client retention level based on internal methodology was 93.2% (2010: 94.4%). We are constantly investing in technology, training and processes to help us provide the level of service our customers need and expect. This includes continuing to enhance web-based functionality across our group lines. This makes it easier for both sponsors and participants to administer our products.
Our customer focus has earned us a number of awards throughout the year, including: • ‘Outstanding Integrated Ad Campaign’ award from the Web Marketing Association, recognising our multimedia campaign ‘To make a long story short’, promoting our revamped member statement
• The Standard Life Corporate Bond Fund won a Lipper Fund Award in the Canadian Fixed Income category over a three-year period, recognising the talent, discipline and management style of our portfolio manager, Standard Life Investments
All International operations are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2011 by various awards received by our operations including: • The German business won two awards for outstanding service and broker support
• The offshore bond business also received ‘Best Regular Premium Investment Contract’ award for our recurrent single premium contract from the monthly publication, International Adviser
In 2010, we invested in the development of our leaders with the introduction of three new leadership development programmes, tailored to the needs of team, area and senior leaders. By the end of 2011, nearly 700 leaders across the Group completed these programmes which focus on their development as leaders.
We continue to invest in building the strength and depth of our talent up through the organisation. During 2011 we completed a review of talent across the Group, increasing the breadth and depth of succession cover for key roles. We have selected our fourth intake into our award-winning Accelerated Development Support programme, our process to support the development of senior leaders with high potential, taking the total numbers involved to 72. In addition, we partnered with a leading business school to strengthen our equivalent programme for emerging leaders and selected a second intake of 31 participants to begin in 2012.
Our overall approach to leadership diversity has, and continues to be, to appoint on the basis of talent to all our positions. We know, however, that we need to do more to attract a diversity of talent at all levels and support all of our talent to progress, with the outcome of ensuring we have strong talent pipelines growing through the organisation which reflect our desired workforce and customer demographic. We are therefore taking actions to further improve, extend and embed our talent management processes, to review talent data and processes through a diversity lens and to address any specific identified issues or barriers to progression.
We have undertaken a group-wide review to identify the key strategic organisational capabilities we require now and in the future. This insight is being used to create development and resourcing plans which will ensure we have the right skills and knowledge to deliver our strategy.
Our Business review for the year to 31 December 2011 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). Under section 417 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 – Chief Executive’s overview. Principal risks are detailed in Section 1.5 – Risk management. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).
The 2011 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 54 of this report, presents profit before tax attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in the accounting policies section – Note 2.1 (a) Basis of preparation. The 2011 EEV consolidated income statement on page 78, presents EEV profit showing both operating and non-operating items. By presenting our results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.
The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation.
Aggregate equity holder tax effect of items recognised in comprehensive income 27 (60)
Other comprehensive (expense)/income for the year from continuing operations (95) 189
Total comprehensive income for the year from continuing operations 251 662
Total comprehensive income for the year from discontinued operations - 44
The Group’s chosen supplementary measure of performance is operating profit. The Directors believe that operating profit provides a more meaningful indication of the long-term operating performance of the Group. To align the measure of the Group’s performance with the long-term nature of its business, operating profit excludes items which create short-term volatility. Operating profit includes the impact of significant actions taken by management during the year.
Equity attributable to equity holders of Standard Life plc 3,961 3,903
There has been a reallocation between cash and cash equivalents and investment securities of £1,629m at 31 December 2010. Refer to Note 2.1 – Accounting policies – (a) Basis of preparation.
Other comprehensive income for the year - - - (61) (34) (95) - (95)
Issue of share capital other than in cash 7 - 134 - - 141 - 141
Shares distributed by employee trusts - 9 - (9) - - - -
Other movements in non-controlling interests in the year - - - - - - (25) (25)
Other comprehensive income for the year - - - 124 89 213 - 213
Total comprehensive income for the year - - - 556 89 645 61 706
Cash and cash equivalents at the beginning of the year1 5,701 8,840
Effects of exchange rate changes on cash and cash equivalents (45) 2
The preliminary results have been prepared using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The Group has adopted the following amendments to IFRSs, International Accounting Standards (IASs) and interpretations which are effective from 1 January 2011 and management considers that the implementation of these amendments and interpretations has had no significant impact on the Group’s financial statements: • Amendment to IAS 32 Financial Instruments: Presentation – classification of rights issues
The Group’s chosen supplementary measure of performance is operating profit. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
The preliminary announcement for the year ended 31 December 2011 does not constitute statutory accounts as defined in Section 434 of the UK Companies Act 2006. PricewaterhouseCoopers LLP have audited the consolidated statutory accounts for the Group for the years ended 31 December 2010 and 31 December 2011 and their reports were unqualified and did not contain a statement under Section 498(2) or (3) of the UK Companies Act 2006. The Group’s consolidated statutory accounts for the year ended 31 December 2010 have been filed with the Registrar of Companies. The Group’s Annual Report and Accounts for the year ended 31 December 2011 will be available from 3 April 2012.
The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed. The Group’s reportable segments are as follows: UK UK operations comprise life and pensions business. The life and pensions business provides a broad range of pensions, protection, savings and investment products to individual and corporate customers. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010. It was classified as a discontinued operation in this reportable segment in the year ended 31 December 2010.
Share of profit from associates and joint ventures 20 15 14 2 - - 51
Tax attributable to policyholders’ returns 211 - - 6 - - 217
Other income included in the income statement is as follows: Other expenses included in the income statement include: Impairment losses (reversed)/recognised
Investments in associates and joint ventures 47 48 127 91 13 - 326
Share of profit/(loss) from associates and joint ventures 21 11 15 (23) - - 24
Profit/(loss) for the year from continuing operations 301 79 145 4 (56) - 473
Profit/(loss) attributable to equity holders of Standard Life plc 260 79 145 4 (56) - 432
Less: Profit for the year from discontinued operations (20) - - - - - (20)
Other income included in the income statement is as follows: Interest income
Amortisation of intangible assets: Amortisation of deferred acquisition costs: Depreciation of property, plant and equipment
Additions during the year 1 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation for the year ended 31 December 2010. The reconciliation to consolidated operating profit for the year ended 31 December 2010 includes continuing operations only.
Non-current non-financial assets for this purpose consist of investment property, property, plant and equipment and intangible assets (excluding intangible assets arising from insurance or participating investment contracts).
2.4 Tax expense The tax expense is attributed as follows: Tax expense attributable to policyholders’ returns 217 400
The Finance Act 2011 reduced the UK corporation tax rate to 25% with effect from 1 April 2012 and this rate has been applied in calculating the UK deferred tax position at 31 December 2011. The 2011 Budget statement also announced the Government's intention to make further reductions in the rate of UK corporation tax in 2013 and 2014. These reductions have not been included in the calculation of deferred tax as they are subject to legislation being enacted in future years.
The total tax expense is split as follows: Income tax: Double tax relief (2) (1)
Deferred tax: Deferred tax (credit)/expense arising from the current year (61) 197
Profit attributable to equity holders of Standard Life plc (£m) 298 432
Weighted average number of ordinary shares in issue (millions) 2,301 2,242
Weighted average number of ordinary shares for diluted earnings per share (millions) 2,304 2,248
Diluted earnings per share from continuing operations (pence per share) 12.9 18.3
The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was three million (2010: six million).
Profit attributable to equity holders of Standard Life plc 298 13.0 432 19.3
Operating profit is based on expected returns on investments backing equity holder funds and the difference between the expected return and actual return on investments is excluded from operating profit and presented within profit before tax. Adjustments are also made consistently to allow for expected movements in equity holder liabilities except where they are directly related to a significant management action. As a result, the components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected investment returns, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from operating profit and disclosed separately within the heading of short-term fluctuations in investment return and economic assumption changes.
Gains and losses on foreign exchange are deemed to represent short-term fluctuations in investment return and economic assumption changes and thus are excluded from operating profit.
For the year ended 31 December 2011, short-term fluctuations in investment return and economic assumption changes were losses of £139m (2010: gains of £157m). Short-term fluctuations in investment return relate principally to the investment volatility in Canada non-segregated funds, UK annuities and in respect of the Group’s subordinated liabilities and assets backing those liabilities.
Subsequent to 31 December 2011, the Directors have proposed a final dividend for the year ended 31 December 2011 of 9.20 pence per ordinary share, £217m in total. The dividend will be paid on 31 May 2012 to shareholders on the Company’s register as at 23 March 2012, subject to approval at the Annual General Meeting on 25 May 2012. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2012.
2.8 Issued share capital and shares held by trusts (a) Issued share capital
Shares issued in respect of share options 158 - 1,305,584 -
The Group also operates a Long-term incentive plan (LTIP) for executives and senior management and a Sharesave (Save-asyou -earn) scheme for all eligible employees. During the year ended 31 December 2011, no (2010: 1,305,584) and 158 (2010: nil) ordinary shares were issued on exercise of share options in relation to the LTIP and Sharesave schemes respectively.
As part of the offer on the demutualisation of SLAC and flotation of Standard Life plc, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who retained their shares for a continuous period of one year from 10 July 2006 were entitled to one bonus share for every 20 shares. Equity holders who were entitled to bonus shares but were not allocated shares on 10 July 2007 had until 10 July 2010 to claim their entitlements. During the year ended 31 December 2010, 583 ordinary shares were issued to equity holders entitled to receive bonus shares.
The number of shares held by trusts at 31 December 2011 which were not offset by a corresponding obligation to deliver a fixed number of equity instruments was 10,879,286 (2010: 12,209,946).
2.9 Insurance contracts, investment contracts and reinsurance contracts 2011 2010 £m £m
Effect of changes in: Effect of: Total change in contract liabilities (665) 1,635 10 980 383 1,363
Economic assumptions reflect changes in fixed income yields, leading to lower valuation rates on non-participating business, and other market movements. Economic assumptions also include a decrease in liabilities of £77m as a result of changes, introduced by management, in respect of the long term asset allocation assumptions in Canada.
The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during 2010 was as follows: Participating insurance contract liabilities
Account balances paid on surrender and other terminations in the year (8,525) (7,589)
The amounts recognised in the summary consolidated income statement for defined contribution and defined benefit schemes are as follows: Current service cost
The present value of the defined benefit obligation less the fair value of gross scheme assets is as follows: 2011 2010 UK Canada Ireland Total UK Canada Ireland Total £m £m £m £m £m £m £m £m
Present value of funded obligation (1,972) (215) (54) (2,241) (1,724) (175) (51) (1,950)
Fair value of plan assets 2,519 179 58 2,756 2,005 175 48 2,228
Net asset/(liability) in the summary consolidated statement of financial position 338 (109) 4 233 281 (62) (3) 216
2.10 Defined benefit and defined contribution plans continued (b) Analysis of amounts recognised in the summary consolidated statement of financial position continued
The Group also recognises a net liability of £6m (2010: £6m) arising from a scheme with a total defined benefit obligation of £6m (2010: £6m) administered for the benefit of employees in Germany, resulting in a net asset of £227m (2010: £210m). The summary consolidated statement of financial position presents any net scheme assets within other assets and any net scheme liabilities within other liabilities.
Rate of increase in salaries 4.45-5.45 3.50 3.50 4.65-5.65 3.50 3.50
Rate of increase in pensions 2.85 1.33 1.00 3.05-3.65 1.33 1.00
(a) Legal proceedings and regulations The Group, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigation) will have a material effect on the results and financial position of the Group.
As at 31 December 2011, £275m (2010: £251m) was contractually committed to the acquisition of investment properties. Of this amount, £248m (2010: £239m) and £27m (2010: £12m) relates to the contractual obligations to purchase, construct or develop investment property and repair, maintain or enhance investment property respectively.
Original term to maturity of more than one year 3 7 70 Standard Life
Included in other commitments is £257m (2010: £315m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through (contractually agreed) additional investments in the subsidiary by the Group and the non-controlling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Not later than one year
Equity attributable to ordinary equity holders of Standard Life plc - 907 849 1,756 1,176 2,932 1,029 3,961
Exclusion of deferred acquisition costs and other inadmissible assets (89) (657) (62) (808) (92) (900) (96) (996)
Changes to the valuation of other assets and liabilities (22) (311) (232) (565) 58 (507) 253 (254)
Total available capital resources to meet regulatory requirement 4,121 189 1,687 5,997 1,394 7,391 933 8,324
Analysed as follows: Capital not subject to constraints - - 1,637 1,637 375 2,012 850 2,862
Capital resources amounting to £38m in respect of other with profits funds are disclosed within the Heritage With Profits Fund (HWPF) column.
Held outside life assurance funds - - 1,008 1,008 1,220 2,228 796 3,024
Held within life assurance funds - 879 - 879 - 879 - 879
Equity holder/inter-fund transfers (68) 68 9 9 29 38 (38) -
Redemption of subordinated liabilities relates to the repurchase of a portion of the Euro denominated subordinated guaranteed bonds and details are provided in Note 2.17 – Subordinated liabilities. Under Financial Services Authority (FSA) requirements, the €63m of the bonds that remain outstanding, do not qualify as capital resources and are shown as a movement in other factors.
Based on draft regulatory returns at 31 December 2011, SLAL had available capital resources of £6.0bn (2010: £6.7bn) and a CRR of £3.4bn (2010: £2.9bn). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis. However, the CRR reflects the higher value required as a result of the application of the realistic peak.
Overseas life operations Capital resources of £1,394m (2010: £1,413m), which relate mainly to operations in Canada, also include operations in Asia. The Canadian regulator sets the minimum required capital. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £1,019m at 31 December 2011 (2010: £836m).
Other activities At 31 December 2011, capital resources of £933m (2010: £704m) and capital subject to constraints of £83m (2010: £81m) relate to the Group’s investment management businesses and group corporate centre activities.
Intra-group transactions The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Canada, Hong Kong, India and China. Through branches, the Group also provides such services in Ireland and Germany. With the exception of the requirements of the Scheme and the intra-group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.
In preparation for the implementation of Solvency 2, the business of Standard Life Investment Funds Limited was transferred to SLAL on 31 December 2011. The current Group capital position has not been significantly impacted.
Group capital requirement The Group must also calculate a group regulatory capital position under the Insurance Groups Directive (IGD). The IGD calculation is a prudent aggregate value for the Group’s capital resources. The capital held within the long-term business funds of approximately £4.4bn (2010: £4.4bn) is restricted to the level of the CRR of those funds of approximately £3.4bn (2010: £2.9bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
On an IGD basis, the estimated regulatory capital position at 31 December 2011 is a surplus of £3.1bn (2010: £3.8bn). The reduction in the estimated regulatory capital surplus is predominantly due to the repurchase of a portion of the Euro denominated subordinated guaranteed bonds.
In respect of the Group’s IGD regulatory reporting there were no breaches of regulatory capital requirements at any time during the year.
The amount of revenue and profit included in the consolidated income statement for the year ended 31 December 2011 contributed by Focus was £16m and £1m respectively.
The newly created sub-funds have been consolidated on a line by line basis in the Group’s results for 31 December 2011. The significant impact of this change has been to decrease the Group’s investments in associates and joint ventures by £2,775m and increase cash and cash equivalents, investment securities and third party interest in consolidated funds.
2.18 Events after the reporting period A judgment handed down on 1 February 2012 in the Commercial Court in London found in favour of Standard Life Assurance Limited in its claim of approximately £100m against the insurers of its 2008/2009 professional indemnity policy in relation to the Standard Life Pension Sterling Fund. The insurers are appealing the judgment and the appeal is unlikely to be heard before autumn 2012. No recoveries in respect of the claim are recognised in the consolidated income statement for the year ended 31 December 2011. The recognition of the benefit of any recoveries in respect of the claim in the consolidated income statement will depend on the timing and outcome of the appeal.
Total EEV profit after tax 369 816 1 Global investment management non-covered EEV operating profit of £69m (2010: £33m) represents operating profit of £125m (2010: £103m) after excluding profits of £56m (2010: £70m) which have been generated by life and pensions covered business. Global investment management EEV operating profit therefore represents third party non-covered EEV operating profit. Refer to Note 3.6(b) – Global investment management EEV operating profit before tax and Note 3.17 – EEV methodology.
Refer to IFRS financial information Note 2.3 – Administrative expenses. The £73m of restructuring costs in 2011 also include additional impacts to required capital and PVIF following the termination of an internal reinsurance agreement. 3 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 – EEV methodology.
4 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and was classified as a discontinued operation for the year ended 31 December 2010.
Weighted average number of ordinary shares on a diluted basis (millions) 2,304 2,248 1 EEV operating profit before tax from continuing operations of £989m (2010: £787m) less attributed tax on EEV operating profit from continuing operations of £265m (2010: £249m).
EEV consolidated statement of comprehensive income For the year ended 31 December 2011
Total comprehensive income for the year attributable to equity holders from continuing operations 252 1,041
Total comprehensive income for the year attributable to equity holders from discontinued operations - 44
Total comprehensive income for the year attributable to equity holders 3.7 252 1,085 1 Consistent with the IFRS consolidated statement of comprehensive income.
3 Refer to the Annual Report and Accounts 2011 IFRS financial information Note 10 – Discontinued operations.
Additional retained earnings on an EEV basis 3,467 3,418 1 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 – EEV methodology.
EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc (the Company) plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.
A detailed description of EEV covered business is provided in Note 3.17 – EEV methodology.
With effect from January 2011, Canadian insurers have adopted IFRS as their basis for reporting, replacing the previous Canadian GAAP (CGAAP) basis. The impact of the change has been to reduce the Canada EEV by £59m. The comparative results for the 12 months to 31 December 2010 have not been restated.
Elsewhere within the Group, the regulatory basis for setting actuarial reserves and required capital has been calculated assuming the continuation of current regimes. Therefore, no allowance has been made for the change in reserving or required capital bases anticipated under Solvency 2. This approach is in accordance with the Interim Transitional Guidance for Embedded Value Reporting issued by the CFO Forum in September 2011. Similarly, no allowance has been made for forthcoming changes to the UK life insurance tax regime. The deferred tax position has been calculated using legislation in force at 31 December 2011.
Within the IFRS segmental analysis, UK operations primarily comprise life and pensions, UK non-covered mutual funds business and the non-covered UK pension scheme. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation for the year ended 31 December 2010. Following the acquisition of Focus Solutions Group plc on 11 January 2011, UK non-covered business results for the year ended 31 December 2011 include Focus. UK non-covered business is shown within Note 3.6 – Non-covered business.
The Finance Act 2011 reduced the UK corporation tax rate to 25% with effect from 1 April 2012. The reduction to 25% has been included within our best estimate assumptions for UK corporation tax as at 31 December 2011.
3.1 Basis of preparation continued Recapture of internal reinsurance On 31 December 2011, the business of Standard Life Investment Funds Limited (SLIF) was transferred to the Standard Life Assurance Limited (SLAL) Shareholder Fund and Proprietary Business Fund under a court approved scheme pursuant to Part VII of, and Schedule 12 to, the Financial Services and Markets Act 2000. The impact of the change has been to reduce the UK EEV by £10m. This is included within restructuring costs.
Contribution from in-force business: Expected return on existing business 242 144 54 - 440
An analysis of EEV profit after tax by territory is provided in Note 3.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although the HWPF includes business written by the UK, Germany and Ireland, the Group manages the risk at an aggregate level. This is consistent with the Group’s IFRS consolidated financial statements as disclosed in Note 42 – Risk management of the Annual Report and Accounts 2011. The results for Canada and International include the cost of the Canada and Asia TVOG and the cost of TVOG arising on business written outside of the HWPF in Germany.
Improved new business profitability was due to higher sales volumes in the UK and increased margins in the UK and Canada. An analysis of new business contribution is provided in Note 3.3 – Analysis of new business contribution.
The increase in the expected return on existing business from £422m in 2010 to £440m in 2011 is primarily due to higher opening PVIF, partly offset by lower opening risk discount rates.
Details of experience variances and operating assumption changes are provided in Note 3.4 – Experience variances and Note 3.5 – Operating assumption changes.
Development expenses of £74m in 2011 (2010: £67m) reflect the increased investment in the business. Development expenses of £33m in the UK mainly relate to investment in corporate propositions, in particular trust based pensions; retail propositions, largely SIPP; and to investment in the launch of our repositioned brand and refreshed visual identity. The £27m of development expenses in International include £8m relating to the costs of developing the JV businesses and £19m relating to development of the wholly owned businesses to build future growth.
Investment return and tax variances generated a profit of £70m across all covered business. Investment return and tax variances in the UK produced a profit of £41m. Investment returns in 2011 generated an increase in free surplus of £165m, largely within annuity business, which was offset by a reduction in PVIF of £237m, largely due to lower than expected investment returns on unitised business. In addition, there was a profit of £110m, in excess of the returns that are included in the expected return on free surplus and in operating variances, arising from differences in movements of subordinated liabilities and the assets that are backing the subordinated debt. Canada investment return and tax variances generated a profit of £41m which is after a £79m pretax loss (£59m post-tax loss) from the impact of adopting IFRS accounting. Refer to Note 3.1 – Basis of preparation. The remaining positive variances in Canada primarily reflect the benefits of strong investment returns in 2011.
Restructuring costs of £59m include £53m within the UK. This primarily represents the covered business costs associated with a number of restructuring programmes including Solvency 2, as well as the free surplus and associated other EEV impacts arising from the termination of the internal reinsurance agreement between SLAL and SLIF.
Transfer back of surplus to Standard Life Investments (36) (2) (3) - (41)
Transfer back of mutual funds net worth 19 (5) - - 14
Actuarial (losses)/gains on defined benefit pension schemes - (42) 8 - (34)
New business contribution (NBC) and the present value of new business premium (PVNBP) margins are shown after the effect of required capital.
The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums.
Individual pensions include Retail Trustee Investment Plan. This was previously included in corporate pensions. The 2010 impact on PVNBP is £25m.
The lapse experience loss of £37m in the UK includes a negative variance within our pensions business of £29m. This was mainly due to transfers within our pension business. UK lapse experience variance also includes a £10m adverse variance within mutual funds and a £2m loss on institutional pensions mainly arising from the loss of one large scheme. The £11m adverse lapse experience within International mainly arises from a £4m loss within the Ireland domestic business and a £5m loss within the JV businesses.
Within Canada, other variances mainly arise from the impact of management actions to enhance investment yields on assets.
Positive lapse assumption changes in the UK include a £25m gain from improved long-term assumptions for institutional pensions, and a £8m profit on legacy life business reflecting recent experience. Favourable changes in assumed early retirement rates for individual pensions have been offset by anticipating a period of higher paid-up activity as a result of pension reform changes.
Within International, the lapse assumption loss of £18m includes a £7m loss from the JV businesses and a £6m loss from higher paid-up assumptions in Hong Kong.
The £39m other assumption changes in International include a gain of £48m within Germany due to revised assumptions for certain classes of deferred annuities, which enables recognition of the profits expected when the policy converts to an annuity inpayment.
3.5 Operating assumption changes continued For the 12 months to 31 December 2010, expense assumption gains in the UK and in Europe reflect changes in the expense allocation for investment related expenses. The UK figure also includes an allowance for the expected benefits on maintenance costs arising from the headcount reductions announced during 2010, but only to the extent that these arrangements had been finalised by 31 December 2010.
3.6 Non-covered business Non-covered business EEV operating profit is represented by operating profit as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business. Refer to Note 3.17 – EEV methodology.
The transfer back of net worth from covered business represents the transfer of profits and losses in relation to the Group’s investment management business, the UK mutual funds business (within UK non-covered, Standard Life Savings Limited) and the Canada mutual funds business (within other non-covered), necessary to reconcile the opening and closing EEV net assets. For further detail refer to Note 3.17 – EEV methodology, under consolidation adjustments.
The other movement in the UK EEV net assets mainly relates to the change in the UK non-covered pension scheme of negative £51m (2010: positive £214m) and the associated deferred tax asset of positive £15m (2010: negative £65m).
Other movements in other including group corporate centre predominantly relate to the £141m issue of share capital other than in cash in relation to the Scrip dividend paid by the Company.
The opening adjustment of £34m represents the reclassification of other non-covered to UK non-covered business during the period.
Refer to Note 2.1(b) – Accounting policies – Operating profit in the IFRS financial information.
Global investment management third party non-covered business EEV operating profit before tax 69 33
Total global investment management EEV operating profit allocated to covered business of £56m (2010: £70m) consists of third party related covered business EEV operating profit of £32m (2010: £33m) and other covered business EEV operating profit of £24m (2010: £37m).
Contribution from in-force business: Expected return on existing business (1) 40 39 294 333
Aggregate tax effect of items not recognised in income statement 12 - 12 - 12 90 Standard Life
Contribution from in-force business: Expected return on existing business (1) 37 36 275 311
Transfer back of mutual funds net worth 24 - 24 - 24
Actuarial losses on defined benefit pension schemes (29) - (29) - (29)
Contribution from in-force business: Expected return on existing business (1) 5 4 177 181
Expected return transfer to net worth 390 (4) 386 (386) -
Transfer back of mutual funds net worth 19 - 19 - 19 92 Standard Life
Transfer back of mutual funds net worth 28 - 28 - 28
Aggregate tax effect of items not recognised in income statement 12 - 12 - 12 94 Standard Life
Actuarial losses on defined benefit pension schemes (20) - (20) - (20)
Contribution from in-force business: Expected return on existing business - 2 2 42 44
Expected return transfer to net worth 126 4 130 (130) -
Actuarial profits on defined benefit pension schemes 8 - 8 - 8 96 Standard Life
Contribution from in-force business: Expected return on existing business - 2 2 31 33
3.11 Market value of subordinated liabilities within covered business continued UK subordinated liabilities include Euro denominated subordinated guaranteed bonds. On 14 September 2011, the Company settled a tender for these bonds, as described in Note 37 to the IFRS financial information in the Annual Report and Accounts 2011. The tender was accepted for bonds with a face value of €687m and bonds with a face value of €63m remain outstanding. This tender resulted in a loss of £7m which is included within UK EEV operating profit as described in Note 3.4 – Experience variances.
The decrease in the UK subordinated liability mainly reflects the tender referred to above, along with increased market yields during 2011. The £39m increase in the Canada subordinated liability includes a £5m reduction from currency movements.
PVIF Cost of capital TVOG Total At 31 December 2011 £m £m £m £m
See also Note 3.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 4.91%
for annuities that are level or subject to fixed escalations and 4.02% for annuities where escalations are linked to a price index. 4
Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds.
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 3.60 2.70 3.60 3.60 2.70 2.70 4
Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 6.73% and 6.10% respectively.
Changes in market risk margins generally arise from changes in the mix of business and asset allocations. In Canada, the market risk is also impacted by the relative movements in the returns assumed on equities and property compared to risk free, which in 2011 led to a significant increase in Canada risk margins.
Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 6.30% and 4.54% respectively.
The PVIF and cost of required capital of the India and China JV businesses is calculated using a ‘risk neutral’ approach whereby projected investment returns and discount rates are based on risk free rates. This was also the approach adopted for Hong Kong until 2011. The risk free rates used were: Hong Kong n/a 1.55
Non-market risk has been allowed for via a specific deduction to PVIF, based on a non-market risk ‘cost of capital’ approach. This has reduced the PVIF of the India and China JV businesses at 31 December 2011 by £25m (31 December 2010: £22m). Similarly, the 2011 pre-tax NBC has been reduced by £7m (2010: £8m) as an allowance for non-market risk.
3.14 Principal economic assumptions – stochastic calculations The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 3.17 – EEV methodology.
Characteristics of ESG used for HWPF TVOG calculations – UK and Europe
The ESG simulates future economic environments in a market-consistent manner. The outputs of the ESG include: • Cash account index
The ESG allows option-pricing techniques to be used to value TVOG.
Property returns As there is no liquid property option market, a best estimate of property return volatility is used. The property volatility is estimated from adjusted Investment Property Databank UK data.
Rental yields are derived from rental income on our actual portfolio of property (with a three month lag).
Sensitivities tested were: • 1% increase and decrease in risk discount rates
• EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations)
Fall in property market values by 10% (17) (56) (2) (15) (90)
Fall in equity market values by 10% (25) (10) (4) - (39)
Fall in property market values by 10% (4) - - - (4)
• Those elements of Wrap business that are contained within a long-term product wrapper, i.e. bonds, SIPPs and mutual funds
• The Group’s business in Hong Kong (Standard Life (Asia) Limited)
• The Group’s share of results in the JV in India, HDFC Standard Life Insurance Company Limited, at 26% for the 12 months to 31 December 2011 (2010: 26%)
• The Group’s share of results in the JV in China, Heng An Standard Life Insurance Company Limited, at 50% for the 12 months to 31 December 2011 (2010: 50%)
Non-covered business EEV operating profit is represented by operating profit as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business.
Covered business includes the profits and losses arising from non-covered businesses providing investment management and other services to the Group’s life and pensions businesses. As a result, the profits and losses on an IFRS basis have been removed from the relevant non-covered segments (global investment management, UK non-covered and other non-covered) and are instead included within the EEV results of the covered businesses.
The consolidation adjustment to remove the impact of the accounting differences for the Canada subordinated liability is explained in more detail under subordinated liabilities in the EEV methodology.
For some assets and liabilities where market value is not the normal basis for accounting, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.
Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways: • Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate
Risk discount rates have been determined as the risk free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, we have opted for an approach whereby the risk margin is determined such that PVIF (excluding the allowance for TVOG) calculated using expected ‘real world’ asset returns equates with PVIF calculated using ‘risk neutral’ investment returns and discount rates. In this way, the benefits of assuming higher than risk free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for nonmarket risk by applying stress tests to PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests.
The values of the risk discount rates used for this reporting period are provided in Note 3.13 – Principal economic assumptions – deterministic calculations – covered business.
The levels of required capital in the current EEV calculations are therefore as follows: • UK and Europe (business in HWPF) – no capital requirement in excess of statutory reserves or asset shares is valued in the EEV
• Canada – the level of required capital is taken as 170% of minimum continuing capital and surplus requirements (MCCSR)
• India, China and Hong Kong – required capital is based on the local statutory capital requirements
• The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the time TVOG is calculated
The level of TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: • The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market-consistent assumptions
• Changes in policyholder behaviour are allowed for according to the particular economic scenario
• Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)
Asia TVOG in the Asia businesses within International arises from guarantees and options given to with profits business written in India and China.
Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed on an annual basis.
Restructuring costs for covered and non-covered business are consistent with those identified in the Group operating profit adjustments and primarily represent costs in relation to a number of restructuring programmes including Solvency 2. Refer to the IFRS financial information Note 2.3 – Administrative expenses for further detail. Restructuring costs in 2011 also include the impact on free surplus, required capital, cost of required capital and PVIF arising from the termination of the internal reinsurance agreement between SLAL and SLIF.
Annuitant mortality assumptions use a combination of base mortality rates, which are generally set by reference to recent experience, and expected future changes in mortality. The latter uses company-specific considerations, along with data provided by the Continuous Mortality Investigation Bureau in the UK and the Canadian Institute of Actuaries in Canada.
• Department for Work and Pensions (DWP) rebates are deemed to be new single premiums
For Germany, new business comprises new contracts written into the equity holder owned funds during the period (with the exception of vesting annuities for tax layer 1 deferred annuities sold before September 2009). NBC for Germany is calculated assuming a specific level of future premium indexation. Similarly, it is assumed that premiums on ‘low start’ policies increase at the end of the low start period.
New business contribution (NBC) The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries. NBC is calculated as at the end of the reporting period.
Present value of new business premiums (PVNBP) New business sales are expressed as PVNBP. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate.
The opening and closing EEV numbers for covered business are determined on an after-tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. EEV attributable tax and EEV profit before tax are derived by grossing up EEV profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of EEV after-tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to new business.
During 2009, a loan was made to the HWPF by the Company, repayment of which is contingent on the emergence of recourse cash flows and surplus in the HWPF (contingent loan agreement). A transfer to equity holders was then made to transfer the remaining unallocated surplus to equity holders without equity holder tax arising. As a result of this, the market risk associated with unallocated surplus was reduced. Future transfers to equity holders from the HWPF will, in the first instance, take the form of repayments under the contingent loan agreement. Such transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers to equity holders will move towards the standard rate of corporation tax.
The liabilities in respect of the UK subordinated debt plus the subordinated debt issued by Canada form part of covered business and have been deducted at market value within EEV. The Canada subordinated liability is owned by a non-covered subsidiary of the Group, where the asset is valued on an amortised cost basis. Total Group EEV has been adjusted to exclude the difference between the market value and the amortised cost value of the Canada subordinated liability.
Operating profit/(loss) before tax from continuing operations 220 125 187 40 (28) - 544
Investment for transformation and growth (61) (34) (35) (15) (4) - (149)
Operating profit/(loss) after tax from continuing operations 198 76 90 7 (35) - 336
Tax on non-operating items 9 - (23) - 5 - (9)
EEV operating profit before tax from continuing operations 461 324 104 100 - 989
Tax on EEV operating profit (115) (80) (26) (44) - (265)
EEV non-operating (loss)/profit after tax and EEV profit after tax from discontinued operations (322) (108) 53 (22) 44 (355) (15)
EEV operating profit before tax from continuing operations 428 250 93 16 - 787
4.3 Reconciliation of operating profit to EEV capital and cash generation
UK Investment management Canada International Other Total 2011 £m £m £m £m £m £m
Look through to investment management 36 (41) 2 3 - -
EEV operating profit after tax – PVIF 138 - 82 66 - 286
EEV operating profit/(loss) after tax from continuing operations 389 54 240 71 (30) 724
Operating profit/(loss) before tax from continuing operations 234 103 110 15 (37) 425
Operating profit/(loss) after tax from continuing operations 198 76 90 7 (35) 336
Impact of different treatment of assets and actuarial reserves (20) - 4 2 - (14)
EEV operating capital and cash generation from continuing operations 219 24 109 (30) (35) 287
EEV operating profit after tax – PVIF 83 - 74 94 - 251
4.4 Group assets under administration and net flows Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included in the statement of financial position. In addition, certain assets are excluded, for example deferred acquisition costs, intangibles and reinsurance assets.
Conventional with profits (excluding annuities) 6.6 0.2 (1.7) (1.5) 0.2 5.3
Closing AUA at 31 Dec 2010 £bn £bn £bn £bn £bn £bn
Market and other movements include the external transfer of the UK money market funds.
3 In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
Individual insurance, savings and retirement 852 (898) (46) 734 (904) (170)
Individual insurance, savings and retirement 223 (238) (15) 225 (245) (20)
SIPP is included within UK mutual funds net flows in the third party investment operations. 2 Standard Life Wealth has been disclosed separately from Individual SIPP for the first time in 2011 and an elimination line has been added to remove the double count between Wealth and Ireland. The 2010 comparatives have not been restated. 3 UK long-term savings include a total net outflow of £622m in relation to conventional with profits business (2010: net outflow £449m). Of this, a net outflow of £207m is in relation to annuities business (2010: net outflow £209m). 4 Includes net flows in respect of Standard Life's share of the India and China JV businesses.
Standard Life Wealth has been disclosed separately from Individual SIPP for the first time in 2011 and an elimination line has been added to remove the double count between Wealth and Ireland. The 2010 comparatives have not been restated. 2 Includes net flows in respect of Standard Life's share of the India and China JV businesses.
4.5 Analysis of new business Long-term savings operations new business 12 months ended 31 December 2011
12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 2010 Change
Individual insurance, savings and retirement 743 624 4 4 783 662 18% 17%
Wholly owned long-term savings 1,567 1,313 86 77 2,275 1,929 18% 18%
3 % change is calculated on the figures rounded to millions.
Total worldwide investment products excluding money market and related funds 41,858 8,079 (5,884) 2,195 (234) 1,961 43,819
UK money market funds and India cash funds5 5,388 (120) - (120) (3,994) (4,114) 1,274
Total third party assets under management excluding money market and related funds 66,225 13,038 (8,638) 4,400 (122) 4,278 70,503
Standard Life Investments – total assets under management 156,874 154,876 1 Included within mutual funds are cash inflows which have also been reflected in UK and Canada mutual funds new business sales and net flows for UK mutual funds, an element of UK non-insured SIPP and Canada mutual funds.
Individual insurance, savings and retirement 195 196 - 1 199 205 (3%) (3%)
Wholly owned long-term savings 417 450 27 28 680 675 1% 1%
Total worldwide long-term savings 2,983 3,236 189 186 4,142 4,272 (3%) (3%)
Total worldwide investment products excluding money market and related funds 42,543 1,858 (1,259) 599 677 1,276 43,819
Total third party assets under management comprise the investment business noted above together with third party insurance contracts. New business relating to third party insurance contracts is disclosed as insurance business for reporting purposes. An analysis of total third party assets under management is shown below.
Third party insurance contracts (new business classified as insurance products) 24,962 1,199 (651) 548 1,174 1,722 26,684
Amounts shown reflect Standard Life's share of the joint venture company's new business.
The total Group external exposure to investment property and financial assets has been segmented below based on the stakeholder sub-group with which the market and credit risk relating to those assets lies.
Shareholders are directly exposed to loans of £2.9bn (2010: £2.8bn) which primarily comprise the Canadian non-segregated funds commercial mortgage book. This mortgage book is deemed to be of very high quality.
Level 3: Fair values measured using inputs that are not based on observable market data (unobservable inputs)
4.7 Fair value hierarchy of financial instruments continued Policyholder (participating) exposure
Total operating cost base in respect of continuing operations 983 923 132 Standard Life
Global investment management Canada International Other Total 2011 £m £m £m £m £m £m
Movement in investing for transformation and growth costs5 (8) (3) 1 (3) 1 (12)
Closing operating cost base in respect of continuing operations 385 257 190 99 52 983
Remove costs relating to discontinued businesses (87) - - - - (87)
Opening operating cost base in respect of continuing operations 339 189 147 97 55 827
5 Movements in the operating cost base, which are specifically identifiable and relate to investing for transformation and growth.
The Preliminary Results 2011 are published on the Group’s website at www.standardlife.com