Under some contracts effected in connection with house purchase, provided the original contract is still in force, the following options can normally be exercised at any time before the 55th birthday of the life assured: • Future insurability option under which a new contract can be effected on then current premium rates, in connection with a further loan, up to the level of life and basic critical illness cover available on the original contract, without any further evidence of health
UK and Irish unit linked life contracts (fee business via RCF) This class of business comprises principally unit linked investment bonds (e.g. Capital Investment Bonds), classified as nonparticipating investment contracts and the unit linked investment element of Homeplan contracts, classified as non-participating insurance contracts. No significant guarantees, other than the guaranteed death benefit on Homeplan contracts, are provided under these contracts.
SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF with Canada Life International Re (the reinsurer). In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 41(c) on credit exposure and Note 6 for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.
The total liability at 31 December 2015 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,811m (2014: £1,972m) and this represents approximately 21% (2014: 21%) of the total liability for UK annuity contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.
UK other non-participating contracts (spread/risk business via RCF) This class of business consists primarily of deferred annuities that provide guaranteed annuity payments from the retirement age associated with the relevant pension plan. The payments depend on the survival of a life or lives with or without a guarantee period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in UK RPI. These contracts are classified as non-participating insurance contracts.
(b)(iii) India and China – Insurance and investment contracts Unit linked life contracts (fee business) The main contract issued by SLA is the Harvest 101 product. This contract was closed to new business in 2015. It is a regular premium savings product with a term ranging from five to 25 years. The customer has the option to invest in unit linked funds offered by SLA and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the 132 Standard Life
initial account value is paid subject to a USD10,000 cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
Universal Life contracts (fee business and spread/risk business) The main Universal Life contract, Perspecta, was a non-participating whole life assurance contract. Perspecta was closed to new business in 2012. Premiums could have been invested in term investment funds, segregated funds or mutual funds. Premiums invested in term investment funds were placed on deposit at rates of interest guaranteed for periods from one day to 20 years. The rate offered was determined with reference to the financial conditions at the time of premium payment. The contract provided life cover and, in addition, on death the value of the segregated funds was guaranteed never to be less than 75% of premiums deposited into those funds, adjusted for expense charges and any withdrawals.
Premiums invested in term funds were placed on deposit at rates of interest guaranteed for a selected term. The rate offered depended on financial conditions at the time of deposit. Proceeds at the end of a guarantee period could be reinvested at the then current rates. The components of contracts invested in term funds were classified as non-participating investment contracts, for all contracts sold prior to May 2014. Individual Ideal Savings term funds issued after 1 May 2014 had an accidental death benefit in the contract, and were therefore classified as non-participating insurance contracts.
Registered retirement income plans (fee business and spread/risk business) Registered retirement income plans were non-participating single premium contracts. These contracts permitted investment into term funds or segregated funds on a similar basis to the individual savings plans described above. Regular withdrawals were made from the account to provide an income during retirement. The policyholder may have varied the amounts withdrawn subject to the regulatory minimum. The components of contracts invested in term funds were classified as non-participating investment contracts. The components of individual contracts invested in segregated funds were classified as non-participating insurance contracts.
Participating individual life contracts (no impact on equity holder profits in the absence of burnthrough) Participating whole life and endowment assurance contracts contained scales of minimum guaranteed surrender values and paid-up policy amounts. Participating whole life contracts issued prior to 1985 included a guaranteed annuity rate option where the lump sum death benefit could be converted into an annuity on guaranteed terms or retained by SLCC whereupon the value accumulated at an annual interest rate of at least 2.5%.
Non-participating life contracts (spread/risk business) This category comprised whole life and term assurance contracts where the guaranteed benefit was payable on death and was closed to new business. These contracts were classified as non-participating insurance contracts.
Foreign exchange gains on instruments other than those at fair value through profit or loss 19 26
5. Fee income Fee income from investment contracts, fund platforms and third party funds under management relates to the provision of investment management and administration services, and is recognised as services are provided and it is almost certain that the fee income will be received. Where fee income is received in advance (front-end fees), this income is deferred and recognised as a deferred income liability until the services have been provided (see Note 38).
Interest payable on deposits from reinsurers 34 32 Premium Adjustments 8 607 Expenses under arrangements with reinsurers from continuing operations 42 639
The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within its Heritage With Profits Fund. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. Interest is payable on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the value of the ring fenced assets and the deposit amount, which has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer.
Interest expense 12 11 Commission expenses 170 234 Staff costs and other employee-related costs 8 635 577 Operating lease rentals 21 30 Auditors’ remuneration 9 7 7 Depreciation of property, plant and equipment 20 16 14 Impairment losses on property, plant and equipment 20 4 - Impairment losses reversed on property, plant and equipment 20 (5) (4) Amortisation of intangible assets 16 51 41 Impairment losses on intangible assets 16 9 47 Other 506 457 1,426 1,414 Acquisition costs deferred during the year 17 (83) (143) Impairment of deferred acquisition costs 17 73 9 Amortisation of deferred acquisition costs 17 124 150 Total other administrative expenses from continuing operations 1,540 1,430
Notes £m £m £m £m £m £m The aggregate remuneration payable in respect of employees: Wages and salaries 491 12 503 456 114 570 Social security costs 57 1 58 55 9 64 Pension costs 37
Defined benefit plans 25 2 27 24 15 39 Defined contribution plans 27 - 27 15 3 18
Information in respect of Directors’ remuneration is provided in the Directors’ remuneration report on pages 75 to 98.
Discontinued operations Total £m £m £m £m £m £m Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated financial statements 0.3 - 0.3 0.3 - 0.3
In December 2014 the Group announced that the UK staff defined benefit pension plan would be closed to future accrual effective April 2016. All employees in the closing plan will be transferred to the UK defined contribution plan for future service and employer contributions into the defined contribution plan will be amended. Following this restructuring of the pension plans, operating profit from continuing operations for the year ended 31 December 2015 has been increased by £35m (2014: £15m) so that operating profit reflects the expected long-term pension expense for the period and is therefore more indicative of the long-term operating performance of the Group. As a result £35m (2014: £15m) of pension costs that are included in staff costs in the consolidated income statement for the year ended 31 December 2015, are included in restructuring and corporate transaction expenses in determining operating profit from continuing operations.
Closure of Singapore1 (7) - Restructuring and corporate transaction expenses used to determine operating profit from continuing operations 115 109 1 Dubai and Singapore businesses, the closure of which were announced in November 2014 and June 2015 respectively, are included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Dubai and Singapore do not constitute discontinued operations and are included under continuing operations in the consolidated income statement.
Restructuring and corporate transaction expenses of £10m (2014: £31m) are used to determine operating profit before tax from discontinuing operations. These expenses relate to the sale of the Canadian business and the closure of the Dubai and Singapore businesses.
11. Taxation continued (a) Tax charge in the consolidated income statement (a)(i) Current year tax expense
Adjustment to tax expense in respect of prior years 12 (7)
Current tax recoverable and current tax liabilities at 31 December 2015 were £168m (2014: £191m) and £113m (2014: £172m) respectively. Current tax assets and liabilities at 31 December 2015 and 31 December 2014 are expected to be recoverable or payable in less than 12 months.
Policyholder tax (net of tax at UK standard rate) 107 196
Tax effect of accounting for share of profit from associates and joint ventures (9) (8)
Adjustment to deferred tax expense in respect of prior years (4) (6)
Total tax expense from continuing operations for the year 211 292
The standard rate of UK corporation tax changed from 21% to 20% with effect from 1 April 2015. Accordingly, the effective tax rate for the accounting period is 20.25% (2014: 21.5%). The UK tax rate will reduce to 19% from 1 April 2017 and 18% from 1 April 2020. These future rate changes have been taken into account in the calculation of the UK deferred tax balance at 31 December 2015.
(c) Tax relating to items taken directly to equity 2015 2014 £m £m
(d) Deferred tax assets and liabilities (d)(i) Movements in net deferred tax liabilities
Amounts credited directly to equity in respect of employee share-based payment schemes 4 5
Transfer to current tax for vested employee share-based payment schemes (5) (6)
A deferred tax asset of £9m (2014: £10m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investments. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against the reversal of deferred tax liabilities and anticipated taxable profits and gains based on business plans. The losses do not have an expiry date.
12. Discontinued operations The Group classifies as discontinued operations areas of business which have been disposed of or are classified as held for sale at the year end and which either, represent a separate major line of business or geographical area, or are part of a plan to dispose of one. The results of discontinued operations are shown separately on the face of the consolidated income statement from the results of the remaining (continuing) parts of the Group’s business.
Profit before tax expense attributable to equity holders’ profits 1,167 188
Total tax expense 20 61 Less: Tax attributable to policyholders’ returns - - Tax expense attributable to equity holders’ profits 20 61 Profit for the year from discontinued operations 1,147 127
Attributable to: Equity holders of Standard Life plc 1,147 127 Non-controlling interests - - 1,147 127
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 5 5
Items that may be reclassified subsequently to profit or loss: Fair value gains on cash flow hedges 58 2
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (4) (5)
Total items that were transferred to profit or loss on disposal of subsidiaries (237) -
Other comprehensive income/(expense) for the year from discontinued operations (187) (18)
The net cash flows from investing activities for year ended 31 December 2015 represents the cash and cash equivalents of the operations disposed of at the date of disposal and do not include cash consideration received of £2,100m.
Basic earnings per share was 69.4p (2014: 21.1p) and diluted earnings per share was 69.1p (2014: 21.0p) for the year ended 31 December 2015. The following table shows the split between continuing and discontinued operations, and details of alternative earnings per share.
Share of associates’ and joint ventures’ tax expense (13) - (5) -
Profit attributable to equity holders of Standard Life plc 276 1,147 376 127
Dilutive effect of share options and awards 9 9 12 12
Diluted alternative earnings per share (post tax) 26.1 0.1 21.7 3.5 1 Dubai and Singapore businesses, the closure of which was announced in November 2014 and June 2015 respectively, are included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Dubai and Singapore do not constitute discontinued operations and are included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit above includes the reclassification of Dubai and Singapore results between discontinued and continuing operations.
As discussed in Note 28 the Company undertook a share consolidation during the year followed by a return of value to shareholders. In accordance with IAS 33, earnings per share have not been restated following the share consolidation as there was an overall corresponding change in resources. As a result of the share consolidation earnings per share from continuing operations for the year ended 31 December 2015 is not directly comparable with the prior year.
From 2016 onwards we intend to make a change to the operating profit accounting policy so that items which, due to their size or nature, are not indicative of the long-term operating performance of the Group are excluded from operating profit (even if they are within the control of management). The objective of the change is to make operating profit a more useful indication of the long-term performance of the Group.
The expected rates of return for debt securities, equity securities and property are determined separately for each of the Group’s operations. The expected rates of return for equity securities and property, with the exception of the Canadian operations, are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium or property risk premium, respectively. The expected rates of return on equity securities and property for Canadian operations included in discontinued operations were determined by the Appointed Actuary in Canada until the sale of the Canadian business on 30 January 2015.
The principal assumptions, as set at the start of the year, in respect of gross investment returns underlying the calculation of the expected investment return for equity securities and property are as follows: In respect of debt securities at fair value through profit or loss, the expected rate of return is determined based on the average prospective yields for the debt securities actually held or, in respect of the Canadian operations was determined by the Appointed Actuary in Canada. For debt securities classified as available-for-sale that support liabilities measured at amortised cost, the expected rate of return is the effective interest rate adjusted for an allowance, established at initial recognition, for expected defaults. If debt securities classified as available-for-sale are sold, any gain or loss is amortised within the expected return over the period to the earlier of the maturity date of the sold debt security, or the redemption date of the supported liability.
For the year ended 31 December 2015, short-term fluctuations in investment return and economic assumption changes resulted in losses of £63m (2014: £17m gains) from continuing operations and gains of £63m (2014: £71m gains) from discontinued operations. Short-term fluctuations in investment return from continuing operations relate principally to investment volatility in UK annuities, and in respect of the Group’s subordinated liabilities and assets backing those liabilities. Short-term fluctuations in investment return from discontinued operations relate principally to investment volatility in Canada non-segregated funds.
The final dividend for the year ended 31 December 2014 and subsequent dividends have been paid on the lower adjusted number of ordinary shares following the share consolidation.
The final recommended dividend will be paid on 24 May 2016 to shareholders on the Company’s register as at 15 April 2016, subject to approval at the Annual General Meeting on 17 May 2016. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2015 is 18.36p (2014: 17.03p).
The Group has also recognised as intangible assets software which has been developed internally and other purchased technology which is used in managing and executing our business. Costs to develop software internally are capitalised after the research phase and when it has been established that the project is technically feasible and the Group has both the intention and ability to use the completed asset.
Intangible assets are recognised at cost and charged to the income statement on a straight-line basis over the length of time the Group expects to derive benefits from the asset.
Gross amount At 1 January 2014 111 29 30 202 57 429 Reclassified to held for sale during the year - - - - (4) (4) Additions 105 208 - 33 10 356 Other - - - (1) - (1) At 31 December 2014 216 237 30 234 63 780
Additions 3 3 - 55 3 64 Disposals and adjustments - - - (1) - (1) Other - - - (1) - (1) At 31 December 2015 219 240 30 287 66 842 Accumulated amortisation At 1 January 2014 - - (18) (93) (18) (129) Reclassified to held for sale during the year - - - - 2 2 Amortisation charge for the year - (11) (4) (21) (5) (41) Impairment losses recognised - (43) - (4) - (47) At 31 December 2014 - (54) (22) (118) (21) (215)
Additions to investment management contracts acquired through business combinations during the year to 31 December 2014 related to the acquisition of Ignis and comprised life company contracts of £80m, institutional client contracts of £90m and retail client contracts of £38m. Each of these categories formed a cash-generating unit. The recoverable amount of the institutional client contracts cash-generating unit at 31 December 2015 was £36m (2014: £44m) which was its value in use. The impairment loss of £5m (2014: £43m) recognised during the year to 31 December 2015 relates to this decrease in recoverable amount.
Estimates and assumptions The key estimates and assumptions in relation to intangible assets are: • Identification and valuation of intangible assets arising from business combinations • Determination of useful life • Determination of the recoverable amount in relation to impairment assessments
Following the impairment the remaining carrying value of the institutional client contracts at 31 December 2015 is £36m (2014: £44m). Increasing the discount rate by 2% or decreasing the operating margin by 5% would result in an additional impairment loss of £3m or £5m respectively. Further if it was assumed that there would be no future inflows into the Absolute Return Government Bond Fund this would result in an additional impairment loss of £8m.
The carrying value of the retail client contracts at 31 December 2015 is £34m (2014: £36m). The recoverable amount of the retail contracts has been calculated using a discount rate of 11% and an operating margin of 40%. Increasing the discount rate by 2% or decreasing the operating margin by 5% would result in an impairment loss of £3m or £5m respectively.
The carrying value of the life client contracts at 31 December 2015 is £66m (2014: £77m). Increasing the discount rate by 2% or decreasing the operating margin by 5% would not result in an impairment loss and therefore would have no impact on profit after tax. The remaining amortisation period of the life contracts is 9 years.
The amount of deferred acquisition costs expected to be recovered after more than 12 months is £558m (2014: £676m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £411m (2014: £460m). Included within the impairment charge of £73m (2014: £9m) is £59m (2014: £nil) in relation to an impairment of deferred acquisition costs in Hong Kong primarily as a result of a review of expense and reserving assumptions following regulatory change. The key non-economic assumptions used in the impairment testing of Hong Kong deferred acquisition costs were those relating to future persistency and expenses. The remaining impairment charge of £14m relates to impairment of deferred acquisition costs in Singapore (2014: £nil) resulting from the closure of the business.
18. Investments in associates and joint ventures Associates are entities where the Group can significantly influence decisions made relating to the financial and operating policies of the entity but does not control the entity. For entities where voting rights exist, significant influence is presumed where the Group holds between 20% and 50% of the voting rights.
Associates, other than those accounted for at fair value through profit or loss, and joint ventures are accounted for using the equity method from the date that significant influence or shared control, respectively, commences until the date this ceases with consistent accounting policies applied throughout.
Investments in associates and joint ventures accounted for using the equity method 292 242 Investments in associates measured at FVTPL 21 5,425 4,264 Loans to associates and joint ventures 21 2 2 Total investments in associates and joint ventures 5,719 4,508
Summarised financial information of associate: Revenue 1,961 2,371 127 94 Profit after tax 72 70 46 39 Other comprehensive income - 2 - - Total assets 7,529 6,610 267 215 Total liabilities 7,228 6,366 131 105 Net assets 301 244 136 110 Interest held 26% 26% 40% 40%
The Group’s interest in the HDFC Standard Life Insurance Company Limited has been built up over time to its current level of 26% (2014: 26%). The difference between the carrying value of this associate and the Group’s current share of net assets is due to additional investments being made at fair value rather than book value.
Insurance Company Country of incorporation and registration China 2015 2014 £m £m
If owner occupied property was measured using the cost model, the historical cost before impairment would be £76m (2014: £155m). As the expected residual value of owner occupied property is in line with the current fair value, no depreciation is currently charged.
Derivative financial assets 23 - 2,444 - - - - 2,444 Equity securities and interests in pooled investment funds 41 71,679 - - - - - 71,679
Derivative financial assets 23 - 4,012 - - 8 1 4,021 Equity securities and interests in pooled investment funds 41 71,327 - - - - - 71,327
22. Loans Loans are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method, less any impairment losses.
Loans with variable rates and fixed interest rates are £67m and £744m respectively (2014: £84m and £316m respectively). Loans that are expected to be recovered after more than 12 months are £138m (2014: £169m).
transferred to retained earnings through the consolidated income statement due to the disposal of the Canadian business on 30 January 2015 (2014: £nil).
Equity derivatives: Bond derivatives: Interest rate derivatives: Foreign exchange derivatives: Other derivatives: Derivative financial instruments held for trading 153,277 2,444 1,254 119,963 4,012 1,681
23. Derivative financial instruments continued (d) Maturity profile continued Within years 11-15 years
Greater than 20 years Total 2014 £m £m £m £m £m £m £m
The amount of other assets expected to be recovered after more than 12 months is £26m (2014: £37m).
26. Assets and liabilities held for sale Assets and liabilities held for sale are presented separately in the consolidated statement of financial position and consist of operations and individual non-current assets whose carrying amount will be recovered principally through a sale transaction and not through continuing use.
Operations held for sale include certain investment vehicle subsidiaries acquired in the year where it is highly probable that the Group will lose control within 12 months. For these subsidiaries their assets are measured collectively as the total of the fair value of the subsidiary and the value of its liabilities. Operations held for sale also include newly established investment vehicles which the Group has seeded but is actively seeking to divest from. For these investment funds, which do not have significant liabilities or non-financial assets, financial assets continue to be measured based on the accounting policies that applied before they were classified as held for sale.
Assets of operations held for sale Canadian business - 29,254 Investment vehicles 207 63 Investments in associates at FVTPL 33 11 Investment property 87 10 Assets held for sale 327 29,338 Liabilities of operations held for sale 83 28,033
The assets and liabilities of operations held for sale at 31 December 2014 primarily related to the Group’s Canadian business which was sold on 30 January 2015 and included the SLAL Canada Branch, the assets and liabilities of which were transferred on 31 December 2015. Refer to Note 1 for further details. The breakdown of these assets and liabilities at 31 December 2014 was as follows: Financial instruments Other
Other assets - - - - 34 34 Assets held for sale - - - - - - Cash and cash equivalents 27 - - - 709 - 709 Total assets of operations held for sale
Insurance contracts Other Total 31 December 2014 Notes £m £m £m £m £m £m Liabilities of operations held for sale
Non-participating insurance contract liabilities 33 - - - 9,425 - 9,425 Non-participating investment contract liabilities 13,734 - 2,118 - - 15,852
Subordinated liabilities 36 - - 223 - - 223 Pension and other post-retirement benefit provisions - - - - 101 101
28. Issued share capital and share premium Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The Company’s share capital consists of the number of ordinary shares in issue multiplied by their nominal value. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in share premium.
Shares issued in respect of share options 642,089 10,046,128 2 17,469,894 1 New shares issued immediately prior to share consolidation 6 - - - -
The Company can issue shares to satisfy awards granted under employee incentive plans which have been approved by shareholders. Details of the Group’s employee plans are provided in Note 47.
Unclaimed Asset Trust 14,709,934 21,143,650 30. Retained earnings The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.
Transfer from equity compensation reserve for vested employee share-based payments 31 32 27 Transfer from revaluation of owner occupied property reserve on sale of owner occupied property - 4
Transfer from other reserves on disposal of a subsidiary 1 827 -
Fair value gains on available-for-sale financial assets - - - - 7 - - - - - 7 Revaluation of owner occupied property
With profits funds: Associated UDS movement recognised in other comprehensive income
Transfer between reserves on disposal of subsidiaries 1 (20) - - - - (1,028) - - 221 - (827)
Balance at 31 December 2015 comprises: Total reserve before with profits fund adjustment 36 - 206 - 1 2,080 53 241 (1,879) 488 1,226 Total with profits fund adjustment
Fair value gains on cash flow hedges - 3 - - - - - - - 3
Aggregate tax effect of items recognised in other comprehensive income - - - - (11) - - - - (11)
Total items recognised in other comprehensive income (1) 3 (43) 15 38 - - - - 12
Reserves credit for employee share-based payment schemes - - - - - - 27 - - 27
Total items recognised directly within equity (4) - - - - - (1) - - (5)
Balance at 31 December 2014 comprises: Total reserve before with profits fund adjustment 66 3 324 54 13 3,108 52 241 (2,100) 1,761
Total with profits fund adjustment (46) - (214) - - - - - - (260)
(b) Third party interest in consolidated funds The movement in third party interest in consolidated funds during the year was: At 1 January 15,805 16,058 Reclassified as held for sale during the year - (965) Foreign exchange differences on translating foreign operations (39) (137) Change in liability for third party interest in consolidated funds 531 758 Net contributions and movements between classifications of investments 1,166 328 Distributions (267) (237) At 31 December 17,196 15,805
Hybrid contracts Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts the product class is separated into the insurance element, a non-participating investment element and a participating investment element, so that each element is accounted for separately.
Embedded derivatives Where a contract contains a feature that meets the definition of both an insurance contract and a derivative, the contract is classified in its entirety as an insurance contract.
Claims paid on insurance contracts and participating investment contracts are recognised as expenses in the consolidated income statement. Maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the insurance liability. Death claims and all other claims are accounted for when notified.
(iv) Measurement – participating contract liabilities Participating contract liabilities are analysed into the following components: • Participating insurance contract liabilities • Participating investment contract liabilities • Present value of future profits on non-participating contracts, which is treated as a deduction from gross participating contract liabilities • Unallocated divisible surplus
• Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to adjust the value of participating insurance and participating investment contract liabilities.
If a deficiency is found in the liability (i.e. the carrying value amount of its insurance liabilities is less than the future expected cash flows), that deficiency is provided for in full. The deficiency is recognised in the consolidated income statement.
(a) Insurance contracts and participating investment contracts 2015 2014 Notes £m £m
Less: Non-participating insurance contract liabilities classified as held for sale 26 - (9,425)
Less: Participating insurance contract liabilities classified as held for sale - (702)
Less: Participating investment contract liabilities classified as held for sale - (2)
Less : Unallocated divisible surplus classified as held for sale - -
Less: Participating contract liabilities classified as held for sale 26 - (704)
Reinsurance contracts Net 2015 £m £m £m £m £m £m At 1 January 15,397 21,841 15,191 52,429 (6,036) 46,393 Expected change (1,042) (808) (902) (2,752) 388 (2,364) Methodology/modelling changes 17 19 (22) 14 (3) 11 Effect of changes in Economic assumptions 148 (491) (17) (360) 101 (259) Non-economic assumptions (225) (47) 182 (90) 8 (82) Effect of Economic experience 315 129 152 596 11 607 Non-economic experience 107 (378) 142 (129) 15 (114) New business 37 964 27 1,028 - 1,028 Total change in contract liabilities (643) (612) (438) (1,693) 520 (1,173) Foreign exchange adjustment (471) (23) (37) (531) 1 (530) At 31 December 14,283 21,206 14,716 50,205 (5,515) 44,690
These components are apportioned in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows: 2015 2014 £m £m Participating contract liabilities before apportionment 28,890 31,216 Apportionment of non-participating PVFP 109 76 28,999 31,292
(d) Movement in components of unallocated divisible surplus (UDS) The movement in UDS was as follows: 2015 2014 £m £m At 1 January 688 680 Change in UDS recognised in the consolidated income statement (117) (71) Change in UDS recognised in other comprehensive income 3 (2) Foreign exchange adjustment 81 81 At 31 December 655 688
Estimates and assumptions continued (i) Non-participating insurance contracts continued The valuation interest rates used are: 1. Business held within the PBF
Group after vesting (business written prior to 10 July 2006) Males: 111.6% RMV00 Males: 110.7% RMV00
For non-participating immediate and deferred annuity contracts, an explicit allowance for maintenance expenses is included in the liabilities. An allowance for investment expenses is reflected in the valuation rate of interest.
The table above shows the changes in the basis between 2014 and 2015. The risk discount rates are calculated on a market consistent basis and are set equal to the risk free rate plus a margin to allow for the non-market risks inherent in the cash flows being discounted.
At 1 January 88,207 97,659 Reclassified as held for sale during the year - (15,097) Contributions 12,561 11,261 Initial charges and reduced allocations - (3) Account balances paid on surrender and other terminations in the year (10,564) (10,230) Change in non-participating investment contract liabilities recognised in the consolidated income statement 3,363 5,362 Foreign exchange adjustment (223) (306) Recurring management charges (450) (439) At 31 December 35 92,894 88,207 35. Financial liabilities Management determines the classification of financial liabilities at initial recognition. The majority of the Group’s financial liabilities are designated as fair value through profit or loss (FVTPL). The methods and assumptions used to determine fair value of financial liabilities designated at FVTPL are discussed in Note 43. Financial liabilities which are not derivatives and not FVTPL are financial liabilities measured at amortised cost.
Financial liabilities measured at amortised cost Total 2015 Notes £m £m £m £m £m Non-participating investment contract liabilities 41 92,890 - - 4 92,894 Deposits received from reinsurers 41 - - - 5,134 5,134 Third party interest in consolidated funds 41 17,196 - - - 17,196 Subordinated liabilities 36 - - - 1,318 1,318 Derivative financial liabilities 23 - 1,254 - - 1,254 Other financial liabilities 39 - - - 2,900 2,900 Total 110,086 1,254 - 9,356 120,696
Amounts due under the subordinated guaranteed bonds and Mutual Assurance Capital Securities are classified as liabilities. This classification is determined by the interaction of these arrangements with the internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company, as set out in the internal subordinated loan note section below.
The bonds are perpetual securities and as such have no fixed redemption date. However, the bonds are redeemable at par at the option of the Company on 12 July 2027 and on every fifth anniversary thereafter. If the bonds are not redeemed on 12 July 2027, the interest rate payable will be reset to 2.85% over the gross redemption yield on the appropriate five year benchmark gilt on the reset date. The Company can elect to defer the payment of interest on the bonds. Interest will accrue on any interest deferred at the then current rate of interest on the bonds. Any interest deferred becomes immediately due and payable on: the date of declaration or payment of dividends, interest or other payment in respect of any equally ranked securities or securities that rank junior to the bonds; the date any of the securities are purchased by the Company, SLAL or a subsidiary of the Company; the date fixed for any payment under a guarantee that ranks junior to the bonds; the date of any redemption or purchase of bonds; or the commencement of winding up of the Company or SLAL.
Internal subordinated loan note SLAL issued a subordinated loan note to the Company on 10 July 2006. The loan note at all times ranks senior to ordinary share capital and junior to Innovative Tier 1 capital of SLAL. There is no fixed redemption date for the note, but interest payments cannot be deferred and must be paid on the date they become due and payable. The note is ranked junior to the subordinated guaranteed bonds and MACS, therefore any interest deferred on the Sterling guaranteed bonds or MACS becomes immediately due and payable on the date of interest payment in respect of the note. This removes the discretionary nature of the interest payments on the Sterling guaranteed bonds and MACS.
The Group’s liabilities in relation to its defined benefit plans are determined by annual actuarial calculations. The Group has funded these liabilities in relation to its principal defined benefit plans by ring-fencing assets in an independent trustee-administered fund. The Group has further smaller defined benefit plans which are unfunded.
For defined contribution plans, the Group pays contributions to separately administered pension insurance plans. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised in current service cost in the consolidated income statement as staff costs and other employee-related costs when they are due.
At the 31 December 2013 triennial actuarial valuation the plan was 112% funded on the Trustees’ technical provisions basis.
The administrative expenses of this plan for the year ended 31 December 2015 were met by the plan. The administrative expenses of this plan for the year ended 31 December 2014 were met by the Group.
The Group currently contributes 9% of pensionable salary to each employee’s plan.
All UK based employees will be offered membership of the plan from April 2016 – including those currently in the defined benefit plan.
During 2015 the terms of a plan amendment to the UK defined benefit plan were agreed which resulted in closure to future accrual from April 2016. This plan amendment did not generate a past service cost. An additional pension contribution of 6% of pensionable salary into the defined contribution plan for eligible members of the defined benefit plan on 16 March 2015 was made on 16 April 2015. A further additional contribution of 6% will be made on 16 April 2016. These contributions have been accrued over the vesting period and are included in current service cost and in the cost of defined contribution plans in Note 8.
UK Other Total UK Other Total Canada1 £m £m £m £m £m £m £m
Effect of limit on plan surpluses Total 2015 £m £m £m £m £m At 1 January (2,922) 4,052 1,130 (414) 716 Total expense
Current service cost (53) - (53) - (53) Interest (expense)/income (101) 131 30 - 30 Administrative expenses (2) - (2) - (2)
Total expense recognised in consolidated income statement (156) 131 (25) - (25) Remeasurements
Remeasurements Return on plan assets, excluding amounts included in interest income - 896 896 - 896
(d) Plan assets Investment strategy is directed by the relevant trustee boards who pursue different strategies according to the characteristics and maturity profile of each plan’s liabilities. To provide more information on the approach used to determine and measure the fair value of the plan assets, the fair value hierarchy has been used as defined in Note 43. Those assets which cannot be classified as level 1 have been presented together as level 2 or 3. The distribution of the fair value of the assets of the Group’s funded plans at 31 December 2015 is as follows: £m £m £m £m £m £m £m £m
Assets measured at fair value based on level 1 inputs Derivatives 7 38 - - - - 7 38 Equity securities and interests in pooled investment funds 850 1,220 48 49 - 146 898 1,415 Debt securities 2,029 1,239 - - - - 2,029 1,239 Total assets measured at fair value based on level 1 inputs 2,886 2,497 48 49 - 146 2,934 2,692
Assets measured at fair value based on level 2 or 3 inputs Derivatives (9) 827 (3) 13 - - (12) 840 Equity securities and interests in pooled investment funds 185 92 - - - - 185 92 Debt securities 589 325 - - - 59 589 384 Qualifying insurance policies 4 4 - - - - 4 4 Total assets measured at fair value based on level 2 or 3 inputs 769 1,248 (3) 13 - 59 766 1,320
The principal economic assumptions for the plans which are based in part on current market conditions are shown below: 2015 2014
adjusted to assume that improvements continue to increase in the short-term before declining toward an ultimate long-term rate of 1.375%
(g) Risk (g)(i) Risks and mitigating actions The Group’s consolidated statement of financial position is exposed to movements in the defined benefit plans’ net asset. In particular, the consolidated statement of financial position could be materially sensitive to reasonably likely movements in the principal assumptions for the UK. By offering post-retirement defined benefit pension plans the Group is exposed to a number of risks. An explanation of the key risks and mitigating actions in place is given below.
In the UK plan pensions in payment are generally linked to CPI, however inflationary risks are hedged using RPI instruments due to lack of availability of CPI linked instruments. Therefore, the plan is exposed to movements in the actual and expected long-term gap between RPI and CPI.
(g)(ii) Sensitivity to principal assumptions The sensitivity of the UK defined benefit plan’s net assets to the principal assumptions is disclosed below. 2015 2014
Amortised to the consolidated income statement as fee income 5 (63) (66)
The amount of deferred income expected to be settled after more than 12 months is £178m (2014: £216m).
Cash collateral held in respect of derivative contracts 41 1,166 1,847
The amount of other liabilities expected to be settled after more than 12 months is £35m (2014: £15m).
The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic experience differing from that expected. This class of risk includes risks that meet the definition of insurance risk under IFRS 4 Insurance Contracts and other financial risks.
The risk that expense levels will be higher than assumed. This can arise from an increase in the unit costs of the company or an increase in expense inflation, either company specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can reflect an increase in liabilities or a reduction in expected future profits.
The risk that through our behaviours, strategies, decisions and actions the Group, or individuals within the Group, do not do the right thing and/or do not behave in a manner which: • Pays due regard to treating our customers and clients fairly • Is consistent with our disclosures and setting of customer and client expectations • Supports the integrity of financial markets
HWPF = Heritage With Profits Fund PBF = Proprietary Business Fund GWPF = German With Profits Fund GSMWPF = German Smoothed Managed With Profits Fund SHF = Shareholder Fund UKSMWPF = UK Smoothed Managed With Profits Fund 1 As discussed in Note 3 and above, unit linked and segregated funds does not include cash flows arising from unit linked or segregated fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked or segregated fund contracts. Such cash flows and liabilities are included in shareholder or participating business.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are borne by the policyholder. The shareholder’s exposure arises from the changes in the value of future fee based revenue earned on unit linked and segregated funds due to market movements.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are expected to be borne by the policyholder. The shareholder’s exposure is limited to changes in the value of future fee based revenue earned on unit linked and segregated funds due to market movements.
The assets and liabilities of the Group’s Canadian business were reclassified as held for sale in the consolidated statement of financial position for the year ended 31 December 2014 as detailed in Note 26 and are not included in the tables in this note.
41. Risk management continued (a) Overview continued (a)(ii) Consolidated financial position by risk segment continued
Equity securities and interests in pooled investment funds at FVTPL 52 31 8,187 9,658 56,307 55,471 7,133 6,167 71,679 71,327
Receivables and other financial assets 495 468 99 98 644 534 209 148 1,447 1,248
Non-participating investment contract liabilities 4 4 - - 92,890 88,203 - - 92,894 88,207
Third party interest in consolidated funds - - - - - - 17,196 15,805 17,196 15,805
Pension and other post-retirement benefit provisions 33 44 - - - - - - 33 44
Net inter-segment assets/(liabilities) 334 628 (367) (477) 41 (133) (8) (18) - 186 Standard Life
Quantitative market risk disclosures are not provided in respect of the assets of the unit linked and segregated funds since the shareholder is not exposed to market risks from these assets. The shareholder’s exposure to market risk on these assets is limited to variations in the value of future fee based revenue earned on the contracts as fees are based on a percentage of the fund value. The sensitivity to market risk analysis includes the impact on those statement of financial position items which are affected by changes in future fee based revenue due to the market stresses changing the value of assets held by the unit linked and segregated funds. The shareholder is also not exposed to the market risk from the assets held by third party interests in consolidated funds and non-controlling interests and therefore they have been excluded from the following quantitative disclosures.
In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £nil (2014: £19m) and investments in associates at FVTPL of £19m (2014: £16m). The participating business has interests in pooled investment funds of £72m (2014: £92m) and investments in associates at FVTPL of £531m (2014: £535m).
Participating business Office Industrial Retail Other Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 £m £m £m £m £m £m £m £m £m £m
The sensitivity of profit after tax to changes in interest rates for both the shareholder business and the participating business is included in the profit after tax sensitivity to market risk table, shown in section (b)(ii).
Other currencies include assets of £3m (2014: £15m) and liabilities of £7m (2014: £16m) in relation to the fair value of derivatives used to manage currency risk.
The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries, joint ventures and associates.
During 2015 the Group reaffirmed its strategy for hedging foreign currency risks in the shareholder business. The purpose of this strategy is to provide a consistent approach to managing foreign exchange risks in the shareholder business. This includes, within certain parameters, minimising currency volatility within the regulatory capital surplus and reducing the currency risk relating to dividend receipts from overseas operations. The Group does not separately hedge translation of reported earnings from overseas operations in the consolidated financial statements. The Group fully hedged the currency risk relating to the sale of its Canadian operations which it completed in January 2015.
(b)(ii) Sensitivity to market risk analysis The Group’s profit after tax and equity from continuing operations are sensitive to variations in respect of the Group’s market risk exposures and a sensitivity analysis is presented on the following pages. The analysis has been performed by calculating the sensitivity of profit after tax from continuing operations and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date applied to assets and liabilities other than those classified as held for sale. For each sensitivity ‘test’, the impact of a reasonably possible change in a single sensitivity factor is presented, while the other sensitivity factors remain unchanged. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.
Changes in equity security and property prices and/or fluctuations in interest rates will affect non-participating unit linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit linked and segregated funds is included in the sensitivity analysis where there is an impact on the value of other statement of financial position items, the change in unit linked liabilities and the corresponding asset movement has not been presented. This is also true of the other with profits funds with the exception of the German With Profits Fund (GWPF). As at 31 December 2015 there is no direct impact of market risk on the sensitivity of GWPF. However, there is an indirect impact on the PBF due to a realistic Capital Support Arrangement that was introduced during 2011 for the GWPF. This provides support by reducing the liability to transfer future annual management charges to the PBF hence increasing the assets on the statement of financial position to the extent necessary to avoid a realistic deficit (if possible). There is no impact on GWPF participating liabilities. At 31 December 2015 support is provided under the realistic Capital Support Arrangement and there is an increase in expense reserves in the PBF. Further realistic support may be required for changes in interest rates and the sensitivity of this is included within the nonparticipating insurance contract liabilities in the table below. Earnings over a period may be reduced as a consequence of the impact of market movements on charges levied on unit linked business, segregated fund business and other with profits fund business. For example, if the tests had been applied as at 1 January, the profit during the year would have varied due to the different level of funds under management. In illustrating the impact of equity/property risk, the assumption has been made, where relevant, that expectations of corporate earnings and rents remain unchanged and thus yields change accordingly. The sensitivities take into account the likely impact on individual Group companies of local regulatory standards under such a scenario.
Limitations The sensitivity of the Group’s profit after tax and equity from continuing operations is non-linear and larger or smaller impacts should not be derived from these results. The sensitivity analysis represents the impact on profit at year end that the changes in market conditions can have. The sensitivity will vary with time, both due to changes in market conditions and changes in the actual asset mix, and this mix is being actively managed. The results of the sensitivity analysis may also have been different from those illustrated had the sensitivity factors been applied at a date other than the reporting date.
41. Risk management continued (b) Market risk continued (b)(ii) Sensitivity to market risk analysis continued Profit after tax of continuing operations sensitivity to market risk
Equity markets Property markets Interest rates 2015 +10% -10% +20% -20% +10% -10% +20% -20% +1% -1% Increase/(decrease) in profit after tax from continuing operations £m £m £m £m £m £m £m £m £m £m Shareholder business UK and Europe: Assets backing non-participating liabilities - - - - - - - - (569) 691 Non-participating insurance contract liabilities - - - - - - - - 538 (642) Non-participating investment contract liabilities - - - - - - - - - -
Standard Life Investments 3 (3) 7 (7) - - - - - - India and China: Deferred acquisition costs 2 (2) 3 (4) - - - - 1 (2) Assets backing non-participating insurance contract liabilities - - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - - - Non-participating investment contract liabilities - - - - - - - - - -
Standard Life Investments 3 (3) 7 (7) - - - - - - India and China: Deferred acquisition costs - - - (1) - - - - - - Assets backing non-participating insurance contract liabilities - - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - - - Non-participating investment contract liabilities - - - - - - - - - -
Participating business UK and Europe: Total 4 (4) 9 (14) - - - - (37) 29 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement. 3 The interest rate sensitivity is a parallel shift subject to a floor of nil.
41. Risk management continued (c) Credit risk As described in the table on pages 184 to 185, the shareholder is exposed to credit risk from the shareholder and participating businesses and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.
The shareholder is also not exposed to the credit risk from the assets held by third party interest in consolidated funds and noncontrolling interests and therefore these have been excluded from the following quantitative disclosures.
An analysis of debt securities by country is as follows: Government,
UK 527 565 389 377 1,335 1,286 1,576 1,330 - - 3,827 3,558 Canada - 3 1 25 - - 1 1 - - 2 29 Australia - - 100 72 - 6 9 10 - - 109 88 Austria 22 25 - - - - - - - - 22 25 Belgium - - 1 25 - - 12 11 - - 13 36 Denmark - - 51 41 - - 15 16 - - 66 57 Finland - - 25 25 - - - - - - 25 25 France 201 209 343 228 - - 306 347 - - 850 784 Germany 296 87 131 115 1 1 243 300 - - 671 503 Greece - - - - - - - - - - - - Ireland - - 1 - - 3 - - - - 1 3 Italy - - 27 36 - - 75 86 - - 102 122 Japan - - 26 119 - 10 22 32 - - 48 161 Mexico 12 1 - - - - 105 112 - - 117 113 Netherlands 21 - 257 313 - - 24 24 - - 302 337 Norway - - 1 - - - 39 40 - - 40 40 Portugal - - - - - - - - - - - - Spain - - 105 37 - - 41 52 - - 146 89 Sweden - - 40 38 1 1 58 66 - - 99 105 Switzerland - - 116 87 - - 7 7 - - 123 94 US - - 217 302 133 133 310 283 - - 660 718 Other 37 48 51 61 52 2 12 11 201 226 353 348 Total 1,116 938 1,882 1,901 1,522 1,442 2,855 2,728 201 226 7,576 7,235 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. 2 This balance primarily consists of securities held in supranationals.
An analysis of debt securities by country is as follows: Government, Provincial and
Total 16,032 17,346 3,704 3,777 2,515 2,690 3,301 3,681 361 291 25,913 27,785 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. 2 This balance primarily consists of securities held in supranationals.
Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 31 December 2015, the Group had pledged £448m (2014: £202m) of cash and £36m (2014: £58m) of securities as collateral for derivative financial liabilities. At 31 December 2015, the Group had accepted £1,166m (2014: £1,847m) of cash and £10m (2014: £16m) of securities as collateral. None of the securities were sold or repledged at the year end.
Gross amounts of financial instruments as presented on the consolidated statement of financial position Financial instruments Financial collateral pledged/(received)
(c)(v)(i) Loans and receivables The Group holds a portfolio of financial instruments which meet the definition of loans and receivables under IAS 39 Financial Instruments: Recognition and Measurement and on initial recognition were designated as at FVTPL. These instruments are included in debt securities on the consolidated statement of financial position. The Group’s exposure to such financial instruments at 31 December 2015 was £652m (2014: £442m) of which £140m related to participating business (2014: £237m) and £512m related to shareholder business (2014: £205m). The fair value of these loans and receivables is calculated using a valuation technique which refers to the current fair value of other similar financial instruments in addition to other unobservable market data. During the year, fair value losses of £4m (2014: £22m gains) in relation to these loans and receivables were recognised in the consolidated income statement. The amount of this movement that is attributable to changes in the credit risk of these instruments was gains of £2m (2014: £3m loss).
As described in section (b), the Group’s risk management framework defines market risk as the risk that arises from the Group’s exposure to market movements, which could result in the income, or value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. The movement in the fair value of loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions.
Morbidity The Group defines morbidity risk as the risk that paid claims dependent on the state of health of a policyholder are incurred at a higher than expected rate or, in the case of income benefits, continue for a longer duration or start earlier than those assumed. This risk will be present on disability income, healthcare and critical illness contracts. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected, for example, due to non-disclosure.
Mortality The Group defines mortality risk as the risk that paid death claims are at a higher rate or are more volatile than assumed. This risk will exist on any contracts where the payment on death is greater than the reserve held. This includes the risk of antiselection that results in a requirement to pay claims that the Group had not expected, for example due to non-disclosure. (d)(i)(ii) Other financial risks Persistency – withdrawals and lapse rates The Group defines persistency risk as the risk that business lapses or becomes paid-up at a different rate than assumed. This risk may arise if persistency rates are greater or less than assumed or if policyholders selectively lapse when it is beneficial for them. If the benefits payable on lapse or being paid-up are greater than the reserve held then the risk will be of a worsening of persistency and if benefits are paid out that are lower than the reserve then the risk will be that fewer policyholders will lapse or become paid-up.
Participating business UK and Europe Recourse cash flows (17) 16 (3) 3 - - (3) 3 Total participating business (17) 16 (3) 3 - - (3) 3 Total (128) 120 (15) 13 - - (3) 3
The shareholder business of UK and Europe currently bears longevity risk both on contracts written in the PBF and on contracts written in the HWPF for which the longevity risk has been transferred to the PBF.
No defined maturity Total 2015 £m £m £m £m £m £m £m £m
Non-participating insurance contract liabilities 691 2,454 2,387 1,640 1,015 1,369 - 9,556
Non-participating insurance contract liabilities 5,267 630 362 96 46 52 - 6,453
Non-participating investment contract liabilities 9,155 29,418 24,351 14,357 8,083 7,526 - 92,890
No defined maturity Total 2014 £m £m £m £m £m £m £m £m
Non-participating insurance contract liabilities 319 1,044 1,143 948 737 1,085 - 5,276
Non-participating investment contract liabilities - 1 1 1 - 1 - 4
Non-participating insurance contract liabilities 4,628 644 378 84 38 40 - 5,812
The analysis that follows presents the undiscounted cash flows payable by remaining contractual maturity at the reporting date for all financial liabilities, including non-participating investment contract liabilities. Given that policyholders can usually choose to surrender, in part or in full, their unit linked contracts at any time, the non-participating investment contract unit linked liabilities of UK and Europe life and pensions business presented in the table below have been designated as payable within one year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. The Group can delay settling liabilities to unit linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets. In this analysis, the maturity within one year includes liabilities that are repayable on demand.
Greater than 20 years Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 £m £m £m £m £m £m £m £m £m £m £m £m £m £m Shareholder business Non-participating investment contract liabilities 4 4 - - - - - - - - - - 4 4
Other financial liabilities 1,317 1,462 7 12 12 19 6 11 6 11 97 242 1,445 1,757 Total participating business 1,317 1,462 7 12 12 19 6 11 6 11 97 242 1,445 1,757 Unit linked and segregated funds Non-participating investment contract liabilities 92,890 88,203 - - - - - - - - - - 92,890 88,203
41. Risk management continued (f) Operational and conduct risk The Group defines operational risk as the risk of loss, or adverse consequences for the Group’s business, resulting from inadequate or failed internal processes, people or systems, or from external events. This includes conduct risk which is defined as the risk that through our behaviours, strategies, decisions and actions the Group, or individuals within the Group, do not do the right thing and/or do not behave in a manner which: • Pays due regard to treating our customers and clients fairly • Is consistent with our disclosures and setting of customer and client expectations • Supports the integrity of financial markets
The policy framework, which includes the Group operational risk policy and the Group conduct risk policy, is used to support the management of operational and conduct risks. Business units adopt the relevant minimum standards and limits contained within these policies and are required to manage risk in accordance with the policies, taking mitigating action as appropriate to operate within appetites.
The types of operational risk to which the Group is exposed are identified using the following operational risk categories: • Fraud or irregularities • Regulatory or legal • Customer treatment • Business interruption • Supplier failure • Planning • Process execution • People
Operational risk exposures are controlled using one or a combination of the following: modifying operations such that there is no exposure to the risk; accepting exposure to the risk and choosing not to control the risk; or accepting exposure to the risk and controlling the exposure by risk transfer or risk treatment. The factors on which the level of control and nature of the controls implemented are based include: • The potential cause and impact of the risk • The likelihood of the risk being realised in the absence of any controls • The ease with which the risk could be insured against • The cost of implementing controls to reduce the likelihood of the risk being realised • Operational risk appetite
(a) Consolidated structured entities As at 31 December 2015 and 31 December 2014, the Group has not provided any non-contractual financial or other support to any consolidated structured entity and there are no current intentions to do so.
Investments in associates 19 16 531 535 4,561 3,568 314 145 5,425 4,264 Equity securities and interests in pooled investment funds - 19 72 92 17,406 15,845 1,425 1,199 18,903 17,155
Additional information on how the Group manages its exposure to risk can be found in Note 41.
(b)(ii) Other interests in unconsolidated structured entities For those structured entities which the Group receives asset management or other fees from but has no direct investment, the maximum exposure to loss is loss of future fees.
Total assets under management of structured entities in which the Group has no direct investments but has other interests in are £11,599m at 31 December 2015 (2014: £13,153m). The fees received in respect of these assets under management during the year to 31 December 2015 were £48m (2014: £65m).
value through a capitalisation process. Capitalisation involves the conversion of income into a capital sum through the application of an appropriate discount rate.
The determination of the fair value of investment property and all owner occupied property requires the use of estimates such as future cash flows from the assets for example, future rental income and discount rates applicable to those assets.
Where an income approach, or a market approach with significant unobservable adjustments, has been used, valuations are predominantly based on unobservable inputs and accordingly these assets are categorised as level 3 within the fair value hierarchy. Where a market approach valuation does not include significant unobservable adjustments, these assets are categorised as level 2.
As recognised in the consolidated statement of financial position line item
Investments in associates at FVTPL 5,425 4,264 33 33 5,458 4,297 5,370 4,214 2 - 86 83
Owner occupied property 55 138 - 26 55 164 - - - 1 55 163 Derivative financial assets 2,444 4,021 - 44 2,444 4,065 692 971 1,752 3,094 - - Equity securities and interests in pooled investment vehicles 71,679 71,327 17 13,035 71,696 84,362 70,877 83,521 - 1 819 840
Debt securities 66,657 64,441 - 11,059 66,657 75,500 23,210 23,780 42,660 50,077 787 1,643 Contingent consideration asset 15 20 - - 15 20 - - - - 15 20 Total assets at fair value 156,266 153,252 137 25,624 156,403 178,876 100,149 112,486 44,414 53,278 11,840 13,112
The table that follows presents an analysis of the Group’s assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41. Fair value hierarchy
Equity securities and interests in pooled investment vehicles 52 31 17 250 69 281 61 254 - - 8 27
Investments in associates at FVTPL 531 535 - - 531 535 459 452 - - 72 83
Investments in associates at FVTPL 4,561 3,568 - 19 4,561 3,587 4,561 3,587 - - - -
Investments in associates at FVTPL 314 145 - - 314 145 314 145 - - - -
Equity securities and interests in pooled investment vehicles 7,133 6,167 - 644 7,133 6,811 6,859 6,541 - - 274 270
43. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(ii) Fair value hierarchy for liabilities measured at fair value in the statement of financial position The table below presents the Group's liabilities measured at fair value by level of the fair value hierarchy.
Total liabilities at fair value 111,340 105,704 - 14,713 111,340 120,417 184 441 109,849 118,634 1,307 1,342
The table that follows presents an analysis of the Group’s liabilities measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 41.
Reclassified as held for sale - - (87) (1,233) - (42) - (1) - (945) - -
Total gains/(losses) recognised in the consolidated income statement 1 2 452 825 4 4 135 (31) - 38 (47) (124)
The Group recognised a contingent consideration asset in 2014 of £20m, in respect of the acquisition of Ignis. The fair value of this asset at 31 December 2015 was £15m (2014: £20m). Movements in fair value of contingent consideration assets are recognised in other income in the consolidated income statement.
As at 31 December 2015, £418m of total gains from continuing operations (2014: £625m) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £465m gains (2014: £749m) were recognised in investment return from continuing operations and £47m losses (2014: £124m) were recognised in change in liability for liabilities in respect of third party interest in consolidated funds from continuing operations in the consolidated income statement.
• Commercial mortgage valuations are obtained from internal models on an individual instrument basis. Sensitivities are determined by adjusting the spread added to the current base rate.
43. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(iv) Sensitivity of level 3 instruments measured as at fair value on the statement of financial position to changes in key assumptions continued The shareholder is directly exposed to movements in the value of level 3 investments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 securities held by the other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.
Investment property and owner occupied property 122 Market comparison Estimated value per square metre £2 to £14,604 (£4,246)
905 Adjusted net asset value Adjustment to net asset value1 N/A
1 A Group level adjustment is made for significant movements in private equity values. 2 Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices
Equity securities and interests in pooled investment funds and investments in associates at FVTPL (private equity investments)
923 Adjusted net asset value Adjustment to net asset value2 N/A
The estimated fair values for subordinated liabilities are based on the quoted market offer price. The estimated fair values of the other instruments detailed above are calculated by discounting the expected future cash flows at current market rates.
The table below presents the instruments as detailed above measured at fair value by level of the fair value hierarchy. Level 1 Level 2 Level 3 Total 2015 2014 2015 2014 2015 2014 2015 2014 £m £m £m £m £m £m £m £m
There were no operations disposed of in the year ended 31 December 2014.
45. Contingent liabilities and contingent assets Contingent liabilities are possible obligations of the Group of which timing and amount are subject to significant uncertainty. Contingent liabilities are not recognised on the consolidated statement of financial position but are disclosed, unless they are considered remote. If such an obligation becomes probable and the amount can be measured reliably it is no longer considered contingent and is recognised as a liability.
(a) Annuity sales Following an earlier thematic review which concluded in 2014, the Financial Conduct Authority (FCA) commenced in mid2015 a sample-based review of non-advised annuity sales from a selection of firms across the industry in which Standard Life has been participating. This review has focussed on processes for identifying and explaining eligibility for enhanced annuity options.
The Group has cooperated with the FCA’s requests for information and has carried out analysis including an initial sampling of historical sales. We are currently analysing the implications of this sample for relevant components of our annuity population. We do not expect to know the outcome of the FCA’s review until later in 2016.
(b) 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.
45. Contingent liabilities and contingent assets continued (c) Unclaimed Asset Trust (UAT) The UAT was established in July 2006. It holds shares and cash which were allocated to eligible members of The Standard Life Assurance Company at the date of demutualisation where those eligible members have not yet claimed their entitlement. Dividends paid on the shares held by the UAT are also held in the UAT until the related shares are claimed. The Scheme of Demutualisation sets a 10-year time limit, ending in July 2016, for those eligible members to claim their entitlements. On expiry of the UAT in July 2016, the ownership of any assets remaining in the UAT would be transferred to the Company, for general corporate purposes including charitable donations. The Board intends that the assets will be used for charitable purposes. At 31 December 2015 the UAT held cash of £47m (2014: £32m). The number of shares held by the UAT is presented in Note 29. The position at July 2016 will depend on the actions of eligible members and the success of the ongoing efforts to trace eligible members.
(b) Unrecognised financial instruments The Group has committed the following unrecognised financial instruments to customers and third parties. 2015 2014 £m £m
Commitments to extend credit with an original term to maturity of one year or less - 1
Later than one year and no later than five years 69 61
47. Employee share-based payments The Group operates share incentive plans for its employees. These generally take the form of an award of options or shares in Standard Life plc (equity-settled share based payments) but can also take the form of a cash award based on the share price of Standard Life plc (cash-settled share based payments). All the Group’s incentive plans have conditions attached before the employee becomes entitled to the award. These can be performance and/or service conditions (vesting conditions) or the requirement of employees to save in the save-as-you-earn scheme (non-vesting condition). The period over which all vesting conditions are satisfied is the vesting period and the awards vest at the end of this period.
(ii) Short-term incentive plan (annual bonus deferred shares) The majority of the members of the executive and senior management including executive Directors participate in the Group annual bonus. Under the terms of the 2015 and 2014 annual bonus, half of any bonus earned by executive Directors and members of the executive team above 25% of salary will be settled in nil-cost options which are deferred for a period of two years, subject to the deferred amount being worth 10% or more of salary. Further details of the annual bonus are set out in the Directors’ remuneration report.
Share awards (i) Share incentive plan The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,800. The Group offers to match the number of shares bought up to a value of £25 each month. The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.
The exercise price for options granted under long-term and short-term incentive schemes is nil. Fair value of options granted under the Group’s incentive schemes is determined using a relevant valuation technique, such as the Black Scholes option pricing model.
No departures from share option schemes are expected at grant date, with any leavers being accounted for on departure. In determining the fair value of options granted under the Sharesave scheme the historic volatility of the share price over a period of up to five years and a risk free rate determined by reference to swap rates was also considered.
The following table shows the range of exercise prices of options outstanding at 31 December 2015. All options are exercisable for a period of six months after the vesting date.
Fair value per granted instrument at grant date2 431p 389p 1 Included in the number of instruments granted are 11,433 (2014: 53,598) rights to shares granted to eligible employees in Germany, Austria and Canada. 2 Weighted average.
The fair value of instruments granted under the share incentive plan is calculated by reference to the share price at grant date. The plan includes the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting date. At the grant date all awards are expected to vest. No departures are expected at the grant date, with leavers being accounted for on departure.
(c) Employee share-based payment expense The amounts recognised as an expense in Note 8 for equity-settled share-based payment transactions with employees are as follows: 2015 2014 £m £m
Additionally, the Group incurred an expense for cash-settled share-based payment schemes from continuing operations of £2m in 2015 (2014: £2m) and £nil (2014: £nil) from discontinued operations. The liability for cash-settled share-based payments outstanding at 31 December 2015 is £3m (2014: £6m).
48. Related party transactions (a) Transactions and balances with related parties In the normal course of business, the Group enters into transactions with related parties that relate to insurance and investment management business.
Transactions with related parties carried out by the Group during the year were as follows: 2015 2014 £m £m
(b) Compensation of key management personnel Key management personnel comprise 20 people (2014: 19 people) within the Group, including all Directors, both executive and non-executive and certain direct reports of the position of Chief Executive. Detailed disclosures of Directors’ remuneration for the year and transactions in which the Directors are interested are contained within the audited section of the Directors’ remuneration report.
During the year to 31 December 2015, key management personnel and their close family members contributed £6m (2014: £1m) to products sold by the Group. At 31 December 2015 the total value of key management personnel’s investments in Group products was £19m (2014: £22m).
There are two primary objectives of capital management within the Group. The first objective is to ensure that capital is, and will continue to be, adequate to maintain the required level of safety and stability of the Group and hence to provide an appropriate degree of security to our stakeholders – this aspect is measured by the Group’s regulatory solvency position. The second objective is to create equity holder value by driving profit attributable to equity holders.
The capital management policy forms one pillar of the Group’s overall management framework. Most notably, it operates alongside, and complements, the strategic investment policy and the Group risk policies. By integrating policies in this way, the Group is working towards a capital management framework that robustly links the process of capital allocation, value creation and risk management.
Regulatory capital The Group operates in a number of geographical regions, and local regulators, primarily the PRA, specify rules and guidance for the minimum level of capital required to meet local requirements.
For the purposes of calculating the Group’s CRR at 31 December 2015, capital resources include the assets in excess of liabilities, valued on a regulatory basis, and certain other components of capital. Certain items that are classified as liabilities under IAS 32 Financial Instruments: Disclosure and Presentation were treated as capital. For the Group, this applies to its subordinated guaranteed bonds, Mutual Assurance Capital Securities and subordinated notes. The CRR represents the total of the individual capital resources requirements of each regulated company in the Group.
Any surplus within the PBF is attributable to equity holders. Capital within the PBF may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund and any further restrictions imposed by the Scheme. The regulatory results of SLAL have the most significant impact on the Group capital position at 31 December 2015. The other significant components are insurance entities in Asia and non-insurance entities, including Standard Life Investments Limited and Standard Life plc. The capital position at 31 December 2014 includes the held for sale insurance entities in Canada which were sold on 30 January 2015.
Group total 2015 £m £m £m £m £m £m £m £m Available capital resources
Equity attributable to ordinary equity holders of Standard Life plc - 1,609 834 2,443 236 2,679 1,323 4,002
Other sources of capital Subordinated liabilities - - - - - - 1,318 1,318 Internal subordinated liabilities - - 819 819 - 819 (819) -
Participating Insurance contracts 14,283 - - 14,283 - 14,283 - 14,283 Investment contracts 14,716 - - 14,716 - 14,716 - 14,716 Total participating contract liabilities 28,999 - - 28,999 - 28,999 - 28,999
Other non-participating Insurance contracts 9,563 5,164 - 14,727 23 14,750 3 14,753 Investment contracts - 3 - 3 1 4 - 4 Total other non-participating liabilities 9,563 5,167 - 14,730 24 14,754 3 14,757
Total contract liabilities 38,562 104,091 - 142,653 443 143,096 3 143,099 1 Capital resources amounting to £183m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,664m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.
Total available capital resources to meet regulatory requirement 4,500 214 1,148 5,862 1,455 7,317 1,224 8,541
Other non-participating Insurance contracts 10,760 5,877 - 16,637 5,178 21,815 3 21,818 Investment contracts - 295 - 295 1,819 2,114 - 2,114 Total other non-participating liabilities 10,760 6,172 - 16,932 6,997 23,929 3 23,932 1 Capital resources amounting to £183m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,553m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.
Equity holder/inter-fund transfers (417) (132) 581 32 3 35 (35) -
Dividend transfers - - (190) (190) - (190) (153) (343) Sale of Canadian business including return of value - - - - (1,327) (1,327) 460 (867)
Equity holder/inter-fund transfers of £417m (2014: £37m) includes the transfer from the HWPF to the PBF and support provided to the German With Profits Fund.
Dividend transfers - - (296) (296) (191) (487) 101 (386) Redemption of subordinated liabilities - - (294) (294) - (294) - (294)
In November 2014, the Company notified the PRA of its intention to call the Euro denominated 5.314% fixed/floating rate Mutual Assurance Capital Securities (MACS) prior to 31 December 2014. At this time these MACS became excluded from regulatory capital resources. The MACS were redeemed in full on 6 January 2015.
Capital subject to constraints for the UK regulated life business of £4,286m at 31 December 2015 (2014: £4,730m) represents capital resources held within long-term business funds, or in relation to other regulated entities, the amount of the CRR.
Overseas life operations Capital resources of £157m (2014: £1,455m) relate mainly to operations in Asia. At 31 December 2014 these also included operations in Canada classified as held for sale. The overseas life capital subject to constraints amounted to £94m at 31 December 2015 (2014: £917m).
Other activities At 31 December 2015, capital resources of £1,534m (2014: £1,224m) and capital subject to constraints of £165m (2014: £185m) relate to the Group’s investment management businesses and group corporate centre activities.
The decrease in the estimated regulatory capital position is due to a £0.2bn net reduction resulting from the sale of the Canadian business comprising of: • The removal of its contribution to Group surplus of £0.6bn at 31 December 2014 • The return of value to shareholders of £1.75bn during the year • Partially offset by the disposal proceeds of £2.2bn received in January 2015
50. Related undertakings The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings which is set out in this note. Related undertakings are subsidiaries, joint ventures, associates and other significant holdings. In this context significant means either a shareholding greater than or equal to 20% of the nominal value of any class of shares, or a book value greater than 20% of the Group’s assets. The particulars of the Company’s related undertakings at 31 December 2015 are listed below.
The ability of subsidiaries to transfer cash or other assets within the Group for example through payment of cash dividends are restricted only by local laws and regulations, and solvency requirements. These are not considered significant restrictions on the Group’s ability to access or use the assets and settle the liabilities of the Group. The Group also has investments in Qualifying Limited Partnerships which are consolidated in these financial statements. For the Qualifying Limited Partnerships, North American Strategic Partners (Feeder) 2006 Limited Partnership and North American Strategic Partners (Feeder) 2008 Limited Partnership an exemption from filing annual accounts with Companies House has been taken in accordance with the Partnership Accounting Regulations (2008).
Gallions Reach Shopping Park (Nominee) Limited United Kingdom Ordinary Shares 100%
Genesis Business Park (Leasehold) Nominee 1 Limited United Kingdom Ordinary Shares 100%
Maidenhead Office Park Management Company Limited United Kingdom Ordinary Shares 100%
NASP 2006 General Partner Limited Partnership United Kingdom Limited Partnership 62%
North American Strategic Partners (Feeder) 2006 United Kingdom Limited Partnership 70%
North American Strategic Partners (Feeder) 2008 Limited Partnership United Kingdom Limited Partnership 100%
North East Trustees Limited United Kingdom Ordinary A Shares Ordinary B Shares
Parnell Fisher Child & Co. Limited United Kingdom Ordinary Shares 100%
Pearson Jones & Company (Trustees) Limited United Kingdom Ordinary Shares 100%
SLCP (General Partner ESF II) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner ESP 2004) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner ESP 2008) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Infrastructure Secondary I) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner NASF I) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner NASP 2008) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Pearl Private Equity) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner SOF II) Limited United Kingdom Ordinary Shares 60%
SLI European Real Estate Club II LP United Kingdom Limited Partnership 100%
SLI Multi Asset Class Fund LP Cayman Islands Limited Partnership 100%
Standard Life (Asia Pacific Holdings) Private Limited Singapore Ordinary Shares 100%
Standard Life Active Plus Bond Trust United Kingdom Unit Trust 100%
Standard Life Assurance (HWPF) Luxembourg S.a r.l. Luxembourg Ordinary Shares 100%
Standard Life Assurance Limited United Kingdom Ordinary Shares Ordinary B shares
Standard Life European Private Equity Trust plc United Kingdom Ordinary Shares 55%
Standard Life Investment Company II: Standard Life Investments Corporate Debt Fund United Kingdom OEIC 100%
Standard Life Investment Company IV: Standard Life Investments UK Property Fund United Kingdom OEIC 85%
Standard Life Investments - India Advantage Fund Mauritius Ordinary Shares 100%
Standard Life Investments (General Partner EPGF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (General Partner GARS) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (General Partner UK Shopping Centre Feeder Fund LP) Limited
Standard Life Investments (Hong Kong) Limited Hong Kong Ordinary Shares 100%
Standard Life Investments (Mutual Funds) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Private Equity) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 1 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 12 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 4 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 9 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments GS (Mauritius Holdings) Limited Mauritius Ordinary Shares 99%
Standard Life Investments Multi Asset Class Company Cayman Islands Ordinary Shares 100%
Standard Life Investments UK Property Development Fund L.P. United Kingdom Limited Partnership 39%
Standard Life Investments UK Shopping Centre Trust Jersey Unit Trust 48%
Standard Life Short Dated UK Government Bond Trust United Kingdom Unit Trust 100%
Standard Life UK Corporate Bond Trust United Kingdom Unit Trust 100%
Standard Life UK Equity General Trust United Kingdom Unit Trust 100%
The Heritable Securities and Mortgage Investment Association Limited United Kingdom Ordinary Shares 100%
Touchstone Insurance Company Limited Guernsey Ordinary Shares 100% Unclaimed Asset Trust United Kingdom N/A 100% Vebnet (Holdings) Limited United Kingdom Ordinary Shares 100% Vebnet (Trustee) Limited United Kingdom Ordinary Shares 100% Vebnet Limited United Kingdom Ordinary Shares 100% Welbrent Property Investment Company Limited United Kingdom Ordinary Shares 100% Whiteleys of Bayswater Limited United Kingdom Ordinary Shares 100%
ESP CPPIB European Mid Market Fund United Kingdom Limited Partnership 0.5%
SL Capital NASF I A LP United Kingdom Limited Partnership 2%
Standard Life Equity Income Trust PLC United Kingdom Ordinary Shares 1%
Standard Life Investment Company: AAA Income Fund United Kingdom OEIC 5%
Standard Life Investment Company II: Standard Life Investments Global Index Linked Bond Fund United Kingdom OEIC 12% Standard Life Investments UK Equity Income Unconstrained Fund United Kingdom OEIC 30% Standard Life Investments UK Equity Unconstrained Fund United Kingdom OEIC 26% Standard Life Investments Emerging Markets Debt Unconstrained Fund United Kingdom OEIC 21%
Standard Life Investments European Property Growth Fund L.P. United Kingdom Limited Partnership 7%
Standard Life Investments Global SICAV: European Corporate Bond Luxembourg SICAV 30%
European Corporate Bond Sustainable and Responsible Investment Fund Luxembourg SICAV <0.01%
Standard Life Investments ICVC plc: Global Real Estate Feeder Fund Ireland OEIC 0.05%
Standard Life Investments UK Property Income Feeder Fund United Kingdom Unit Trust 8%
Our opinion In our opinion, Standard Life plc’s company financial statements (the ‘financial statements’):  Give a true and fair view of the state of the company’s affairs as at 31 December 2015 and of its profit and cash flows for the year then ended
 Have been prepared in accordance with the requirements of the Companies Act 2006
Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.
ISAs (UK & Ireland) reporting Under International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’) we are required to report to you if, in our opinion, information in the Annual report and accounts is:  Materially inconsistent with the information in the audited financial statements  Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit
Company, or returns adequate for our audit have not been received from branches not visited by us
Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Directors’ responsibility statement set out on page 99, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:  Whether the accounting policies are appropriate to the
In addition, we read all the financial and non-financial information in the Annual report and accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Stephanie Bruce (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh
Tax effect relating to items that may be reclassified subsequently to profit or loss F 2 (6)
Purchase of ‘C’ shares - - - - - - Reserves credit for employee share-based payment schemes R - - - - 34 34 Transfer to retained earnings for vested employee share-
Shares acquired by employee trusts - (9) - - - (9)
Total comprehensive income for the year - - - 553 22 575
Dividends paid on ordinary shares - - - (386) - (386)
Return of cash to shareholders under ‘B/C’ share scheme (1,749) -
Cash and cash equivalents at the beginning of the year N 34 40
Cash and cash equivalents at the end of the year N 61 34
The Notes on pages 243 to 260 are an integral part of these financial statements.
Company accounting policies (a) Basis of preparation These financial statements have been prepared in accordance with 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 financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of available-for-sale financial assets (AFS) and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss (FVTPL).
(a)(ii) Financial guarantee contracts The Company recognises and measures financial guarantee and indemnity contracts initially at fair value. The Company must reassess the value at each subsequent reporting date by estimating the expenditure required to settle the contract and comparing this to the fair value (net of any amortisation). The higher of these values is recognised on the statement of financial position.
(a)(iii) Pension costs and other post-retirement benefits The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee administered funds. The pension plans are funded by payments from employees and by the Group companies, determined by periodic actuarial calculations.
(b) Critical accounting estimates and judgement in applying accounting policies The preparation of financial statements requires management to make estimates and assumptions and exercise judgements in applying the accounting policies that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The area where estimates and assumptions have the most significant effect on the amounts recognised in the consolidated financial statements is as follows: Financial statement area Critical accounting estimates or assumptions Related notes Investments in subsidiaries and joint ventures held at cost
Notes to the Company financial statements A. Investment return 2015 2014 £m £m
Dividend income for the year of £1,240m (2014: £613m) includes £885m relating to a dividend received from the Company’s subsidiary Standard Life Oversea Holdings Limited (SLOH). The Company received a dividend of £2,230m from SLOH on 4 February 2015 which resulted in an impairment in the Company’s investment in SLOH of £1,345m. The dividend has been presented in dividend income net of the resulting impairment.
C. Staff costs and other employee-related costs 2015 2014 Notes £m £m
The staff who manage the affairs of the Company are employed by Standard Life Employee Services Limited (SLESL), a wholly owned subsidiary of the Company. These costs are recharged to the Company and the amounts recharged are set out above. Information in respect of compensation of key management personnel is provided in Note 48 of the Group financial statements and the audited section of the Directors’ remuneration report. Details of the employee share-based payment schemes operated by the Company are given in Note 47 of the Group financial statements.
E. Auditors’ remuneration In 2015 auditors’ remuneration amounted to £0.3m (2014: £0.3m) in respect of the audit of the Company’s individual and Group financial statements. Auditors’ remuneration for services other than the statutory audit of the Company is disclosed in Note 9 of the Group financial statements.
The standard rate of UK corporation tax for the accounting period is 20.25% (2014: 21.5%). The UK tax rate will reduce to 19% from 1 April 2017 and 18% from 1 April 2020. These future rate changes have been taken into account in the calculation of the UK deferred tax balance at 31 December 2015.
Current tax credit/(charge) on net change in financial assets designated as available-for-sale R 2 (6) Tax relating to each component of other comprehensive income that may be reclassified subsequently to profit or loss
Tax at UK corporation tax rate of 20.25% (2014: 21.5%) (217) (115)
Details of the Company’s subsidiaries are given in Note 50 of the Group financial statements.
On 19 June 2014 the Company sold 100% of the share capital of Standard Life Wealth Limited (SLW) to Standard Life Investments (Holdings) Limited (SLIH), another wholly owned subsidiary of the Company. The consideration received was equal to 123,200,000 newly issued £1 ordinary shares of SLIH. As the carrying value of Standard Life Wealth Limited on the Company’s statement of financial position at the date of disposal was £123m no gain or loss was recognised in the statement of comprehensive income.
On 30 January 2015 Standard Life Oversea Holdings Limited, a subsidiary of the Company, sold its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife), for a fixed consideration of CAD $4bn (£2.1bn). Following the sale, a dividend of £2,230m was paid to the Company from Standard Life Oversea Holdings Limited which resulted in an impairment in the Company’s investment in this subsidiary of £1,345m (see Note A).
Included within the impairment charge of £1,415m (2014: £nil) is £70m (2014: £nil) additional impairment in the Company’s investment in its subsidiary Standard Life Oversea Holdings Limited. This was primarily in relation to an impairment of Standard Life Oversea Holdings Limited’s investment in Standard Life (Asia) Limited as a result of a review of expense and reserving assumptions following regulatory change.
Investments in subsidiaries at FVTPL are £257m (2014: £131m) which relates to holdings in short term investment funds over which the Group has control.
(a) Investments in associates The Company’s investment in associates measured at cost relates to a 25.3% (2014: 25.3%) interest in Tenet Group Limited, a company incorporated in England. The reporting date for Tenet Group Limited is 30 September as this is its year end date. This is different from the Company’s year end date of 31 December. In addition to the above the Company has investments in associates measured at FVTPL of £13m (2014: £13m).
Debt securities - - 743 - 743 Receivables and other financial assets L - - - 48 48
Receivables and other financial assets L - - - 40 40
The amount of debt securities expected to be recovered or settled after more than 12 months is £290m (2014: £357m). Due to the nature of investments in associates at FVTPL, there is no fixed term associated with these securities.
The derivative liabilities of £2m (2014: £25m) are expected to be settled within 12 months. The derivative assets of £nil (2014: £24m) are expected to be recovered within 12 months.
M. Other assets Other assets of £19m (2014: £10m) comprise amounts due from related parties in respect of Group relief, which are expected to be received within 12 months.
Demand and term deposits with original maturity of less than three months 61 34
Transfer from merger reserve on disposal of subsidiary R 1,028 -
Transfer from equity compensation reserve for vested employee share-based payments R 32 27
Available-forsale financial assets Total 2015 £m £m £m £m £m £m
Loss on sale of AFS financial assets recycled to profit and loss - - - - (2) (2)
Financial liabilities measured at amortised cost Total 2015 Notes £m £m £m
Subordinated notes: 5.5% Sterling fixed rate due 4 December 2042 £500,000,000 499 £500,000,000 499
Subordinated guaranteed bonds: Mutual Assurance Capital Securities: 5.314% Euro fixed/floating rate perpetual - - €360,000,000 294
Subordinated liabilities are considered current if the contractual re-pricing or maturity dates are within one year. On 6 January 2015 the Company redeemed in full the 5.314% Euro fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000. Accrued interest of £15m relating to these securities was also settled. The principal amount of all other subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on the remaining subordinated liabilities of £37m (2014: £37m) is expected to be settled within 12 months.
Further information on the terms and conditions of the subordinated liabilities is given in Note 36 of the Group financial statements.
The geographic classification for loans and cash and cash equivalents is determined by the currency of the underlying financial instruments. Geography UK Europe Other Total 2015 2014 2015 2014 2015 2014 2015 2014 £m £m £m £m £m £m £m £m
Investments in subsidiaries at FVTPL 257 131 - - - - 257 131
Investments in associates at FVTPL - - - - 13 13 13 13
W. Risk management continued (b) Market risk continued (b)(ii) Sensitivity analysis – market risk The table below illustrates the sensitivity of profit after tax and equity to reasonably possible variations in the key assumptions made in relation to the Company’s most significant market risk exposures. The sensitivity analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security prices and to changes in interest rates as at the reporting date, assuming other assumptions remain unchanged. When illustrating the impact of equity risk, the expectations of corporate earnings remain unchanged. Correlation between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.
Impact on profit after tax 5 3 (5) (3) 2 1 (2) (1) - 1 - 1
The sensitivity of the Company’s total equity to variations in equity markets in respect of each of the scenarios shown in the preceding tables is the same as the sensitivity of the Company’s profit after tax.
(c)(iii) Offsetting financial assets and liabilities The Company does not offset any financial assets and liabilities in the statement of financial position, as there are no unconditional rights to set off.
Derivatives1 (2) - (2) - 2 - Total financial liabilities (2) - (2) - 2 - 1 Only derivatives subject to master netting agreements have been included above.
The Company ensures that it can meet its financial obligations as they fall due by maintaining suitable levels of liquid assets. The obligations arising from subordinated liabilities are offset by receipts arising from loans to subsidiaries and investments in subsidiaries. Refer to Note K, for the maturity profile of undiscounted cash flows of derivative financial instruments.
X. Contingent liabilities, contingent assets, indemnities and guarantees (a) Legal proceedings and regulations The Company, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigation) will have a material effect on the results and financial position of the Company.
(c) Indemnities and guarantees During 2009, the Company provided an indemnity to the Standard Life Unclaimed Asset Trust (UAT) to cover any expenses, damages, losses and costs that cannot be recovered from the assets held within the UAT. The indemnity is for a maximum of £30m and gave rise to a liability of £nil at 31 December 2015 (2014: £nil).
Transactions with related parties carried out by the Company during the year were as follows: Revenues from related parties: Subsidiaries 1,295 684 Associates - 1 1,295 685
(b) Compensation of key management personnel The Directors and key management personnel of the Company are considered to be the same as for the Group. Information on both Company and Group compensation paid to Directors and key management personnel can be found in Note 48 of the Group financial statements. Information on transactions with/from and balances from/to key management personnel and their close family members can also be found in Note 48 of the Group financial statements.
Z. Fair value of assets and liabilities (a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used: Level 1 Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 3 Fair values measured using inputs that are not based on observable market data (unobservable inputs).
Derivative financial assets and derivative financial liabilities The Company’s derivatives are over-the-counter investments which are fair valued using valuation techniques based on observable market data and are therefore treated as level 2 investments within the fair value hierarchy.
Debt securities For debt securities, the Company has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Company has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows: • Government, including provincial and municipal, and supranational institution bonds
Z. Fair value of assets and liabilities continued (c) Methods and assumptions used to determine fair value of assets and liabilities continued (c)(ii) Reconciliation of movements in level 3 instruments During the year, there were no disposals (2014: none) of level 3 equity securities.
The estimated fair values of loans to subsidiaries are determined with reference to quoted market prices determined using observable market inputs. The fair values of subordinated liabilities are based on the quoted market offer price. The Company does not consider its loans to subsidiaries to be impaired.
Group assets under administration (summary) 12 months ended 31 December 2015
Third party strategic partner life business M 43.8 0.2 (5.0) (4.8) 0.6 39.6
Standard Life Investments third party F 89.8 23.8 (23.7) 0.1 71.4 161.3
Associate and joint venture life businesses O O 1.6 0.4 (0.2) 0.2 0.3 2.1
11.2 Standard Life Investments assets under management and net flows 12 months ended 31 December 2015 Opening
Closing AUA at 31 Dec 2015 £bn £bn £bn £bn £bn £bn
Standard Life Group 84.6 4.1 (6.1) (2.0) 0.5 83.1 Phoenix Group 43.8 0.2 (5.0) (4.8) 0.6 39.6 Strategic partner life business AUM 128.4 4.3 (11.1) (6.8) 1.1 122.7 Standard Life Investments AUM – continuing operations 245.9 35.7 (32.2) 3.5 3.8 253.2 12 months ended 31 December 2014 Opening AUA at 1 Jan 2014 Gross flows Redemptions
UK 68.3 14.3 (12.4) 1.9 5.3 75.5 Europe 10.4 2.8 (1.5) 1.3 (0.4) 11.3 North America 5.2 2.9 (1.4) 1.5 1.4 8.1 Asia Pacific 1.8 1.0 (0.6) 0.4 (0.2) 2.0 India 4.1 0.9 - 0.9 1.1 6.1 Ignis - 1.9 (6.2) (4.3) 18.8 14.5 By geography of client 89.8 23.8 (22.1) 1.7 26.0 117.5 Equities 15.1 2.8 (4.1) (1.3) 1.7 15.5 Fixed income 20.2 2.3 (3.3) (1.0) 2.8 22.0 Multi-asset2 31.4 11.4 (6.3) 5.1 2.1 38.6 Real estate 6.1 1.1 (0.4) 0.7 0.6 7.4 MyFolio 4.0 2.2 (0.6) 1.6 0.3 5.9 Other3 13.0 2.1 (1.2) 0.9 (0.3) 13.6 Ignis4 - 1.9 (6.2) (4.3) 18.8 14.5 By asset class 89.8 23.8 (22.1) 1.7 26.0 117.5 Institutional 55.1 9.4 (8.6) 0.8 5.5 61.4 Wholesale 28.9 11.8 (6.6) 5.2 1.4 35.5 Wealth 5.8 0.7 (0.7) - 0.3 6.1 Ignis - 1.9 (6.2) (4.3) 18.8 14.5 By channel 89.8 23.8 (22.1) 1.7 26.0 117.5
Standard Life Group 80.3 3.8 (6.2) (2.4) 6.7 84.6 Phoenix Group - - (1.6) (1.6) 45.4 43.8 Strategic partner life business AUM 80.3 3.8 (7.8) (4.0) 52.1 128.4 Standard Life Investments AUM – continuing operations 170.1 27.6 (29.9) (2.3) 78.1 245.9 1 Excluding strategic partner life business. 2 Comprises absolute return strategies, enhanced diversification strategies, risk-based portfolios and traditional balanced portfolios. 3 Comprises cash, private equity and Wealth. Net inflows from India cash funds £0.6bn (2014: net inflow £0.3bn). 4 Includes net inflows from Ignis liquidity funds of £0.7bn (2014: net outflows £1.0bn).
3 months to 3 months to 3 months to 3 months to £bn £bn £bn £bn £bn
Third party strategic partner life business M (2.3) (0.3) (0.9) (1.3) (0.9)
11.4 Additional analysis – Standard Life Investments 15 months net flows Standard Life Investments assets under management net flows 15 months ended 31 December 2015 3 months to 31 Dec 2014 £bn £bn £bn £bn £bn
12.1 Report from the With Profits Committee of Standard Life Assurance Limited
SLAL has had a WPC since demutualisation. Its role is to monitor and advise the SLAL Board on the management of with profits business, providing independent judgement on the fair treatment of with profits policyholders, and to take a proactive role in raising any issues that merit further consideration. The Committee reviews all proposals that are material to the interests of SLAL’s with profits policyholders. The Committee has the authority to engage external advisers and has engaged an actuary from Milliman LLP to routinely provide the members with advice. The Chairman has a right of access at all times to the Chairman of the Risk and Capital Committee but saw no requirement during the year to exercise this right. The Committee’s routine formal interaction with the SLAL Board is by the minutes of its meetings together with feedback on its advice, and by an annual report to the SLAL Board in which it reviews the management of with profits business having regard to SLAL’s duty to treat its with profits policyholders fairly and to meet their reasonable benefit expectations. The Committee has authority to make a report to the with profits policyholders. It did not do so during 2015 and would not expect to do so unless it disagreed materially with SLAL’s own annual report to its with profits policyholders (which is required by FCA regulations) on the management of the with profits business. The directors of SLAL and of the Company have an open invitation to attend any of the Committee meetings and two Directors of the Company attended WPC meetings during 2015. Minutes of the Committee meetings are submitted to the Board and, in May 2015, the outgoing and incoming Committee Chairmen attended a meeting of the Board which focused on three key with profits issues – the investment strategy framework, the closure to new business in the German with profits fund, and changes to discretionary practices in UK pensions business.
Policy Values – the WPC approved management’s recommendations regarding regular bonus rates and asked that the algorithm used to set these bonus rates be reviewed in 2016 so that they can ensure that it remains appropriate.
Pension freedoms - the WPC has been keen to understand how Standard Life’s with profits customers have been reacting to the recent legislative changes in the UK and reviewed this in two sessions during the year.
Pensions discretionary practices – the WPC reviewed SLAL’s initial proposals for extending its discretionary practices following these legislative changes, and after proposing an amendment to the approach, was supportive 268 Standard Life
The WPC approved the transfers to shareholder funds, in accordance with the Demutualisation Scheme, for the year ended 31 December 2014 of some £195m.
The WPC also reviewed the With Profits Actuary’s advice relating to expense allocation within SLAL and agreed with his conclusion that the methodology had no material bias against policyholders’ interests.
The WPC approved SLAL’s proposal that no changes were required to the rates of deduction from with profits policies in respect of the cost of guarantees.
Annuity Rates for GAO/GMP Buyouts The Committee has continued to review and challenge management on the competitiveness of SLAL’s immediate annuity rates, insofar as they are used when buying out guaranteed liabilities of the HWPF.
Regulatory and Governance Principles and Practices of Financial Management (PPFM) The WPC sought and obtained assurance that the with profits businesses in the UK have been managed in accordance with the published PPFM. Solvency II The introduction of Solvency II on 1 January 2016 has necessitated a number of changes to the Demutualisation Scheme. The WPC approved the first tranche of these changes (those not requiring Court approval) and during the early part of 2016 will be reviewing more substantial changes prior to SLAL seeking Court approval. Investments The WPC receives quarterly presentations from Standard Life Investments regarding the performance of the with profits funds. The Committee was pleased to note the generally strong performance against benchmark, but raised some questions regarding the performance of particular asset classes which it will continue to keep under review.
Conclusion Looking back on 2015, the WPC concluded that:  The management of SLAL’s with profits business has paid due regard to its duty to treat its with profits policyholders fairly and to meet their reasonable benefit expectations
 The UK Smoothed Managed With Profits Fund and the HWPF PPFMs have been complied with
The Committee provides information on its composition and how the Committee protects the interests of policyholders and makes its views known at the following website www.standardlife.co.uk/c1/funds/withprofits -committee.page
Independent Governance Committees have been established as a response to:  The market review undertaken in 2013 by the Office of Fair Trading which identified that competition was not having the expected impact in improving value for policyholders in workplace pension schemes and that change was required to ensure that they received Value for Money (VfM)
The Committee’s key duties are to:  Act solely in the interests of relevant policyholders (both active and deferred scheme members)
The Committee’s work in 2015 An indicative breakdown as to how the Committee spent its time is shown below: Legacy Audit The IGC focused initially on the results of the legacy audit, reviewing the IPB report and requiring the business to conduct some further analysis to identify at a member level how many members were experiencing ongoing charges in excess of 1% and, if so, why this was the case. The IGC reviewed the Standard Life proposals provided by 30 June 2015, and challenged the business to ensure these proposals delivered value. Following this process an implementation plan was agreed with the SLAL board and in place by the end of 2015.
Value for Money (VfM) The IGC considered the ongoing VfM provided to policyholders by the relevant schemes. In this review, the IGC focused on the default investment offerings of the schemes together with the other items noted in 19.5.5 of the FCA’s Code of Business rules, recognising that the vast majority of policyholders and assets were invested in those offerings. The IGC considered whether the default strategies were designed in the interests of relevant members with clear statements of aims, objectives and structure, and reviewed the governance processes and reporting used by Standard Life to ensure that the default and other investment strategies remained in the interests of scheme members.
Compliance with 2014 Pensions Act The IGC has also undertaken an initial assessment of Standard Life’s compliance with the charges measures introduced by the 2014 Pensions Act and which came into effect on 6 April 2015.
As noted above, more detail on the IGC’s work since its formation, its conclusions on the Standard Life proposals responding to the legacy audit and VfM will be available in its first annual report.
A report with their findings will be published at the end of July 2016.
13.1 Product related terms Annuity A periodic payment made for an agreed period of time (usually up to the death of the recipient) in return for a cash sum. The cash sum can be paid as one amount or as a series of premiums. If the annuity commences immediately after the payment of the sum, it is called an immediate annuity. If it commences at some future date, it is called a deferred annuity.
Participating/with profits policy A policy where, in addition to guaranteed benefits specified in the policy, additional bonuses may be payable from relevant surplus. The declaration of such bonuses (usually annually) reflects, amongst other things, the overall investment performance of the fund of which the policy forms part.
Personal pension plan An individual pension arrangement with particular tax advantages whereby individuals who are self-employed or those who are not members of employersponsored pension scheme arrangements can make provision for retirement or provide benefits for their dependents in a tax efficient manner.
SICAV A SICAV (société d’investissement à capital variable) is an open-ended collective investment scheme common in Western Europe. SICAVs can be crossborder marketed in the EU under the Undertakings for Collective Investment in Transferable Securities (UCITS) directive.
13.2 Key financial terms Assets under administration (AUA) A measure of the total assets that the Group administers on behalf of individual customers and institutional clients. It includes those assets for which the Group provides investment management services, as well as those assets that the Group administers where the customer has made a choice to select an external third party investment manager. Assets under administration reflect the value of the IFRS gross assets of the Group adjusted, where appropriate, for consolidation adjustments, intercompany assets and intangible assets. In addition, the definition includes third party assets administered by the Group which are not included on the consolidated statement of financial position.
Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA is defined as earnings before interest, taxation, depreciation, amortisation, foreign exchange gains and losses, fair value movements on certain derivatives, restructuring costs and non-controlling interest.
EBITDA margin This is an industry measure of performance for investment management companies. It is calculated as EBITDA divided by net revenue.
Fee based business Fee based business is a component of operating profit and is made up of products where we generate revenue primarily from asset management charges (AMCs), premium based charges and transactional charges. AMCs are earned on products such as SIPP, corporate pensions and mutual funds, and are calculated as a percentage fee based on the assets held. Investment risk on these products rests principally with the customer, with 272 Standard Life
the major indirect Group exposure to rising or falling markets coming from higher or lower AMCs.
Group capital surplus This is a regulatory measure of our financial strength.
From 1 January 2016 our Group capital surplus is measured on a Solvency II basis. Prior to 1 January 2016, our Group capital surplus compared the Group's capital resources to its capital resources requirements in accordance with the Insurance Groups Directive.
Mature book / business Mature books are expected to provide a stable and consistent contribution to our profit. This includes UK Mature Retail, Standard Life Investments third party Strategic Partner Life books and spread/risk based business. It also includes the with profits business in Germany which closed to new business in April 2015.
Operating profit The Group’s chosen supplementary measure of performance is operating profit and is a non-GAAP measure. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
Operating profit also excludes the impact of the following items:  Restructuring costs and significant corporate transaction expenses. Restructuring includes the impact of major regulatory change.
Operating return on equity (RoE) The annualised post-tax operating profit expressed as a percentage of the opening IFRS equity, adjusted for time apportioned dividends paid to equity holders.
Solvency capital requirement Under Solvency II, insurers are required to identify their key risks – for example that equity markets fall – and hold sufficient capital to withstand adverse outcomes from those risks. This amount of capital is referred to as the Solvency capital requirement or SCR.
Spread/risk based business Spread/risk based business mainly comprises products where we provide a guaranteed level of income for our customers in return for an investment, for example, Annuities. The ‘spread’ referred to in the title primarily relates to the difference between the guaranteed amount we pay to customers and the actual return on the assets over the period of the contract.
Spread/risk margin Spread/risk margin is a component of operating profit and reflects the margin earned on spread/risk business. This includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and reserving changes.
Standard Life Investments Institutional Standard Life Investments institutional business sell to institutions (including corporates, pension schemes, local authorities, government agencies and insurance companies) either directly or through intermediaries.
Standard Life Investments Wholesale Standard Life Investments wholesale sell retail products through wholesale distributors including third party fund supermarkets, global financial institutions and private banks.
Strategic partner life business A measure of the assets that Standard Life Investments manages on behalf of Standard Life Group companies and under other long-term life book partnership agreements, such as Phoenix Group.
UK retail This relates to business where we have a relationship with the customer either directly or through an independent financial adviser. We analyse this type of business into growth and mature categories. Retail growth includes the products, platforms, investment solutions and services of our UK retail business that we continue to market actively to our customers. Retail mature includes business that was predominantly written before demutualisation.
Canadian business On 3 September 2014 the Group announced its intention to sell its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife). The assets and liabilities of the Canadian business were classified as held for sale at 31 December 2014 and the results of this business were classified as discontinued operations for the year then ended. The comparative consolidated income statement, statement of comprehensive income and related notes were restated on this basis. The Canadian business comprises the Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc. and its subsidiaries), the Canadian investment management business (Standard Life Investments Inc. and its subsidiaries) and the business of the Canadian branch of Standard Life Assurance Limited (SLAL Canada branch).
The sale of Standard Life Financial Inc. and Standard Life Investments Inc. completed on 30 January 2015. The assets and liabilities of the SLAL Canada branch were transferred on 31 December 2015 following the fulfilment of certain conditions to completion, including regulatory approval.
Fair value through profit or loss (FVTPL) FVTPL is an IFRS measurement basis permitted for assets and liabilities which meet certain criteria. Gains or losses on assets or liabilities measured at FVTPL are recognised directly in the income statement.
Investment grade Debt securities with a credit rating of BBB or higher.
Strategic executive committee Responsible for the day-to-day running of the Group and comprises; Chief Executive, Chief Executive – UK and Europe, Chief Financial Officer, Chief Investment Officer, Chief Operating Officer, Chief People Officer, Chief Risk Officer and the Global Client Director.
Shareholder services We offer a wide range of shareholder services. For more information, please:  Contact our registrar, Capita, on 0345 113 0045* if calling from the UK. International numbers can be found on the back cover of this report
 Visit our share portal at www.standardlifeshareportal.com * Calls may be monitored and/or recorded to protect both you and us and help with our training. Call charges will vary.
Signing up means:  You’ll receive an email when documents like the Annual report and accounts, Half year results and AGM guide are available on our website
Set up a share portal account Having a share portal account means you can:  Manage your account at a time that suits you  Download your documents when you need them
Preventing unsolicited mail By law, the Company has to make certain details from its share register publicly available. Because of this, it is possible that some registered shareholders could receive unsolicited mail or phone calls. You could also be targeted by fraudulent ‘investment specialists’. Remember, if it sounds too good to be true, it probably is.
If you are a certificated shareholder, your name and address may appear on a public register. Using a nominee company to hold your shares can help protect your privacy. You can transfer your shares into the Companysponsored nominee – the Standard Life Share Account – by contacting Capita, or you could get in touch with your broker to find out about their nominee services.
# These figures include the Company-sponsored nominee – the Standard Life Share Account – which had 1,074,753 participants holding 746,258,569 shares, and the Unclaimed Asset Trust, which holds 14,709,934 shares on behalf of eligible claimants.
*Calls may be monitored and/or recorded to protect both you and us and help with our training. Call charges will vary. Please remember that the value of shares can go down as well as up and you may not get back the �ll amount invested or any income from it. All �gures and share price information have been calculated as at 31 December 2015 (unless otherwise indicated). This document has been published by Standard Life plc for information only. It is based on our understanding as at February 2016 and does not provide �nancial or legal advice. Apple, the Apple logo and iPad are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Standard Life plc is registered in Scotland (SC286832) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. www.standardlife.com © 2016 Standard Life, images reproduced under licence
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