Standard Life Group annual bonus outcome Before approving the level of performance in 2017, the Remuneration Committee sought the views of the Group Audit Committee on material accounting issues that it considered during the year and the Group Chief Risk Officer and the Risk and Capital Committee on the management of risk within the business.
The performance measures for the non-financial elements of the bonus scorecard are reviewed by the Remuneration Committee each year. Assessment of achievement against these outcomes takes into account corporate performance on environmental, social and governance issues either as a specific measure in the scorecard (e.g. brand advocacy and employee engagement) or in the exercise of judgement at the end of the year in determining awards when the Remuneration Committee seeks to ensure the outcome is fair in the context of overall Group performance. This includes performance against our sustainability priorities as set out in the Sustainability section within the Strategic report.
Operating profit before tax Threshold: £685m Target: £725m Maximum: £765m Outcome: £736m
The reported outcomes reflect the out-turns attributed to the Standard Life Group consistent, as far as possible, with the original targets. Adjustments include, as a result of the change to the Group’s key alternative performance measure to adjusted profit1, the restatement of the adjusted profit out-turn for 2017 to reflect the targeted operating basis as well as the removal of items considered specific to the merger which were not included in the original targets.
Management of Standard Life Group’s strategy and its delivery across the Company, including the annual investment and strategic change programmes, any corporate transactions, and the efficiency of the Group’s balance sheet.
Drive customer focus within the organisation and build advocacy for the Standard Life Group brand. Deliver meaningful progress in brand advocacy as measured through Net Promotor Score (NPS) measures or equivalent indices/measures. Protect and enhance Standard Life’s corporate reputation. Enhance collaboration and co-operation across the company to support customer and client needs Ensure that the appropriate processes and controls are in place in order to deliver fair outcomes for customers and clients.
Standard Life’s KPMG Nunwood Brand NPS score increased from 0 in 2016 to +12 in 2017, moving the Group up 100 places on the index to 33. Continued promotion of the brand through high profile partnerships with the British and Irish Lions, the Ryder Cup and Andy Murray. During 2017 the Group received a number of industry accolades including the Moneywise 2017 Investment Trust Award (Property Direct UK), 20 years of excellence in defined contribution pension schemes award at the Professional Pensions UK Pensions Awards and four awards at the Schroders UK Platform Awards. The Group also continued to feature on a number of key sustainability indices, including the Dow Jones Sustainability Index World and Europe, FTSE4Good and the Climate Disclosure Project and was ranked fourth in the Social Mobility Employer Index 2017
Score (out of 5) 4.75 1 Following completion of the merger the Group have changed the calculation of adjusted profit before tax (named operating profit before tax when the target for the 2017 annual bonus award was set). This is explained further on page 176. 2 The non-financial measures used for the determination of the annual bonus plans for 2017 have not been disclosed in this Directors’ remuneration report as the Board deems that the disclosure of these could seriously prejudice the Group’s business. Detailed disclosure is provided on key achievements in the year to provide shareholders with context on the level of performance delivered in 2017.
Based on performance against each of the four Standard Life Group performance elements and considering the performance of Standard Life Group as a whole, the Remuneration Committee approved a rating of 4.4 out of 5 for performance against the Standard Life Group annual bonus scorecard during 2017.
In determining the bonus awards for personal performance in respect of the Standard Life Group annual bonus the Remuneration Committee considered individual performance with regard to the Company’s overall strategic priorities.
G o ver n an c e 117Standard Life Aberdeen 2017
 Launch of new funds across a range of asset classes , including equities, multi asset, fixed income and private markets  Investment performance within a complex investing environment was mixed but with strength across most fixed income and tactical asset allocation products balanced against mixed performance in equities. Stronger longer term returns with strength in elements of all asset classes.
 Leadership of Standard Life Pensions and Savings until stepping down from the Board at the end of February  Support and development of Barry O’Dwyer and handover of the leadership role  Continued strategic support for Keith Skeoch for the period to his retirement in August
 Forged further asset management partnerships around the world to drive product innovation and open up possibilities for our clients and continued growth in our strategic partnerships serving our clients in markets worldwide
 Maintenance of strong relationships with customers, clients and advisers and delivery of resilient flows in growth channels in a challenging market environment
 Continued active engagement with our investors and the analyst community  Provided support and effective handover of responsibilities to Bill Rattray
 Leadership of Standard Life Pensions and Savings with an increase in AUA, UK Retail gross inflows and Platform AUA  Building our advice capability with the continued growth of 1825 business, our financial planning and personal tax advice business with further acquisitions to increase our national footprint  Integration of the Elevate platform to complement our existing WRAP platform 118 Standard Life Aberdeen 2017
If the bonus payable amounts to more than 25% of salary, then half of the amount above 25% of salary is deferred for three years into an award over Standard Life Aberdeen plc shares. The deferral is not made if the amount to be deferred is less than 10% of salary.
Standard Life Investments annual bonus plan Rod Paris participated in the Standard Life Investments’ personal and company bonus plans, in addition to the Group annual bonus plan.
Standard Life Investments annual bonus plan opportunity Rod Paris has a personal bonus opportunity of 105% of salary and a company bonus opportunity of 200% of salary.
Standard Life Investments annual bonus plan outcome Based on Rod Paris’ and Standard Life Investments’ performance in 2017, the Remuneration Committee approved a personal bonus award of 88% and a company bonus award of 170%.
 Strong investment performance in third party assets over 1, 3 and 5 years  Strengthening performance for Money weighted assets with performance over each of 1, 3, 5 and 10 years being between median and upper quartile  Recovery across range of assets, especially within Absolute Return, UK and GEM Equities and continuing outperformance within the Credit
Fixed Income range  Launch of new funds across a range of asset classes to meet the changing investment needs of our clients and customers  Net outflows in growth channels and multi-asset with net inflows for MyFolio.  Improving three-year information ratios demonstrating that returns continue to be generated within a controlled risk environment.  Earnings before interest, taxes, depreciation and amortisation (EBITDA) behind plan with EBITDA margin on plan and adjusted operating expenses favourable to plan.
The table below shows the outcome of their participation in this plan from the date of the merger of the Standard Life Group and the Aberdeen Asset Management Group (14 August 2017). Although the Company is not required to disclose details of pay-outs from the legacy Aberdeen Asset Management incentive arrangements in the period from 1 October 2016 to 13 August 2017, the period prior to the merger, in the interests of transparency details of the out-turns in this period are set out on page 134.
of maximum) Target (50% of maximum) Stretch (100% of maximum) Actual
Total 42.1% Annual non-financial strategic 10.0% Remuneration Committee assessment – see below 6.75% Annual personal performance 10.0% Remuneration Committee assessment – see below 7%-8%
Key performance indicators Key points in period from 14 August 2017 to 31 December 2017 Client retention Completed six significant communication exercises to customers and clients as well as their advisers, pre and post-merger completion covering merger progress, senior management and organisational changes. These six exercises covered all regions, channels and countries across the combined client base. As a result of the engagement there were no adverse changes to consultant ratings between 14 August and 31 December 2017. Proactive defence was taken by Distribution teams globally, increasingly focused on specific products due to performance and merger concerns.
Long-term incentives 2015 Executive LTIP awards vesting in respect of performance ending in 2017 (audited) The awards granted in 2015 under the Executive LTIP have two performance conditions. The outcome is based 70% on cumulative Group operating profit before tax and 30% on cumulative Group net flows.
The awards are also subject to two underpins when assessing the Group performance. The first requires the Risk and Capital Committee to be satisfied that performance obtained has been achieved within acceptable defined risk parameters. The second requires the Remuneration Committee to be satisfied that Group operating profit performance and Group net flows performance reflect overall Group performance.
Awards were made in March 2015 of 200% of salary to Keith Skeoch and of 125% of salary for Luke Savage. Awards were also granted to Paul Matthews and Barry O’Dwyer who were not Directors at the time of grant in March 2015.
Cumulative Group operating profit before tax1 for Standard Life Group for the three years ended 31 December 20171 £1,670m £1,820m £2,040m £2,122m Vesting outcome (70% weighting) 100% Cumulative Group net flows for the Standard Life Group for three years ended 31 December 20171 £16.6bn £21.0bn £27.6bn (£8.4bn) Vesting outcome (30% weighting) 0% 1 Following completion of the merger the Group have changed the calculation of adjusted profit before tax (named operating profit before tax when the target for the 2015 award was set). This is explained further on page 176. 2 The actual outcome includes the 2017 out-turn of £736m consistent with the annual bonus outcome noted on page 116.
The level of vesting is then subject to consolidated cumulative three-year third party earnings before interest, taxes, depreciation and amortisation (EBITDA) performance shown in the following table. The actual EBITDA targets are not disclosed as Standard Life Investments is a subsidiary business of Standard Life Aberdeen plc and the Board deems that this is commercially sensitive information which, if disclosed, could seriously prejudice the Group’s business.
Before an award can vest, the Risk and Capital Committee is required to verify to the Committee that the level of vesting was not as a result of behaviour that has exposed the Group to undue risk. If the Risk and Capital Committee determines that the Group has been exposed to undue risk, the Committee will take this into account when determining the level of vesting.
As performance was above the lower quartile of the money-weighted average of all assets under management (both captive and third party assets) compared to other asset managers and the consolidated cumulative three-year third party EBITDA was 93.84% of target, the Remuneration Committee determined that 84.6% of the target award (42.3% of the maximum award) granted in 2015 would vest in 2018.
In addition to business performance criteria, all of the awards are subject to an additional personal performance underpin whereby, if an executive Director performs at an unsatisfactory level in any year during the three-year performance period, their original award would be reduced by one-third, unless the Co-Chief Executive Officers, or the Remuneration Committee in the case of Keith Skeoch, recommends otherwise.
The following adjustments have been made to the performance targets for the 2017 awards:  Update of the existing operating profit targets to adjusted profit before tax  Preservation of perfomance outcomes at the end of 2017 resulting from Standard Life Group operating profit/net flows targets and outcomes to end 2017  Inclusion of Aberdeen profits and net flows, and proposed synergies for performance years 2018 and onwards  Removal of the change in the share of HDFC Life profits and flows from existing targets and inclusion of interest on the sales proceeds  No change to the original net flows target
Keith Skeoch 400% £2,800,000 778,902 Colin Clark 300% £1,800,000 500,723 Barry O’Dwyer 120% £630,000 175,253 Luke Savage 125% £768,750 213,850 Nature of award Nil cost option
Cumulative adjusted profit before tax (80%) and cumulative net flows (20%) for the three-year period ended 31 December 2019
Vesting: 100% Cumulative Group adjusted profit before tax Maximum: £3,650m Cumulative Group net flows Maximum: £45.9bn 1 Based on the average share price for the five dealing days immediately before the awards were granted (359.48 pence).
Standard Life Investments LTIP In March 2017, prior to his appointment to the Board, Rod Paris was granted an award under this plan.
Rod Paris 600% £1,800,000 500,723 1 Based on the average share price for the five dealing days immediately before the awards were granted (359.48 pence).
Group deferred share awards Under the Group annual bonus plan, if the bonus payable amounts to more than 25% of salary, then half of the amount above 25% of salary is deferred for three years into an award over Standard Life Aberdeen plc shares. This resulted in the award of the following shares in 2017 in respect of the bonus earned for 2017. The award made to Barry O’Dwyer is in respect of a bonus earned prior to his appointment to the Board.
Sharesave Awards Martin Gilbert was granted an award over 4,349 shares under the Standard Life Sharesave Plan on 28 September 2017. The award will normally become exercisable on 1 November 2022. The exercise price is 344.9 pence.
Awards to be granted in 2018 As set out in the Committee Chairman’s statement the Remuneration Committee intends to grant awards in 2018 to Keith Skeoch and Rod Paris, in the form of nil-cost options, under the Executive LTIP plan, which will vest in March 2023. These are set out in the table below.
Basis of award (% of salary at 31 December 2017) Face value at grant
Vesting: 100% Cumulative Group adjusted profit before tax excluding spread/risk margin Maximum: £3,615m Cumulative Group growth net flows Maximum: £83.7bn
In line with the approach for the 2017 award the following adjustments have been made to the performance targets for the 2016 awards:  Update of the existing operating profit targets to adjusted profit before tax  Preservation of performance outcomes at the end of 2017 resulting from Standard Life Group operating profit/net flows targets and outcomes to end 2017  Inclusion of Aberdeen profits and net flows, and proposed synergies for performance year 2018  Removal of the change in the share of HDFC Life profits and flows from existing targets and inclusion of interest on the sales proceeds
The table below summarises the original performance targets and the adjusted targets: Original targets Adjusted targets
Vesting: 0% Cumulative Group adjusted profit before tax Threshold: £2,490m Cumulative Group net flows Threshold: £30.8bn
Vesting: 100% Cumulative Group operating profit before tax Maximum: £2,595m Cumulative Group net flows Maximum: £51.0bn
Vesting: 0% Cumulative Group adjusted profit before tax Maximum: £3,030m Cumulative Group net flows Maximum: £51.0bn
Share ownership A shareholding requirement was implemented in 2014 and we continue to require executive Directors and senior management to maintain a material long-term investment in Standard Life Aberdeen plc shares.
The current requirement is that the Co-Chief Executive Officers acquire and maintain a shareholding valued at 500% of salary. For 2017, the other executive Directors were required to acquire and maintain a shareholding valued at 200% of salary. As part of the new policy going forward, the shareholding guideline for other executive Directors (excluding the Co-Chief Executive Officers) has been increased to 300% of salary with effect from 2018.
The shares which the executive Directors are required to hold to reach their respective shareholding requirement under the current requirements are based on the net vested shares arising from the exercise of an award. Net vested shares are those shares which the executive Director would retain after selling sufficient shares to cover the costs of the income tax and employee national insurance payable when the award is exercised.
Executive Directors will be required to retain shares held in respect of the requirement for a period of one year following their departure from the Group. The Remuneration Committee reviews progress against the requirement annually and retains discretion to require executive Directors to purchase shares to meet the requirement. Personal investment strategies (such as hedging arrangements) are not permitted.
Directors’ interests in shares (audited) The following table shows the total number of Standard Life Aberdeen plc shares held by the executive Directors and their connected persons.
1 These are deferred awards under the Aberdeen Variable Pay plan which have vested and can be exercised. 2 The closing share price at 31 December 2017 used to determine total value was 436.6 pence.
At 31 December 2017 all executive Directors have complied with the current requirement in respect of retaining shares from vested awards. Keith Skeoch, Martin Gilbert, Bill Rattray and Rod Paris hold significantly more shares than their shareholding requirements.
G o ver n an c e 125Standard Life Aberdeen 2017
1 This comprises Executive LTIP awards made in 2015, 2016 and 2017, awards under the Standard Life Investments LTIP made in 2015, 2016 and 2017 and awards made under the Standard Life Restricted Stock Plan excluding, in each case, shares to be awarded in lieu of dividend equivalents. 2 This comprises awards under the Executive LTIP granted in 2014, deferred bonus awards (including unvested awards under the Aberdeen Variable Pay plans and excluding shares to be awarded in lieu of dividend equivalents) and options granted under the Standard Life Sharesave Plan. 3 For Martin Gilbert and Bill Rattray this comprises awards made under the Aberdeen Variable Pay plans prior to the merger which are now exercisable. In relation to Barry
O’Dwyer - this relates to an unexercised 2014 Executive LTIP award. 4 This comprises awards made under the 2014 Standard Life Investments LTIPs, deferred share awards granted in 2015 in respect of the 2014 Group bonus plan and
Loss of office payments (audited) Colin Clark Colin Clark stepped down from the Board with effect from 14 August 2017 and was on garden leave from 1 September 2017 until 31 December 2017 at which point he left the Company. He continued to be eligible for his salary and benefits until his termination date of 31 December 2017. Colin Clark accrued bonus until 31 August 2017. Details of Colin Clark’s bonus for 2017, for the period in which he served as an executive Director, are set out on page 114.
From 1 January 2018 to 31 August 2018 Colin Clark will be entitled to a payment in lieu of notice, which includes salary, pension allowance and payments in respect of private medical cover and life insurance, which is paid in instalments subject to mitigation.
In respect of outstanding incentive awards Colin Clark was treated as a good leaver. The following treatment of outstanding options therefore applies:  2016 Deferred share award (the deferred element of the 2015 short-term bonus) vested on 31 December 2017. The number of shares vested is 19,149.  2017 Deferred award (the deferred element of the 2016 short-term bonus) will vest on 31 March 2020. The number of shares that will vest
is 203,761.  2016 Executive LTIP award: pro-rated to cessation of employment. The maximum number of shares that will vest on 24 March 2021, subject to performance (but excluding additional dividend-equivalents) is 365,248.  2017 Executive LTIP award: pro-rated to cessation of employment. The maximum number of shares that will vest on 27 March 2022, subject to performance (but excluding additional dividend-equivalents) is 175,508.  Restricted Stock Plan (2015): pro-rated to cessation of employment. The number of shares that will vest on 30 March 2018 is 110,601.
From 1 March 2018 to 31 August 2018 Luke Savage will be entitled to payment in lieu of notice which includes salary, pension allowance, car allowance and payments in respect of private medical cover and life insurance, which is paid in instalments subject to mitigation.
Luke Savage will not be eligible to participate in the 2018 Executive LTIP award.
Barry O’Dwyer Barry O’Dwyer was appointed to the Board with effect from 1 March 2017. He stepped down from the Board with effect from 14 August 2017 but continues in his role as Chief Executive, Standard Life. He continues to be eligible for salary, benefits and bonus. Details of Barry O’Dwyer’s bonus for 2017, for the period in which he served as an executive Director, are set out on page 114. Outstanding incentive awards granted to Barry O'Dwyer will remain unchanged and will be subject to the terms agreed at the time of grant.
No other payments were made to former directors that are not reported elsewhere.
August 2017. The increase in the dividend paid for the year ended 2017 when compared to 2016 included both the increase in the dividend paid and the increased share capital on which the payment is made as a result of the merger
5.4 Annual remuneration report – what we did in 2017 for non-executive Directors Single total figure of remuneration – non-executive Directors (audited) The following table sets out the single total figure of remuneration for each of the non-executive Directors who served as a Director at any time during the financial year ending 31 December 2017. Non-executive Directors do not participate in bonus or long-term incentive plans and do not receive pension funding.
Jutta af Rosenborg2 2017 36 – 36 2016 – – – Akira Suzuki2,3 2017 – – – 2016 – – –
1 Sir Gerry Grimstone received an allowance of £15,000 towards his business related accommodation costs in Edinburgh in addition to his Chairman’s fees. Other amounts reported relate to expenses such as travel and accommodation expenditure incurred on Group business. While these payments are the reimbursement of expenses and not benefits, they are included as being a payment which is subject to tax.
2 Appointed to the Board with effect from 14 August 2017. 3 No fee is paid to non-executive directors who represent a shareholder. Akira Suzuki, a managing executive officer of Mitsubishi UFJ Trust and Banking (MUTB), did not receive a fee as a non-executive director of Aberdeen, and as MUTB has continued to hold shares in the combined Group post the merger, this position has been maintained. 4 Stepped down from the Board with effect from 14 August 2017.
The service agreements/letters of appointment for Directors are available to shareholders to view on request from the Company Secretary at the Company’s registered address (details of which can be found in Section 12) and at the 2018 AGM.
Chairman/Non executive Director Initial Appointment to the Board1 Initial election by shareholders
Shares acquired/(sold) by the Directors during the period to 31 December 2017 or date of cessation of earlier
Shares acquired/ (sold) by the Directors during the period 31 December 2017 to 22 February 2018
The Chairman continues to be subject to a guideline holding of 100% of the value of his annual fee in Standard Life Aberdeen plc shares within four years of appointment. Sir Gerry Grimstone, as Chairman, fully met this requirement in 2017 with the value of his shares at the end of the year being 237% of his fees.
Chairman’s fees2 £380,000 £380,000 Deputy Chairman’s Fees £200,000 £200,000 Non-executive Director fee3 £73,500 £73,500 Additional fees: Senior Independent Director £25,000 £18,000 Chairman of the Audit Committee £30,000 £30,000 Chairman of the Risk and Capital Committee £30,000 £30,000 Chairman of the Investment Performance Commitee £30,000 – Chairman of the Remuneration Committee £30,000 £30,000 Chairman of Standard Life Assurance Limited £75,000 £75,000 Committee membership (Audit, Risk and Capital, Remuneration, Investment Performance and Nomination Committees) £10,000 £10,000 1 The core fee of £73,500 paid to each non-executive Director (including the Chairman and Deputy Chairman) is expected to total £808,500 for 2018 (2017: £670,688). This is within the maximum £1,000,000 permitted under Article 87 of Standard Life Aberdeen plc’s articles of association. Total fees including additional duties are expected to amount to £1,577,500 for 2018 (2017:£1,286,000).
External advisers The Committee received information on comparative pay data from Willis Towers Watson. Pinsent Masons LLP provided legal interpretation of variable pay plan rules and contractual terms to the Committee.
A representative from Deloitte LLP attends, by invitation, all Committee meetings to provide information and updates on external developments affecting remuneration as well as specific matters raised by the Committee. Outside of the meetings, the Committee’s Chairman seeks advice on remuneration matters on an ongoing basis. As well as advising the Committee, Deloitte LLP also provided tax, risk, data, consultancy and transaction related services to the Group during the year. Deloitte Total Rewards and Benefits is an investment adviser to the trustees of the Standard Life Staff Pension Scheme. In addition, Standard Life Aberdeen is the current appointed provider for the Defined Contribution Master Plan that Deloitte LLP provides for its employees and Deloitte LLP is one of the employee benefit consultants through which Standard Life Aberdeen has been appointed to provide defined contribution arrangements for Deloitte’s clients through competitive tender.
Where appropriate, the Committee receives input from the Chairman, Co-Chief Executive Officers, Chief Financial Officer, Chief People Officer, Group Reward and Employment Policy Director, Group Chief Risk Officer, and the Head of Corporate Governance at Standard Life Investments. This input never relates to their own remuneration. The Committee also receives input from the Risk and Capital Committee and Audit Committee.
As noted in Section 2 Sir Gerry Grimstone is an independent non-executive board member of Deloitte LLP. He was appointed to this role to represent the public interest following a recommendation by the Financial Reporting Council that all major audit firms should have such representation. His remuneration for that role is a fixed sum and has no relationship to Deloitte’s business activities. Both the Chairman and the Committee recognised the need to ensure there is no conflict of interest arising from the appointment process. The Committee was satisfied at the date of the appointment that the nature of the Chairman’s appointment to Deloitte LLP did not create a conflict of interest and the Chairman was not involved in the tender process that resulted in the reappointment of Deloitte LLP. Whilst Sir Gerry Grimstone has access to the Committee adviser to the extent that he is invited to attend Committee meetings, he does not meet with the Committee adviser, other than in those meetings, to discuss matters relating to Standard Life Aberdeen. Communication between Deloitte LLP and the Committee is on instruction from the Committee Chairman.
 Mid-year review of performance against target for annual bonus and LTIP awards  Directors’ remuneration policy – design for 2018
Share dilution limits The Executive LTIP, the Standard Life Investments LTIP, the Standard Life (Employee) Share Plan, the Standard Life Sharesave Plan, the Aberdeen Asset Management Deferred Share plans and the Standard Life Ireland Sharesave Plan contain dilution limits that comply with the guidelines produced by The Investment Association (IA). On 31 December 2017, therefore, the Company’s standing against these dilution limits was:  1.51% where the guideline is no more than 5% in any ten years under all discretionary share plans in which the executive Directors participate
G o ver n an c e 133Standard Life Aberdeen 2017
 2.17% where the guideline is no more than 10% in any ten years under all share plans As is normal practice, there are employee trusts that operate in conjunction with the Executive LTIP, Standard Life Investments LTIP, the Restricted Stock Plan, the deferred elements of the Standard Life annual bonus plan and the Aberdeen Asset Management deferred plans. On 31 December 2017 the trusts held 39,735,984 shares acquired to satisfy these awards. Of these shares 9,093,106 are committed to satisfying vested but unexercised awards. The percentage of share capital held by the employee trusts is 1.33% - well within the 5% best practice limit endorsed by the IA.
Related party transactions All transactions between Directors and the Group are on commercial terms that are equivalent to those available to all employees. During the year to 31 December 2017, the Directors (including close family members) contributed £3,156,250 (2016: £1,408,546) to products sold by the Group.
5.6 Additional Information Aberdeen Variable Pay plan outcome for the period 1 October 2016 to 13 August 2017 The bonus entitlement for the directors of Aberdeen Asset Management who are now Directors of Standard Life Aberdeen plc was as follows: Maximum cash variable pay (multiple of fixed pay)
Long-term quantitative Compound growth in underlying earnings per share 12.5% 6% 9% 12% (13.2%) 0.0%
Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent Company financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:  Select suitable accounting policies and then apply them consistently  Make judgements and estimates that are reasonable, relevant and reliable  State whether they have been prepared in accordance with IFRSs as adopted by the EU  Assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern
 Use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so
 The Directors’ report and Strategic report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face
The Group’s critical accounting estimates and assumptions are summarised in the Presentation of consolidated financial statements section which follows the primary financial statements. Further detail on these critical accounting estimates and assumptions is provided in the relevant note with this background colour.
Contents 7. Independent auditors’ report 138 8. Group financial statements 147 9. Company financial statements 265 10. Supplementary information 280
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
Coverage 72% of total profits and losses that made up Group profit before tax
Acquisition of Aberdeen Asset Management plc – goodwill and intangible assets
Valuation of the UK defined benefit pension scheme present value of funded obligation 138 Standard Life Aberdeen 2017
2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
We found the identification and valuation of intangibles assets and goodwill acquired to be acceptable.
 Our actuarial expertise: We used our own actuarial specialists to perform procedures in this area.
 Benchmarking assumptions and our sector experience: We utilised the results of KPMG benchmarking of longevity and credit risk assumptions and our knowledge of relevant peers to inform our challenge of these assumptions.
Subjective estimate: The Group has a provision for the costs arising from a review of non-advised annuity sales at the request of the Financial Conduct Authority (‘FCA’). This is an area that involves significant judgement over the redress payable to customers.
 Tests of detail: We assessed the judgements made in determining the assumptions by reference to: – FCA data on the proportion of the population that could have benefited from an enhanced annuity; – Group data on rates of potential noncompliance with FCA sales practice requirements; – Industry data on medical conditions prevalent in the UK population; – And average annual uplifts to annuities such customers would have obtained
 Assessing transparency: We considered whether the Group’s disclosures in relation to the assumptions used in the calculation of the provision appropriately represent the sensitivity of the provision to the use of alternative assumptions; Our results
(Internally generated software assets not yet available for use £53 million; 2016: £56 million)
Refer to page 84 (Audit Committee Report), page 178 (accounting policy) and page 178 (financial disclosures).
Customer relationship and investment management contracts acquired through business combinations comprise £774 million of the intangible asset balance. The valuation of these intangible assets is subjective and requires the use of assumptions relating to future cash flows and the use of valuation models. In addition, management need to make subjective judgements when assessing whether there are any indicators of impairment to the customer relationship and investment management contract intangibles.
Customer relationships and investment management contracts acquired in business combinations:  Our valuation expertise: We involved our own valuation specialists to assist in evaluating the appropriateness of discount rates applied, which included recalculating discount rates on a market participant basis using comparable company information. We evaluated whether there had been indicators of impairment that would trigger an impairment review. This included a critical assessment of the business performance, such as outflows of assets under management relating to each intangible. Where indicators were identified, we assessed management’s valuation model.
 Our sector experience: Where there was an indicator of impairment, we evaluated the appropriateness of assumptions applied in key inputs such as fee revenue, operating costs and discount rates.
Internally generated software not yet available for use:  Tests of detail: We challenged the Group’s assessment of the continuing technical feasibility of completing a sample of the internally generated software assets that were not yet available for use by reference to project plans and design specifications. We used our own IT specialists to perform procedures in this area. We evaluated the Group’s calculations of recoverable amount by reference to the determination of the cash generating unit and the associated discounted cash flow.
For each of these valuations there is a degree of complexity and subjectivity: Investment property valuations require assumptions to be made such as expected rental yields in order to determine future rental income. Independent property experts assist the Directors in selecting these assumptions. Directors use judgement to select the methodology to which these assumptions are applied in order to derive the valuation.
Unquoted private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation guidelines by using underlying fund manager valuations as a basis. These are adjusted where considered appropriate. There is a significant risk over the valuation of these investments.
 Methodology Choice: We considered the pricing model methodologies with reference to Royal Institution of Chartered Surveyors Valuation – Professional Standards (the ‘Red Book’).
– For private equity funds we challenged the investment manager on key judgements affecting investee company valuations, including any adjustments made to the independent valuation produced by the underlying fund manager of the private equity funds.
 Assessing transparency: Consideration of the appropriateness, in accordance with relevant accounting standards, of the disclosures in respect of complex financial instruments and the effect of changing one or more inputs to reasonably possible alternative valuation assumptions.
Refer to page 84 (Audit Committee Report), page 205 (accounting policy) and page 206 (financial disclosures).
 Benchmarking assumptions and our sector experience: We utilised the results of KPMG benchmarking of base mortality, mortality improvement, discount rate and inflation assumptions and our knowledge of industry practice to inform our challenge of the Group’s assumptions in these areas
We found the valuation of the present value of the funded obligation to be acceptable.
Our procedures included:  Tests of detail: We compared the carrying amount of 100% of the investment balance with the relevant subsidiaries’ financial statements/draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making.
 Assessing subsidiary audits: We assessed the work performed by the subsidiary audit teams and considering the results of that work to date on those subsidiaries’ profits and net assets
 Our sector experience: For the investments where the carrying amount exceeded the net asset value, we compared the carrying amount of the investment with the expected value of the business based on the method applied by management in valuing the business. We assessed the key inputs to this valuation to determine whether they were reasonable.
Materiality for the parent company financial statements as a whole was set at £17m, determined with reference to a benchmark of normalised profit before tax, of which it represents 4.9%.
The components within the scope of our work accounted for the percentages illustrated opposite.
The remaining 21% of total group revenue, 28% of group total profits and losses that made up the group profit before tax and 18% of total group assets is represented by 194 of reporting components, none of which individually represented more than 2% of any of total group revenue, total profits and losses that made up Group profit before tax or total group assets. For these residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.
4. We have nothing to report on going concern We are required to report to you if:  We have anything material to add or draw attention to in relation to the directors’ statement in section (a) on page 154 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information
 The section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee
 The parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or
As explained more fully in their statement set out on page 135, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities
Irregularities – ability to detect We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence.
In addition we considered the impact of laws and regulations in the specific areas of regulatory capital (recognising the importance of this to the continuing operation of the company) and regulatory conduct (recognising the potential for economic outflow associated with noncompliance ). With the exception of any known or possible noncompliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related financial statements items. Further detail in respect of the valuation of provision for annuity sales practices is set out in the key audit matter disclosures in section 2 of this report.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identified at group level, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of non-compliance with relevant laws and regulations (irregularities), as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
Jonathan Mills (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor
Total tax expense 10 232 370 Less: Tax expense attributable to policyholders’ returns 10 (166) (302) Tax expense attributable to equity holders 10 66 68 Profit for the year 732 419
Profit for the year 732 419 Items that will not be reclassified subsequently to profit or loss: Remeasurement (losses)/gains on defined benefit pension plans 35 (18) 162 Revaluation of owner occupied property 18 1 5 Change in unallocated divisible surplus 29 – (5) Equity holder tax effect of items that will not be reclassified subsequently to profit or loss 10 (10) 2 Total items that will not be reclassified subsequently to profit or loss (27) 164
Attributable to: Equity holders of Standard Life Aberdeen plc 637 647 Non-controlling interests
Ordinary shares 25 51 Preference shares and perpetual notes 8 –
Short-term fluctuations in investment return and economic assumption changes 12 67 13 Restructuring and corporate transaction expenses 9 (173) (67) Amortisation and impairment of intangible assets acquired in business combinations 2 (138) (38) Provision for annuity sales practices 38 (100) (175) Coupons payable on perpetual notes classified as equity3 12 10 – Profit on disposal of interests in associates 1 319 –
Total adjusting items 2 (40) (269) Share of associates’ and joint ventures’ tax expense 2 (41) (13) Profit attributable to non-controlling interests – ordinary shares 2 25 51 Profit before tax expense attributable to equity holders5 798 487 Tax (expense)/credit attributable to
Total tax expense attributable to equity holders (66) (68) Profit for the year 732 419 1 Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the Other segment, a £3m increase to the Aberdeen Standard Investments segment and a corresponding £5m adjustment to shortterm fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.
Derivative financial assets 19 3,053 3,534 Equity securities and interests in pooled investment funds1 19 99,020 90,683
Receivables and other financial assets 19 1,242 1,255 Current tax recoverable 10 192 166
Equity attributable to equity holders of Standard Life Aberdeen plc 8,604 4,347 Non-controlling interests
Total equity 8,992 4,644 Liabilities Non-participating insurance contract liabilities 31 22,740 23,422 Non-participating investment contract liabilities 32 105,769 102,063 Participating contract liabilities 31 30,647 31,273 Deposits received from reinsurers 33 4,633 5,093 Third party interest in consolidated funds 33 16,457 16,835
Liabilities of operations held for sale 24 706 – Total liabilities 189,119 185,851 Total equity and liabilities 198,111 190,495 1 Presentation changed and 2016 comparative restated. Refer Note 16(c).
The Notes on pages 154 to 264 are an integral part of these consolidated financial statements
The consolidated financial statements on pages 147 to 264 were approved by the Board and signed on its behalf by the following Directors: Sir Gerry Grimstone Bill Rattray Chairman, 23 February 2018 Chief Financial Officer, 23 February 2018 150 Standard Life Aberdeen 2017
The Notes on pages 154 to 264 are an integral part of these consolidated financial statements 152 Standard Life Aberdeen 2017
Cash flows from investing activities Purchase of property, plant and equipment 18 (37) (10) Proceeds from sale of property, plant and equipment – 22 Proceeds from sale of seeding investments 19 – Acquisition of subsidiaries and unincorporated businesses net of cash acquired 495 (5) Disposal/(acquisition) of investments in associates and joint ventures 1 359 (179) Purchase of intangible assets (69) (61) Net cash flows from investing activities 767 (233) Cash flows from financing activities Repayment of other borrowings (1) (2) Proceeds from issue of subordinated liabilities 565 – Capital flows to third party interest in consolidated funds and non-controlling interests – ordinary shares (1,011) (1,845) Distributions paid to third party interest in consolidated funds and non-controlling interests – ordinary shares (109) (109) Shares acquired by trusts (61) (3) Sale of shares held by trusts 4 – Proceeds from issue of shares 26 5 6 Interest paid (97) (83) Ordinary dividends paid 13 (469) (370) Net cash flows from financing activities (1,174) (2,406) Net increase/(decrease) in cash and cash equivalents 1,787 (1,903) Cash and cash equivalents at the beginning of the year 7,900 9,591 Effects of exchange rate changes on cash and cash equivalents 28 212 Cash and cash equivalents at the end of the year 25 9,715 7,900 Supplemental disclosures on cash flows from operating activities Interest paid 4 3 Interest received 1,710 1,929 Dividends received 2,086 2,023 Rental income received on investment property 503 564
Amendments to IAS 12 Income Taxes : Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 These amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset.
The Group’s accounting policies have been updated to reflect these and additional disclosures in respect of liabilities arising from financing activities have been added to Note 42. The implementation of the above interpretations and amendments to existing standards has had no significant impact on the Group’s financial statements.
Consolidated Financial Statements and IFRS 11 Joint Arrangements  Investments in associates and joint ventures within scope of IAS 28 Investments in Associates and Joint Ventures
In 2015 the IASB issued amendments to the standard and delayed the mandatory adoption date until 1 January 2018. A detailed impact assessment was completed in 2017 for all major revenue streams, reviewing contracts and analysing the revenue recognised by the Group. No significant impacts to profit or net assets were identified.
The main impact on the Group of IFRS 16 will be for property that the Group leases for use as office space which is currently classified as operating leases. As a result of the new standard the property leased by the Group will be brought onto the statement of financial position at inception of a lease. At inception the right of use asset will be measured equal to the present value of the lease liability. The present value of the lease liability takes into account prepayments and incentives and will be measured using the interest rate implicit in the lease or the incremental borrowing rate. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability will be recognised separately. The Group is currently assessing the impact of the new standard on the consolidated financial statements. A breakdown of the Group’s existing operating lease commitments is provided in Note 44.
As well as presentation and measurement changes, IFRS 9 also introduces additional disclosure requirements.
In September 2016 the IASB issued amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4, Insurance Contracts. The amendments address the consequences of the different effective dates of IFRS 9 and the new insurance contracts standard, IFRS 17. Insurers are permitted to defer implementation of IFRS 9 until periods beginning on or after 1 January 2021 if they satisfy criteria regarding the predominance of their insurance activities, or to apply an overlay approach to remove incremental volatility from the income statement. At 31 December 2015 the Group’s liabilities arising from contracts within the scope of IFRS 4 and liabilities connected with insurance as a percentage of total liabilities were 32% and in excess of 96% respectively. Therefore the Group was eligible to defer the implementation of IFRS 9. Following the merger with Aberdeen Asset Management PLC, the predominance of insurances activities has been reassessed as at 31 December 2017. The Group remains eligible to defer and has opted to defer.
IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021) IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts. IFRS 4 is an interim standard which permits the continued application of accounting policies, for insurance contracts and contracts with discretionary participation features, which were being used at transition to IFRS except where a change satisfies criteria set out in IFRS 4. IFRS 17 introduces new required measurement and presentation accounting policies for such contracts which reflect the view that these contracts combine features of a financial instrument and a service contract.
Intangible assets Identification and valuation of intangible assets arising from business combinations Determination of amounts to be recognised as internally developed software
The areas where assumptions and other sources of estimation uncertainty at the end of the reporting period have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows: Financial statement area Critical accounting estimates and assumptions Related note Participating contract liabilities, nonparticipating insurance contract liabilities and reinsurance assets
Determination of the valuation interest rates for annuity liabilities Determination of longevity and mortality assumptions for annuity liabilities
Investment property Determination of the fair value of investment property Notes 17 and 41
Defined benefit pension plans Determination of principal UK pension plan assumptions for mortality, discount rate and inflation
 We have improved the disclosure of the estimate in relation to determination of the recoverable amount in relation to intangible assets to inform users that the critical area of estimation uncertainty relates to customer relationships and investment management contracts
 We have removed the critical assumptions around determination of expense assumptions in relation to participating contracts, nonparticipating contracts and reinsurance contracts. We have also removed the critical estimate for over-the-counter derivatives in relation to financial instruments at fair value through profit or loss. These assumptions and estimates have been removed as they are no longer considered to result in a significant risk of material adjustment to carrying value in the next financial year.
All other critical accounting estimates and assumptions are the same as the prior year.
Translation differences on non-monetary items, such as equity securities held at fair value through profit or loss, are reported as part of the fair value gain or loss within net investment return in the consolidated income statement. Translation differences on financial assets and liabilities held at amortised cost are included in the relevant line in the consolidated income statement.
The Group’s financial statements consolidate the financial statements of the Company and its subsidiaries.
At the acquisition date the consideration and net assets acquired from Aberdeen were as follows: 14 August 2017 Notes £m Fair value of equity consideration 4,000 Adjustment for replacement employee share-based payments1 89 Consideration 4,089 7.0% Perpetual cumulative capital notes2 402 5.0% Preference shares 99 Fair value of non-controlling interests 501 Net assets acquired: Intangible assets 14 865 Property, plant and equipment 18 18 Equity securities and interests in pooled investment funds 1,945 Debt securities 187 Deferred tax assets 35 Receivables and other financial assets 428 Cash and cash equivalents 973 Other assets 24 Total assets 4,475 Non-participating investment contract liabilities3 1,665 Bank overdrafts 478 Other financial liabilities 771 Current tax liabilities 25 Deferred tax liability 124 Pension and other post-retirement benefit provisions 30 Provisions 1 Total liabilities 3,094
Net assets acquired 1,381 1 On the acquisition date outstanding share awards issued to Aberdeen employees over Aberdeen Asset Management PLC shares were replaced with awards over Standard
Intangible assets acquired in the business combination consist of customer relationships, brand and technology. Refer Note 14 for further details of these assets and the components of goodwill. None of the goodwill recognised is deductible for income tax purposes.
(c) Disposals (c) HDFC Standard Life Insurance Company Limited Profit on disposal of interests in associates of £319m includes £302m in relation to the HDFC Standard Life Insurance Company Limited (HDFC Life) initial public offering (IPO).
HDFC Life, the Group’s associate Indian life business, announced in July 2017 that its board of directors had approved proceeding with an IPO, with Standard Life (Mauritius Holdings) 2006 Limited (MH06) offering up to 5.43% and HDFC Limited offering up to 9.57% of HDFC Life’s equity shares representing, in aggregate, up to 15% of the paid-up equity share capital of HDFC Life.
On 17 November 2017, HDFC Life listed on the National Stock Exchange of India Limited and The Bombay Stock Exchange Limited following completion of the IPO. On opening, the equity shares in HDFC Life were listed at a price of Rs 290 per share. Through the IPO, MH06 sold 108m equity shares in HDFC Life for a total consideration of Rs 31,489m (£359m). MH06's shareholding in HDFC Life now stands at 590m equity shares or 29.3% of the issued equity share capital of HDFC Life. The gain on sale of £302m was calculated using the weighted-average cost method. On disposal £2m was recycled from the translation reserve and was included in determining the gain on sale.
India and China life (formerly India and China) The businesses included in India and China life offer a range of insurance and savings products and comprise our life insurance associate in India, our life insurance joint venture in China, and wholly owned operations in Hong Kong. The assets and liabilities of our wholly owned operations in Hong Kong are classified as held for sale.
China life1 Other2 Eliminations Total 31 December 2017 Notes £m £m £m £m £m £m
Insurance Company Limited and HDFC Asset Management Company Limited. 4 Amortisation and impairment of intangible assets acquired in business combinations includes £125m included in Other administrative expenses and set out in Note 14, and £13m relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the consolidated income statement.
Each reportable segment reports total adjusted operating income as its measure of revenue in its analysis of adjusted profit before tax. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes.
Adjusted operating income relates to revenues generated from external customers with the exception of £125m (2016: £112m) included within Aberdeen Standard Investments which relates to investment management fees arising from intra-group transactions with the Pensions and Savings segment. At a Group level an elimination adjustment is required to remove intra-group impacts.
The Group has a widely diversified customer base. There are no customers whose revenue represents greater than 10% of fee based revenue.
Share of associates’ and joint ventures’ profit before tax4 35 – 41 – – 76 Adjusted profit/(loss) before tax 386 362 36 (66) – 718 Tax on adjusted profit (73) (71) – 18 – (126) Share of associates’ and joint ventures’ tax expense 10 (11) – (2) – – (13) Adjusted profit/(loss) after tax 302 291 34 (48) – 579 Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes 12 – 13 – – – 13 Restructuring and corporate transaction expenses 9 (23) (38) (3) (3) – (67) Amortisation and impairment of intangible assets acquired in business combinations (25) (13) – – – (38) Provision for annuity sales practices 38 – (175) – – – (175)
Profit for the year 419 1 Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the Other segment within Capital management, a £3m increase to the adjusted profit of the Aberdeen Standard Investments segment within operating expenses and a corresponding £5m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.
Tax expense attributable to policyholders’ returns 166 – 302 – Adjusting items included in revenue and expenses 331 (358) – (269) Non-controlling interests – ordinary shares and capital management 31 – 64 – Total revenue and expenses as presented in the consolidated income statement 16,980 (16,061) 18,729 (18,003)
(d) Non-current non-financial assets by geographical location 2017 2016 £m £m
Standard Life International Designated Activity Company The Pensions and Savings reportable segment also contains the International Bond issued by Standard Life International Designated Activity Company (SL Intl) to UK residents. SL Intl operates using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element are held in the non-unit linked fund.
(a)(ii) India and China life The entity in the India and China life reportable segment that issues insurance and investment contracts, other than associates and joint ventures, is Standard Life (Asia) Limited (SL Asia) which is a Hong Kong entity. SL Asia operates using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. The assets and liabilities of SL Asia have been classified as held for sale during the year. Refer Note 24 for further details.
(a) (iii) Aberdeen Standard Investments The entity in the Aberdeen Standard Investments operating segment that issues investment contracts is Aberdeen Asset Management Life and Pensions Limited (Aberdeen Life), which is a UK entity. The company serves as a delivery mechanism for investment services to the Aberdeen group’s institutional pension scheme clients and other insurance entities through the issue of Trustee Investment Plans and the reassurance of unit linked liabilities. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds.
(b) Insurance, investment and reinsurance contract terms including guarantees and options Details of the significant types of insurance and investment contracts issued by the Group, the nature of any guarantees and options provided under these contracts and details of significant reinsurance contracts are given below. The accounting policy for the classification of contracts is set out in Note 31.
(b)(i) Pensions and Savings – Insurance and investment contracts issued since demutualisation UK annuity-in-payment contracts (spread/risk business) This class of business consists of single premium contracts that provide guaranteed annuity payments. The payments depend on the survival of a life or lives with or without a guaranteed period and may reduce on a specified death or increase each year at a predefined rate or based on the movement in UK RPI. These contracts are classified as non-participating insurance contracts.
The total liability at 31 December 2017 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £457m (2016: £445m) and this represents approximately 10% (2016: 10%) of the total liability for UK annuity in payment contracts held within the PBF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall. If the market moves in line with the adverse scenarios as shown in the market risk sensitivity analysis in Note 39(b), then the impact on shareholder equity from these RPI linked annuities and corresponding assets is not significant.
UK and Ireland unit linked pension contracts (fee business) This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts.
The major unit linked pension contracts include UK Active Money Self Invested Personal Pensions (SIPP), UK Active Money Personal Pensions, UK Stakeholder, Irish Synergy Personal Pensions, UK Group SIPPs, UK Group Flexible Retirement Plans, UK Group Stakeholder and Trustee Investment Plans. These contracts do not contain a with profits investment option except for UK Group Stakeholder and UK Stakeholder, under which customers may invest in the UKSMWPF.
The costs of contracts invested in unit linked funds are recovered by deduction of an asset management charge from the unit linked funds. Under Stakeholder contracts, this asset management charge has a specified maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.
Under UK SIPP contracts, as well as investing in unit linked funds offered by SLAL, policyholders can choose to invest in a wide range of other permitted investments. These other investments are not recognised on the Group’s consolidated statement of financial position.
UK unit linked investment bonds (fee business) Unit linked investment bonds issued by SLAL (e.g. Capital Investment Bond) are single premium whole of life contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.
The International Bond is issued by SL Intl to UK residents. It is a single premium whole of life investment bond. The customer has the option to invest in unit linked funds offered by SL Intl and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the last life assured an additional benefit of 0.1% of the surrender value is paid unless the death is accidental when an additional benefit of 10% of the surrender value is paid subject to a £1m cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
Germany unitised with profits deferred annuity contracts (fee business) Germany unitised with profits deferred annuity contracts were written in the PBF with the participating investment elements being transferred to the GWPF and, to a significantly lesser extent, to the GSMWPF. These contracts were closed to new business in 2015. The death benefit under all of the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value, and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.
As shown in the market risk sensitivity analysis in Note 39(b), there is no impact on shareholder equity arising from contracts in the HWPF for either of the market movements scenarios. As explained in the limitations of the sensitivity analysis, this is because although shareholders are potentially exposed to the full cost if the assets of the HWPF are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.
Regular bonuses are declared at the discretion of the Group in accordance with the Principles and Practices of Financial Management (PPFM) of the HWPF for UK business and similar principles for European business and are set at levels which aim to achieve a gradual build-up in guaranteed participating policy benefits whilst not unduly constraining investment freedom and the prospects for final bonuses. In setting these rates, the financial position (both current and projected) of the HWPF is taken into account, and were it necessary, regular bonus rates would be set to zero. Regular bonus rates are set for each relevant class of participating policy and/or internal fund and reflect its characteristics, including any guarantees. For some contracts, final bonuses may also be paid. These bonuses are not guaranteed and can be withdrawn at any time.
UK conventional with profits contracts (no impact on equity holder profits in the absence of burnthrough) Conventional (i.e. non-unitised) with profits contracts consist of single or regular premium endowment, whole life and pension contracts held in the HWPF.
for example those with guaranteed minimum pensions. The major unitised with profits pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.
The significant options and guarantees under these contracts are the following:  Contracts where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per year or that the unit price will not fall and that there will be no unit price adjustment (UPA) at specified retirement dates or death
 Certain Trustee Investment Plan contracts where, subject to specified conditions and limits, it is guaranteed that there will be no unit price adjustment (UPA) when units are encashed
The significant options and guarantees under these contracts are the following:  Contracts where, subject to specified conditions, it is guaranteed on death or maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity
Under contracts effected in connection with house purchase, the death benefit is guaranteed. Under other regular premium contracts, at any time after the first 10 years, the Group may review the status of the contract and, if it deems it necessary, the sum assured may be reduced, within the limits permitted.
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
 Term extension option on then current premium rates under which the term of the contract may be extended by a whole number of years if the lender agrees to extend the term of the loan
The total liability at 31 December 2017 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,806m (2016: £1,983m) and this represents approximately 22% (2016: 22%) 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.
Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted such as rent free periods are recognised as an integral part of the total rental income and are spread over the term of the lease.
Interest and similar income Cash and cash equivalents 55 86 Available-for-sale debt securities 10 12
Dividend income 2,080 1,999 Gains/(losses) on financial instruments at fair value through profit or loss
Equity securities and interests in pooled investment funds (other than dividend income)1 8,833 9,788 Debt securities 1,218 7,169 Derivative financial instruments (339) (3,857)
Foreign exchange losses on financial instruments other than those at fair value through profit or loss (81) (80) Income from investment property
Investment return 12,774 15,376 1 Presentation changed and comparative restated. Refer Note 16(c).
Fee income from investment contracts and fund platforms 721 649 Fee income from third party funds under management 891 466 Fee income deferred during the year 36 (11) (15) Amortisation of deferred income 36 52 61 Other fee income 33 25 Total fee income 1,686 1,186
Interest expense 6 5 Commission expenses 195 153 Staff costs and other employee-related costs 7 781 596 Operating lease rentals 44 34
Employee share-based payments and deferred fund awards 45 38 32 Total staff costs and other employee-related costs 781 596
The average number of staff employed by the Group during the year: Aberdeen Standard Investments1 2,860 1,681 Pensions and Savings 4,315 4,026 India and China life2 82 112
8. Auditors’ remuneration During the financial year ended 31 December 2017, the Group appointed KPMG LLP (KPMG) as principal auditor replacing PricewaterhouseCoopers LLP (PwC). Accordingly the following table relates to KPMG for 2017 and PwC for 2016: restated £m £m
The audit of the Company’s consolidated subsidiaries pursuant to legislation 4.8 3.8 Audit related assurance services 1.9 0.8
9. Restructuring and corporate transaction expenses Total restructuring and corporate transaction expenses incurred during the year were £176m (2016: £62m). The expenses mainly relate to the merger with and integration of Aberdeen including deal costs of £38m and stamp duty of £21m, Ignis integration, Elevate integration and a number of other business unit restructuring programmes. In addition to corporate transaction expenses recognised in the consolidated income statement £4m (2016: £nil) was recognised directly in the merger reserve in equity in relation to the Aberdeen merger.
The table below reconciles restructuring and corporate transaction expenses in the consolidated income statement with restructuring and corporate transaction expenses used to determine adjusted profit before tax.
Restructuring and corporate transaction expenses 176 62 Pension plan restructuring – 5 Expenses incurred by the Heritage With Profit Fund (3) – Restructuring and corporate transaction expenses used to determine adjusted profit before tax 173 67
8. Group financial statements continued 10. Taxation The Group’s tax expense comprises both current tax and deferred tax expense.
The Group provides additional disclosure in relation to the total tax expense. Certain products are subject to tax on policyholders’ investment returns. This tax, ‘policyholder tax’, is accounted for as an element of current and deferred tax. To make the tax expense disclosure more meaningful, we disclose policyholder tax and tax payable on equity holders’ profits separately. The policyholder tax expense is the amount payable in the year plus the movement of amounts expected to be payable in future years by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders’ profit.
(a) Tax charge in the consolidated income statement (a)(i) Current year tax expense £m £m
Current tax recoverable and current tax liabilities at 31 December 2017 were £192m (2016: £166m) and £166m (2016: £113m) respectively. Current tax assets and liabilities at 31 December 2017 and 31 December 2016 are expected to be recoverable or payable in less than 12 months.
 Share of profit from associates and joint ventures is presented net of tax in the consolidated income statement and therefore also gives rise to a reconciling item
 The ability to value losses and other tax assets will also affect the actual tax charge. The write down of deferred tax asset of £25m relates to a reduction in the valuation of the German tax reserves primarily due to the expected impact of Brexit restructuring and adjustments to our transfer pricing methodology. The adjustment to deferred tax expense in respect of prior years of £35m relates mainly to a change in the valuation of German temporary differences due to the changed economics of that business leading to adjustments to our transfer pricing methodology. All these items are expected to be non-recurring.
Tax relating to defined benefit pension plan deficits 10 (2) Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 10 (2) Current tax on net change in financial assets designated as available-for-sale – 3 Tax relating to fair value losses recognised on cash flow hedges (5) – Tax relating to cash flow hedge losses transferred to consolidated income statement 2 – Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (3) 3 Tax relating to other comprehensive income 7 1
Tax relating to expiry of unclaimed asset trust claim period – 7 Tax credit on reserves for employee share-based payments 29 (1) – Tax credit relating to coupons payable on perpetual notes classified as equity (2) – Tax relating to items taken directly to equity (3) 7
(d) Deferred tax assets and liabilities (d)(i) Movements in net deferred tax liabilities £m £m
Gross deferred tax liabilities 386 328 Less: Offset against deferred tax assets (19) (69) Deferred tax liabilities 367 259 Net deferred tax liability at 31 December (302) (217)
(e) Unrecognised deferred tax Due to uncertainty regarding recoverability, deferred tax assets have not been recognised in respect of the following:  Cumulative losses carried forward of £90m in the UK and £293m overseas (2016: £52m, £113m respectively)  Tax reserves of the German branch of Standard Life Assurance Limited of £102m (2016: £20m)  Unrealised investment losses of £nil (2016: £12m)  Loss relating to Irish pension scheme deficit £42m (2016: deferred tax asset was recognised)
Adjusted profit before tax 854 718 Tax on adjusted profit (108) (126) Share of associates’ and joint ventures’ tax expense (41) (13) Adjusted profit after tax 705 579 Adjusting items (40) (269) Tax credit attributable to adjusting items 42 58 Adjustment for coupons payable on perpetual notes classified as equity net of tax (8) – Profit attributable to equity holders of the Company 699 368
Basic earnings per share 29.8 18.7 Diluted earnings per share 29.6 18.6 Adjusted earnings per share 30.1 29.4 Adjusted diluted earnings per share 29.9 29.3 1 Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short term fluctuations in investment return and economic assumption changes will now only be adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in an £8m reduction to the adjusted profit of the other segment, a £3m increase to the Aberdeen Standard Investments segment and a corresponding £5m adjustment to shortterm fluctuations in investment return and economic assumption changes within adjusting items, for the year ended 31 December 2016.
Details of share options and awards which have a dilutive effect are provided in Note 45.
Adjusted profit also excludes the impact of the following items:  Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.  Amortisation and impairment of intangible assets acquired in business combinations  Profit or loss arising on the disposal of a subsidiary, joint venture or associate  Fair value movements in contingent consideration  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group
Following completion of the merger the Group has changed the calculation of adjusted profit. Short term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to holding companies and other non-insurance entities. The 2016 comparatives have been restated to reflect this change. The reason for the change is to align the approach with that used by Aberdeen in their key profit alternative performance measure; and to make the measure more relevant as it is more consistent with other asset management peers.
(a) Short-term fluctuations in investment return and economic assumptions changes – insurance entities The components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movement in equity holder liabilities, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from adjusted profit for the Group’s wholly owned insurance entities. Investments backing equity holder funds include investments backing annuities and subordinated debt, and investments from surplus capital in insurance companies.
The expected rates of return for debt securities and equity securities are determined separately. The expected rates of return for equity securities are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium of 3% (2016: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also use an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium of 3% (2016: 3%).
The expected rates of return used for both the assets backing subordinated liabilities and the subordinated liabilities themselves include a discount for expected credit defaults. This means that the interest expense included in adjusted profit for subordinated liabilities is after deducting a margin for own credit risk. Additionally, the effect of the accounting mismatch, where subordinated liabilities are measured at amortised cost and certain assets backing the liabilities are measured at fair value, is also excluded from adjusted profit.
Gains and losses on foreign exchange are deemed to represent short-term fluctuations in investment return and economic assumption changes and thus are excluded from adjusted profit.
Short-term fluctuations in investment return for the year ended 31 December 2017 and 31 December 2016 relate principally to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities.
Dividends are distributions of profit to holders of Standard Life Aberdeen plc’s share capital and as a result are recognised as a deduction in equity. Final dividends are announced with the Annual report and accounts and are recognised when they have been approved by shareholders. Interim dividends are announced with the Half year results and are recognised when they are paid.
Current year final recommended dividend 14.30 421 13.35 262 1 Estimated for current year final recommended dividend.
Goodwill is created when the Group acquires a business and the consideration exceeds the fair value of the net assets acquired. In determining the net assets acquired in business combinations, intangible assets are recognised where they are separable or arise from contractual or legal rights. Intangible assets acquired by the Group through business combinations consist mainly of customer relationships, technology and brands. Any remaining value that cannot be identified as a separate intangible asset on acquisition forms part of goodwill.
Purchased software and other Total Notes £m £m £m £m £m £m £m
Amortisation charge for the year 6 – (7) (68) (5) (37) (7) (124)
Disposals and adjustments – – – – 1 – 1 1 Included in the internally developed software of £156m (2016: £167m) is £53m (2016: £56m) relating to intangible assets not yet ready for use.
The goodwill arising on acquisition of Aberdeen is mainly attributable to expected cash flows from new customers and significant synergies which are expected to be realised. Synergies expected to be available to all market participants which impact the cash flows relating to existing Aberdeen customer relationships are included in the valuation of the intangible assets discussed below, with additional synergies forming part of goodwill.
Other intangible assets arising on the Aberdeen acquisition Identification and valuation of intangible assets acquired in business combinations is a key judgement. On the acquisition of Aberdeen, we identified intangible assets in relation to customer relationships, brand and technology as being separable from goodwill.
The description of the three separate intangible assets including their estimated useful life at the acquisition date is as follows: Customer relationship intangible asset Description
Open ended funds Separate vehicle group – open ended investment vehicles. 11 years 223 209 Segregated and similar All other vehicle groups dominated by segregated mandates which represent 75% of this group. 12 years 427 402
Once identified, measuring the fair value of intangible assets acquired in business combinations requires further assumptions and judgements. Customer relationships are valued using discounted cash flow projections. The key assumptions in measuring the fair value of the customer relationships at the acquisition date were as follows:  Net attrition – net attrition represents the expected rate of outflows of assets under management net of inflows from existing customers. This assumption is primarily based on recent experience.
 Market growth – a market growth adjustment has been applied based on the asset class  Operating margin – this assumption is consistent with forecast margins and includes the impact of synergies that would be expected by any market participant and impact the Aberdeen customer relationship cash flows  Discount rate – this assumption is based on the internal rate of return (IRR) of the transaction and is consistent with a market participant discount rate
Estimates and assumptions The key estimates and assumptions in relation to intangible assets are:  Determination of useful lives  Determination of the recoverable amount in relation to impairment assessment of customer intangibles
The determination of useful lives requires judgement in respect of the length of time that the Group expects to derive benefits from the asset and considers for example expected duration of customer relationships and when technology is expected to become obsolete for technology based assets. The amortisation period and method for each of the Group’s intangible asset categories is as follows:  Customer relationships acquired through business combinations – generally between 7 and 12 years, generally reducing balance method  Investment management contracts acquired through business combinations – between 10 and 17 years, straight-line  Brand acquired through business combinations – 5 years, straight-line  Technology acquired through business combinations – between 3 and 6 years, straight line  Internally developed software – between 2 and 6 years. Amortisation is on a straight-line basis and commences once the asset is available for use  Purchased software – between 2 and 6 years, straight-line
Goodwill is assessed for impairment at each reporting date. For other intangible assets an assessment is made as to whether there is an indication that the intangible asset has become impaired. If any indication of impairment exists and the carrying value of an intangible asset exceeds its recoverable amount then the carrying value is written down to the recoverable amount.
In February 2018 Lloyds Banking Group (LBG) and Scottish Widows informed the Group that Scottish Widows and LBG's Wealth business intend to review their long term asset management arrangements including those services that are currently undertaken by certain legacy Aberdeen entities. The impairment of customer relationship and investment management contracts intangible assets in 2017 of £40m relates to this announcement and is an impairment of the Lloyds Banking Group customer relationship intangible asset in the Aberdeen Standard Investments segment. The recoverable amount of this asset, which is its value in use, at 31 December 2017 is £26m and was calculated using a pre-tax discount rate of 13%. The other key assumptions used to measure the value in use calculation are consistent with those used in the acquisition date valuation set out on page 179 other than the useful live which has been reassessed as 1.1 years.
Goodwill allocated to the Aberdeen Standard Investments group of cash-generating units is significant in comparison to the total value of goodwill. The recoverable amount of this group of cash-generating units is based on fair value less costs of disposal. The key assumption used to measure fair value is a price/earnings ratio. Given the recent acquisition of Aberdeen we have used the price/earnings ratio of this transaction, which is comparable with price/earnings ratios of similar asset management businesses at the impairment testing date, to calculate fair value. This fair value measurement would be categorised as level 3 in the fair value hierarchy. A reasonably possible change in the price/earnings ratio would not result in an impairment.
The Group incurs costs to obtain and process new business. These are accounted for as follows: Pensions and Savings – insurance and participating investment contracts Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that was subject to the Prudential Regulation Authority (PRA) realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts both incremental acquisition costs and other indirect costs of acquiring and processing new business are deferred.
The amount of deferred acquisition costs expected to be recovered after more than 12 months is £536m (2016: £566m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £356m (2016: £389m).
Under the equity method, investments in associates and joint ventures are initially recognised at cost and include any goodwill identified on acquisition. The carrying value is adjusted for the Group’s share of post-acquisition profit or loss and other comprehensive income of the associate or joint venture, which are recognised in the consolidated income statement and other comprehensive income respectively. The carrying value is also adjusted for any impairment losses.
Where the Group has an investment in an associate, a portion of which is held by, or is held indirectly through, a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at fair value through profit or loss (FVTPL).
During the year ended 31 December 2017 we have changed our judgement in determining when the Group has significant influence over investment vehicles managed by the Group. In general, investment vehicles which are not subsidiaries are now considered to be associates where the Group holds more than 20% of the voting rights. Previously our judgement was that the Group had significant influence over all investment vehicles where, through its role as investment manager, it had power over the investment decisions of the vehicle. As a result previously the Group classified all Group managed investment vehicles which were not subsidiaries and in which the Group held an
Investments in associates and joint ventures accounted for using the equity method of £503m (2016: £572m) includes £nil (2016: £3m) in relation to loans to associates and joint ventures.
(a) Investments in associates accounted for using the equity method The following are particulars of the Group’s principal associates.
Associates accounted for using the equity method 304 363 90 111 Associates classified as held for sale – – 33 –
Total amount recognised in consolidated statement of financial position 304 363 123 111
In November 2017, HDFC Asset Management Company Limited (HDFC AMC) announced that its board of directors had approved initiation of the process of an IPO subject to receipt of necessary approvals, with the Group offering a portion of the paid up equity share capital of HDFC AMC. As a result a portion of the equity share capital of the associate has been classified as held for sale as at 31 December 2017. Refer Note 24 for further details.
The year end date for HDFC AMC and HDFC Life is 31 March which is different from the Group’s year end date of 31 December. For the purposes of the preparation of the Group’s consolidated financial statements, financial information as at and for the 12 months ended 30 September and 31 December is used for HDFC AMC and HDFC Life respectively.
Summarised financial information of joint venture: Revenue 358 254 Profit after tax 20 15 Other comprehensive income/(expense) 7 (15) Total assets 1,358 1,212 Total liabilities 1,160 1,035 Net assets 198 177 Interest held 50% 50% Current share of net assets 99 88 Carrying value of joint venture 99 88 Dividends received – –
Presentational change A presentational change has been made to the consolidated statement of financial position to include associates measured at FVTPL within ‘Equity securities and interests in pooled investment funds’. Previously these were included within ‘Investments in associates and joint ventures’ which has been renamed ‘Investments in associates and joint ventures accounted for using the equity method’. The reason for the change is to make the presentation more relevant to the users of the financial statements as it is more consistent with peers. The carrying value of associates measured at FVTPL at 31 December 2016 was £4,797m restated (2015: £5,025m restated) and the consolidated statement of financial position comparative has been updated to reflect the change in presentation.
The fair value of investment property can be analysed as: Freehold 7,297 7,271 Long leasehold 2,452 2,658 1 During 2017 investment property measured at £225m (2016: £191m) was reclassified as held for sale and income strips measured at £319m were reclassified as debt securities. Refer Note 41 for further details on income strips. 2 Additions – acquisitions includes £nil (2016: £1,289) relating to the merger of property investment vehicles.
Acquired through business combinations 2 16 18 Transferred from investment property 17 17 – 17 Reclassified as held for sale (4) (2) (6) Disposals and adjustments1 – (3) (3)
Impairment losses reversed 6 4 – 4 Foreign exchange adjustment – (1) (1)
Accumulated depreciation At 1 January 2016 – (102) (102) Depreciation charge for the year 6 – (14) (14) Disposals and adjustments1 – 9 9
If owner occupied property was measured using the cost model, the historical cost before impairment would be £112m (2016: £93m). As the expected residual value of owner occupied property is in line with the current fair value, no depreciation is currently charged.
The majority of the Group’s debt securities and all equity securities and interests in pooled investment funds are designated at FVTPL as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis. These investments are recognised at fair value with changes in fair value recognised in investment return in the consolidated income statement. Commercial real estate loans are included within debt securities designated at fair value.
Loans and receivables Total 2017 Notes £m £m £m £m £m
Receivables and other financial assets 22 6 – – 1,236 1,242 Cash and cash equivalents 25 – – – 10,226 10,226
Derivative financial assets 21 – 3,534 – – 3,534 Equity securities and interests in pooled investment funds 39 90,683 – – – 90,683
The amount of debt securities expected to be recovered or settled after more than 12 months is £50,619m (2016: £55,591m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
Determination of the fair value of private equity investments and those debt securities categorised as level 3 in the fair value hierarchy is a key estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 41.
Loans with variable rates and fixed interest rates are £38m and £53m respectively (2016: £52m and £243m respectively). Loans that are expected to be recovered after more than 12 months are £60m (2016: £88m).
Derivative assets of £1,957m (2016: £2,460m) are expected to be recovered after more than 12 months. Derivative liabilities of £318m (2016: £215m) are expected to be settled after more than 12 months.
(a) Cash flow hedges On 18 October 2017, the Group issued subordinated notes with a principal amount of US$750m. In order to manage the foreign exchange risk relating to the principal and coupons payable on these notes the Group entered into a cross-currency swap which is designated as a cash flow hedge. The cross-currency swap has a fair value liability position of £33m (2016: £nil). During the year ended 31 December 2017 losses of £33m (2016: £nil) were recognised in other comprehensive income in relation to the cross-currency swap. In addition £13m (2016: £nil) and less than £1m (2016: £nil) was transferred from other comprehensive income to Investment return and Finance costs respectively in the consolidated income statement.
8. Group financial statements continued cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2017 and 2016, the ineffectiveness recognised in the consolidated income statement arising from cash flow hedges was less than £1m.
Futures – – – – – – Options – – – 1 – – Other derivatives: Inflation rate swaps 5,464 39 49 2,032 27 41
Derivative financial instruments held for trading 160,838 3,053 780 119,926 3,534 965
Net derivative financial instruments cash inflows 558 266 248 56 162 457 1,747 188 Standard Life Aberdeen 2017
Greater than 20 years Total 2016 £m £m £m £m £m £m £m Cash inflows Derivative financial assets 23,319 448 355 172 221 744 25,259
Net derivative financial instruments cash inflows 383 411 328 142 179 597 2,040 22. Receivables and other financial assets 2017 2016 Notes £m £m
The amount of receivables and other financial assets expected to be recovered after more than 12 months is £85m (2016: £77m).
Certain amounts seeded into funds are classified as investments in associates at FVTPL. Investment property and owner occupied property held for sale relates to property for which contracts have been exchanged but the sale had not completed during the current financial year. Investments in associates at FVTPL and investment property held for sale continue to be measured based on the accounting policies that applied before they were classified as held for sale.
Investments in associates accounted for using the equity method 33 – Investment and owner occupied property1 211 236 Assets held for sale 1,038 263 Liabilities of operations held for sale –
(a) Standard Life (Asia) Limited On 29 March 2017, the Group announced the proposed sale of its wholly owned Hong Kong insurance business, Standard Life (Asia) Limited to the Group’s Chinese joint venture business, Heng An Standard Life Insurance Company Limited, both of which are reported within the India and China life segment. The transaction is subject to obtaining local regulatory and other approvals in mainland China and Hong Kong.
Assets of operations held for sale Equity securities and interests in pooled investment funds 638 Cash and cash equivalents 31 Other assets 34 Total assets of operations held for sale 703 Liabilities of operations held for sale Non-participating insurance contract liabilities 603 Non-participating investment contract liabilities 62 Other liabilities 13 Total liabilities of operations held for sale 678 Net assets of operations held for sale 25
Cash and cash equivalents 10,226 7,938 Cash and cash equivalents classified as held for sale 24 31 –
(a) Issued share capital The movement in the issued ordinary share capital of the Company was: 2017 2016 Issued shares fully paid 12 2/9p each £m 12 2/9p each £m
Shares issued in respect of share options 5 6 27. Shares held by trusts
On completion of the merger on 14 August 2017, 31,483,948 Aberdeen Asset Management PLC shares held by the EBT were exchanged for 23,833,349 Standard Life Aberdeen plc shares at a total nominal value of £3m.
Recognised directly in equity Dividends paid on ordinary shares (469) (370) Transfer for vested employee share-based payments 86 23 Cancellation of capital redemption reserve 29 – 488 Sale of shares held by trusts 4 – Reclassification of perpetual notes to liability 19 – Shares distributed by employee and other trusts (8) (7) Expiry of unclaimed asset trust claim period – 41 Aggregate tax items recognised in equity – (4) Total items recognised directly in equity (368) 171
Transfer for vested employee share-based payments includes £32m (2016: £nil) in relation to replacement awards granted to employees of Aberdeen which vested before the acquisition date and were recognised directly in retained earnings on acquisition.
In addition to unclaimed shares, which are referred to in Note 27, the UAT held cash in relation to unclaimed cash entitlements arising from both cash entitlements which were allocated to eligible members of the mutual company at the date of demutualisation and dividends received on shares held in the UAT. On expiry of the UAT claim period on 9 July 2016, the entitlement to the unclaimed assets remaining in the UAT transferred to the Group. The expiry resulted in the derecognition of a liability of £41m to eligible members in relation to their cash entitlements, which was recognised directly in retained earnings in equity during the year ended 31 December 2016.
Group reconstruction Total 2017 Notes £m £m £m £m £m £m £m £m £m
Capital redemption reserve Total 2016 Notes £m £m £m £m £m £m £m £m £m
Recognised in other comprehensive income Fair value gains on available-forsale financial assets – – 17 – – – – – 17 Revaluation of owner occupied property 18 5 – – – – – – – 5 Exchange differences on translating foreign operations – 173 – – – – – – 173 With profits funds: Associated UDS movement recognised in other comprehensive income 31 (5) (62) – – – – – – (67) Aggregate tax effect of items recognised in other comprehensive income – – (3) – – – – – (3) Total items recognised in other comprehensive income – 111 14 – – – – – 125 Recognised directly in equity Reserves credit for employee share-based payments – – – – 30 – – – 30 Transfer to retained earnings for vested employee share-based payments 28 – – – – (23) – – – (23) Cancellation of capital redemption reserve – – – – – – – (488) (488) Aggregate tax effect of items recognised directly in equity – – – – (3) – – – (3) Total items recognised directly within equity – – – – 4 – – (488) (484)
Non-controlling interests include preference shares and until December 2017, perpetual notes issued by Aberdeen Asset Management PLC. These are classified as equity whilst no contractual obligation to deliver cash exists.
(a) Non-controlling interests – ordinary shares Included in non-controlling interests – ordinary shares of £289m (2016: £297m) are non-controlling interests of Standard Life Private Equity Trust plc (SLPET) of £269m (2016: £251m) which is considered material to the Group. Non-controlling interests own 44% (2016: 45%) of the voting rights of SLPET. The profit allocated to non-controlling interests of SLPET for the year ended 31 December 2017 is £24m (2016: £49m). Dividends paid to non-controlling interests of SLPET during the year ended 31 December 2016 were £7m (2016: £4m).
Statement of financial position: Total assets 600 540 Total liabilities 1 7 Income statement: Revenue 89 119 Profit after tax 81 107 Total comprehensive income 81 107 Cash flows: Cash flows from operating activities 2 5 Cash flows from investing activities 1 73 Cash flows from financing activities (15) (13) Net (decrease)/increase in cash equivalents (12) 65
There are no protective rights of non-controlling interests which significantly restrict the Group’s ability to access or use the assets and settle the liabilities of the Group.
(b) Non-controlling interests – preference shares and perpetual notes 2017 2016 £m £m 5% 2015 Non-voting perpetual non-cumulative redeemable preference shares 99 –
(b)(i) Preference shares The preference shares have no fixed redemption date, except at the sole discretion of the issuer after the fifth anniversary from issue. Preference share dividends are discretionary and where declared, are paid in arrears in two tranches at a rate of 5% per annum and are non-cumulative. No interest accrues on any cancelled or unpaid dividends. Since acquisition no dividends have been declared or paid on the preference shares.
The preference shares can be converted irrevocably into a fixed number of ordinary shares in the event of the conversion trigger. The conversion trigger occurs if Aberdeen Asset Management PLC’s Common Equity Tier 1 (‘CET1’) capital ratio falls below 5.125%. This is a regulatory requirement to enable the preference shares to be treated as Additional Tier 1 capital. The CET1 ratio (unaudited) at 31 December 2017 was 36.2%.
During the year ended 31 December 2017 £8m (2016: £nil) was recognised directly in equity (net of tax) and £2m (2016: £nil) was recognised in Finance costs in the consolidated income statement in relation to coupons payable. The coupons payable on perpetual notes are tax deductible.
Details of the accounting policies for non-participating investment contracts are given in Note 32.
future benefits which contain significant insurance risk, the related investment contract liability is derecognised and an insurance contract liability is recognised. The withdrawal proceeds which are used to secure the insurance contract are recognised as premium income.
The Group’s principal with profits fund is the Heritage With Profits Fund (HWPF) operated by Standard Life Assurance Limited (SLAL). The participating contracts held in the HWPF were issued by a with profits fund that fell within the scope of the PRA realistic capital regime. Under the Scheme of Demutualisation (the Scheme), the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that SLAL’s board is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. This planned enhancement to the benefits under with profits contracts held in the HWPF is included in the FPRL under the PRA realistic basis, resulting in a realistic surplus of nil. Applying the policy noted above, this planned enhancement is therefore included within the measurement of participating contract liabilities.
The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund (SHF) or the Proprietary Business Fund (PBF) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of Germany branch business in SLAL.
Under the PRA realistic basis, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those
Some participating contract liabilities arise under contracts issued by a non-participating fund with a with profits investment element then transferred to a with profits fund within SLAL that fell within the scope of the PRA’s realistic capital regime. The with profits investment element of such contracts is measured as described above. Any liability for insurance features retained in the non-participating fund is measured using the gross premium method applicable to non-participating contracts (see Section (v)).
As a result of the policies for measuring the HWPF’s assets and all its other recognised liabilities:  The UDS of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future recourse cash flows on non-participating contracts), the value of future additional expenses to be charged on Germany branch business and the effect of any measurement differences between the Realistic Balance Sheet value and IFRS accounting policy value of all assets and all liabilities other than participating contract liabilities recognised in the HWPF
India and China life The Group’s policy for measuring liabilities for non-participating insurance contracts issued by overseas subsidiaries is to apply the valuation technique used in the issuing entity’s local statutory or regulatory reporting.
Contracts that give rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contain an element that does not transfer significant insurance risk and which can be measured separately from the insurance component. Where such elements are present, they are accounted for separately with any deposit element being accounted for and disclosed in a manner consistent with 198 Standard Life Aberdeen 2017
financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as reinsurance contracts.
Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised on an accruals basis in the consolidated income statement as expenses under arrangements with reinsurers.
(a) Insurance and participating investment contract premium income 2017 2016 £m £m
Claims and benefits paid 4,449 4,801 Claim recoveries from reinsurers (480) (492) Net insurance claims 3,969 4,309 Change in reinsurance assets and liabilities 31(e) 561 140 Change in insurance and participating contract liabilities 31(e) (1,244) 2,115 Change in unallocated divisible surplus 31(f) 140 53 Expenses under arrangements with reinsurers 31(c) 202 509 Insurance and participating investment contract claims and change in liabilities 3,628 7,126
(d) Insurance and participating investment contract liabilities 2017 2016 £m £m
Total change in contract liabilities recognised in the consolidated income statement1 (916) (175) (253) (1,344) 568 (776)
Due to changes in economic and non-economic factors, certain assumptions used in estimating insurance and investment contract liabilities have been revised. Therefore, the change in liabilities reflects actual performance over the period, changes in assumptions and, to a limited extent, improvements in modelling techniques.
Economic assumptions reflect changes in fixed income yields, leading to small changes in valuation interest rates for non-participating business, and other market movements.
Economic assumptions also include the effect of changes in the inflation scenarios that are used to value inflation linked annuities. This change has resulted in a decrease in non-participating insurance contract liabilities, predominantly offset by an increase in participating liabilities.
The valuation interest rates used are: Non-participating 2017 2016 1. Business held within the PBF Annuities: Individual and group
Pensions: reinsured externally 1.50% 1.55% Pensions: not reinsured externally 1.15% 1.15% Deferred annuities 1.15% 1.15%
Reinsured externally (1.50%) (1.85%) Not reinsured externally (2.00%) (2.10%) Deferred annuities (2.00%) (2.10%)
Longevity assumptions The future mortality assumptions are based on historical experience, with an allowance for future mortality improvement in annuities. The Group’s own mortality experience is regularly assessed and analysed, and the larger industry-wide investigations are also taken into account.
The SLAL parameterisation of the CMI_2015 and CMI_2014 models make the following changes relative to the ‘core’ model:  Blends period improvements between ages 60 to 80 to the long-term improvement rate over a 15-year period (compared with a 20-year period in the core CMI model)
In addition the SLAL parameterisation of the CMI_2015 model makes the following change relative to the ‘core’ model:  Tapers long-term improvements rates to 1.25% at age 100+ from age 82 (compared with tapering to 0% at age 110 over a 25-year period, in the core CMI model)
Withdrawals paid out to policyholders on non-participating investment contracts are treated as a reduction to policyholder deposits and not recognised as expenses in the consolidated income statement.
Reclassified as held for sale during the year (68) – Acquired through business combinations 1,411 –
Account balances paid on surrender and other terminations in the year (15,903) (10,737) Change in non-participating investment contract liabilities recognised in the consolidated income statement1 8,954 8,768 Recurring management charges (490) (473) Foreign exchange adjustment 223 835 1 Change in non-participating investment contract liabilities recognised in the consolidated income statement in the table above excludes £9m (2016 £nil) in relation to nonparticipating investment contract liabilities classified as held for sale.
Financial liabilities measured at amortised cost Total 2017 Notes £m £m £m £m £m Non-participating investment contract liabilities 39 105,765 – – 4 105,769 Deposits received from reinsurers 39 – – – 4,633 4,633 Third party interest in consolidated funds 39 16,457 – – – 16,457
Financial liabilities measured at amortised cost Total 2016 Notes £m £m £m £m Non-participating investment contract liabilities 39 102,059 – 4 102,063 Deposits received from reinsurers 39 – – 5,093 5,093 Third party interest in consolidated funds 39 16,835 – – 16,835
8. Group financial statements continued 34. Subordinated liabilities Subordinated liabilities are debt instruments issued by the Company which rank below its other obligations in the event of liquidation but above the share capital. Classification of the Group’s subordinated liabilities as liabilities on the consolidated statement of financial position is discussed further below. Subordinated liabilities are initially recognised at the value of proceeds received after deduction of issue expenses. Subsequent measurement is at amortised cost using the effective interest rate method.
A description of the key features of the Group’s subordinated liabilities is as follows: 4.25% US Dollar fixed rate1 5.5% Sterling fixed rate 6.75% Sterling fixed rate 6.546% Sterling fixed rate
If not called by the Company interest will reset to 2.915% over the five-year Treasury rate (and at each fifth anniversary)
2.85% over the gross redemption yield on the appropriate five-year benchmark gilt rate 2.7% over the gross redemption yield on the appropriate one-year benchmark gilt rate
Solvency II own funds treatment Tier 2 Tier 2 Tier 1 Tier 1 1 The cash flows arising from the US dollar subordinated notes give rise to foreign exchange exposure which the Group manages with a cross-currency swap designated as a cash flow hedge. Refer Note 21 for further details.
The Group operates two types of pension plans:  Defined benefit plans which provide pension payments upon retirement to members as defined by the plan rules. All of the Group’s defined benefit plans, with the exception of a small plan in Ireland are closed to future service accrual.
Net interest income (if a plan is in surplus) or interest expense (if a plan is in deficit) is calculated using yields on high quality corporate bonds and recognised in the consolidated income statement. A current service cost is also recognised which represents the expected present value of the defined benefit pension entitlement earned by members in the period.
The defined contribution plans comprise a mixture of arrangements depending on the employing entity and other factors. Some of these plans are located within the same legal vehicles as defined benefit plans. The Group contributes a percentage of pensionable salary to each employee’s plan. The contribution levels vary by employing entity and other factors.
This is the Group’s principal defined benefit plan. The plan closed to new membership in 2004 and changed from a final salary basis to a revalued career average salary basis in 2008. Accrual ceased in April 2016. The funding of the plan depends on the statutory valuation performed by the trustees, and the relevant employers, with the assistance of the scheme actuary – i.e. not the IAS 19 valuation. The funding valuation was last completed as at 31 December 2016, and measured plan assets and liabilities to be £4.9bn and £4.2bn respectively. This corresponds to a surplus of £0.7bn and funding level of 117%. As there is currently no deficit, no recovery plan is required.
In December 2009 this plan closed to new membership and changed from a final salary basis to a career average revalued earnings (CARE) basis. At the last trustee valuation, effective 1 January 2016, the plan was 70% funded on an ongoing basis.
During 2015 the terms of a plan amendment to the principal 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. Eligible members of the defined benefit plan received an additional contribution of 6% of pensionable salary into the defined contribution plan in April 2016. These contributions were accrued over the vesting period and are included in current service cost and in the cost of defined contribution plans in Note 7 for the year ended 31 December 2016.
(b) Analysis of amounts recognised in the consolidated statement of financial position 2017 2016
Principal plan Other Total Principal plan Other Total £m £m £m £m £m £m
The principal plan surplus is considered to be recoverable as a right to a refund exists. The surplus has been reduced to reflect an authorised surplus payments charge that would arise on a refund.
Return on plan assets, excluding amounts included in interest income – 1,036 1,036 – 1,036 Gain from change in demographic assumptions – – – – – Loss from change in financial assumptions (812) – (812) – (812)
Further information on risks is provided in Section (g) of this note. The £2,949m (2016: £3,547m) of debt securities includes £2,858m (2016: £3,357m) government bonds (including conventional and index-linked). Of the remaining £91m (2016: £190m) debt securities, £75m (2016: £169m) are investment grade corporate bonds or certificates of deposit.
In 2015, the trustees of one of the Aberdeen UK plans purchased an insurance policy to protect the plan against future investment and actuarial risks. The £75m (2016: £nil) qualifying insurance asset has been calculated by valuing the estimated benefits that will be paid by the insurer using the reporting date IAS 19 assumptions and the same approach used to value the year end liabilities. The other Aberdeen UK plan has a contract in place to hedge longevity risk for pensioners. The fair value of this derivative is £nil at 31 December 2017.
Consumer Price Index (CPI) 2.20 2.25 Retail Price Index (RPI) 3.20 3.25
The changes in economic assumptions over the period reflect small changes in both corporate bond prices and market implied inflation.
The most significant non-economic assumption for the principal plan is post-retirement longevity which is inherently uncertain. The assumptions (along with sample expectations of life) are illustrated below: Normal Retirement
Expectation of life from NRA Male age today Female age today 2017 Table Improvements NRA 40 NRA 40
Advanced parameterisation of CMI 2011 mortality improvements model – adjusted to assume that improvements continue to increase in the short term before declining toward an ultimate long-term rate of 1.375%
The change in longevity assumptions over the period reflects the assumptions that have been agreed with the trustees for the 2016 triennial funding valuation. These assumptions reflect a cautious allowance for the recently observed slowdown in longevity improvements.
Current pensioner 15 15 Non-current pensioner 29 29 1 Restated due to updated methodology.
In the principal 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.
Yield/discount rate Decrease by 1% (i.e. from 2.60% to 1.60%) (1,018) 1,634 (1,040) 1,768
Where the Group receives fees in advance (front-end fees) for services it is providing, including investment management services, these fees are initially recognised as a deferred income liability and released to the consolidated income statement on a straight line basis over the period services are provided.
Reclassified as held for sale during the year (2) – Additions during the year 5 11 15 Amortised to the consolidated income statement as fee income 5 (52) (61) Foreign exchange adjustment 2 8
The amount of deferred income expected to be settled after more than 12 months is £115m (2016: £148m).
Amounts payable on direct insurance business 318 368 Amounts payable on reinsurance contracts 5 6 Outstanding purchases of investment securities 194 300
Property related liabilities 198 246 Contingent consideration liabilities 41 25 15
Provision for annuity sales practices Legal provisions Other provisions Total provisions 2016 £m £m £m £m
Used during the year – – (16) (16) Foreign exchange adjustment – 3 1 4
The Group has in place liability insurance and is seeking for up to £100m of the financial impact of the provision to be mitigated by this insurance. Discussions are ongoing with our insurers and, as a result, no insurance recovery has been recognised as an asset in these financial statements.
The Group has not provided for any possible FCA-levied financial penalty relating to the review. Disclosure of related contingent liabilities is included in Note 43.
The FCA thematic review noted that between 39% and 48% of customers who bought a standard annuity may potentially have been eligible for an enhanced annuity, and the provision assumes 43.5% of customers were eligible for an enhanced annuity.
The assumption of the percentage of eligible customers that did not receive sufficient information from Standard Life Aberdeen about enhanced annuities and suffered loss as a result is based on the sample of Standard Life Aberdeen customers reviewed to date.
Assumptions relating to future annuity payments are consistent with other annuity reserving assumptions.
The costs of conducting the review relate to administrative expenses per case and wider project costs. The costs are based on our project planning.
Percentage changed by +/-4.5 (e.g. 43.5% increased to 48%) +/- £17m
(b) Other liabilities The amount of other liabilities expected to be settled after more than 12 months is £nil (2016: £nil).
8. Group financial statements continued 39. Risk management (a) Overview (a)(i) Application of the risk management framework The Group’s approach to effective risk management is predicated on strong risk awareness and risk accountability across all of our business. This approach aims to deliver long-term value for clients, customers and shareholders and protect their interests. The Group ensures that:  Well informed risk-reward decisions are taken in pursuit of the business plan objectives  Our fiduciary responsibilities are prioritised  Capital is delivered to areas where most value can be created from the risks taken
The Group’s risk framework operates through a well-embedded risk culture, effective risk control processes, robust risk governance, sound financial management and active monitoring of risks. The Enterprise Risk Management (ERM) framework enables a risk-based approach to managing the business and integrates concepts of strategic planning, operational management and internal control, and is set out in more detail in the Strategic report.
Expense The risk that expense levels are higher than planned or revenue falls below that necessary to cover actual expenses. 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.
Third party interest in consolidated funds and non-controlling interests Third party interest in consolidated funds and non-controlling interests refers to the assets and liabilities recorded on the Group’s consolidated statement of financial position which belong to third parties. The Group controls the entities which own the assets and liabilities but the Group does not own 100% of the equity or units of the relevant entities.
The table below sets out how the shareholder is exposed to market, credit, demographic and expense, and liquidity risk at the reporting date, arising from the assets and liabilities of the four risk segments: Risk Shareholder business Participating business Unit linked funds
The shareholder is not exposed to the market risk from assets in respect of TPICF & NCI since the financial risks of the assets are borne by third parties.
The shareholder is not exposed to the credit risk from assets in respect of TPICF & NCI since the financial risks of the assets are borne by third parties.
The shareholder is exposed to longevity and mortality risk on annuity contracts held by Pensions and Savings, and mortality risk on contracts held in non-participating funds by Pensions and Savings, and India and China life including those containing insurance features that are invested in unit linked funds or in the GWPF or GSMWPF. The shareholder is also exposed to expenses and persistency being different from expectation on these contracts.
With profits funds are normally expected to meet their obligations through liquidating assets held in the respective with profits fund. If a with profits fund cannot meet its obligations as they fall due, the shareholder will be required to provide liquidity to meet the policyholder claims and benefits as they fall due.
The shareholder is exposed to operational, conduct, regulatory and legal, and strategic risks arising across the four risk segments and any losses incurred are typically borne by the shareholder.
The shareholder is also exposed to certain risks relating to defined benefit pension plans operated by the Group. These risks are explained in Note 35.
Pension and other post-retirement benefit assets 1,099 1,093 – – – – – – 1,099 1,093
Equity securities and interests in pooled investment funds at FVTPL 331 88 10,327 9,325 80,099 73,057 8,263 8,213 99,020 90,683 Debt securities
Receivables and other financial assets 697 515 70 97 366 533 109 110 1,242 1,255
Non-participating insurance contract liabilities 6,068 6,192 8,878 9,796 7,794 7,434 – – 22,740 23,422 Non-participating investment contract liabilities 4 4 – – 105,765 102,059 – – 105,769 102,063 Participating insurance contract liabilities – – 14,659 15,151 – – – – 14,659 15,151 Participating investment contract liabilities – – 15,313 15,537 – – – – 15,313 15,537
Pension and other post-retirement benefit provisions 78 55 – – – – – – 78 55
Liabilities of operations held for sale 59 – – – 641 – 6 – 706 –
1 Third party interest in consolidated funds and non-controlling interests. 2 Net assets of the shareholder business comprises equity attributable to equity holders of Standard Life Aberdeen plc of £8,604m and equity attributable to preference shareholders of £99m.
Quantitative market risk disclosures are not provided in respect of the assets of the unit linked 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 funds. The shareholder is also not exposed to the market risk from the assets held by third party interest in consolidated funds and non-controlling interests and therefore they have been excluded from the following quantitative disclosures.
The Group manages market risks through the use of a number of controls and techniques including:  Defined lists of permitted securities and/or application of investment constraints and portfolio limits  Clearly defined investment benchmarks for policyholder and shareholder funds  Stochastic and deterministic asset/liability modelling  Active use of derivatives to improve the matching characteristics of assets and liabilities and to reduce the risk exposure of a portfolio  Setting risk limits for main market risks and managing exposures against these appetites
Equity securities and interests in pooled investment funds at FVTPL 96 – Debt securities 34 – Assets held for sale 24 63 27
Scheme of Demutualisation and the Principles and Practices of Financial Management  The need to ensure that regulatory and capital requirements are met
As a result of the diversity of the products offered by the Group and the different regulatory environments in which it operates, the Group employs a range of methods of asset and liability management across its business units.
(b)(i)(i) Group exposure to equity risk The Group is exposed to the risk of adverse equity market movements which could result in losses. This applies to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk:  Direct equity shareholdings in the shareholder business and the Group’s defined benefit pension plans  Burnthrough from the with profits funds where adverse movements in the market values and returns on holdings in the equity portfolios of these funds mean the assets of the with profits funds are not sufficient to meet their obligations  The indirect impact from changes in the value of equities held in funds from which management charges are taken
The table below shows the shareholder and participating businesses’ exposure to equity markets. Equity securities are analysed by country based on the ultimate parent country of risk.
Shareholder business Participating business Total 2017 2016 2017 2016 2017 2016 £m £m £m £m £m £m
In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £204m (2016: £30m). The shareholder exposure to interests in pooled investment funds primarily relates to:  Co-investment holdings in property and infrastructure funds  Investments in certain Aberdeen managed funds to hedge against liabilities from variable pay awards that are deferred and settled in cash by reference to the share price of those funds  Seed capital in funds which are not consolidated
 The indirect impact from changes in the value of property held in funds from which management charges are taken
The table below analyses investment property held by the participating business by country and sector: Participating business
Unit linked funds Changes in equity security and property prices and/or fluctuations in interest rates will affect unit linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit linked 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.
GWPF For the GWPF, whilst shareholders are entitled to charges from this fund, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. Profit after tax and equity are sensitive to the extent that the receipt of future charges is not taken into account in the measurement of the non-participating contract liabilities in the shareholder risk segment in economic scenarios where the charges are deemed foregone to support the participating liabilities. This sensitivity is included within the non-participating insurance contract liabilities in the following table.
Profit after tax sensitivity to market risk Equity markets Interest rates
Equity markets Interest rates 2016 +10% -10% +20% -20% +1% -1% Increase/(decrease) in profit after tax £m £m £m £m £m £m Shareholder business Pensions and Savings: Deferred acquisition costs – – – – – – Assets backing non-participating liabilities – – – – (696) 833 Non-participating insurance contract liabilities – – – – 673 (790) Non-participating investment contract liabilities – – – – – – Other assets and liabilities – – – – – – Total Pensions and Savings – – – – (23) 43
India and China life: Deferred acquisition costs – – – – – (4) Assets backing non-participating insurance contract liabilities – – – – – – Assets backing non-participating investment contract liabilities – – – – – – Non-participating insurance contract liabilities – – – – – – Non-participating investment contract liabilities – – – – – – Other assets and liabilities – – – – 1 1 Total India and China life – – – – 1 (3)
Participating business Pensions and Savings: Recourse cash flow – – – – – – Total Pensions and Savings – – – – – – Total participating business – – – – – –
The sensitivity of the Group’s total equity to variations in equity and property prices for assets and liabilities other than those classified as held for sale in respect of each of the scenarios shown in the preceding tables is the same as the sensitivity of the Group’s profit after tax.
Quantitative credit risk disclosures are not provided in respect of the assets of the unit linked funds since the shareholder is not directly exposed to credit risk from these assets. The unit linked business includes £3,846m (2016: £3,779m) of assets that are held as reinsured external funds links. Under certain circumstances the shareholder may be exposed to losses relating to the default of the reinsured external fund links. These exposures are actively monitored and managed by the Group and the Group considers the circumstances under which losses may arise to be very remote.
The Group’s credit risk exposure mainly arises from its investments in financial instruments. Concentrations of credit risk are managed by setting maximum exposure limits to types of financial instruments and counterparties. The limits are established using the following controls: Financial instrument with credit risk exposure Control Cash and cash equivalents Maximum counterparty exposure limits are set with reference to internal credit assessments. Derivative financial instruments Maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. Refer to Section (c)(iii) for further details on collateral.
Shareholder business An analysis of financial and reinsurance assets by credit rating is as follows: Loans to associates and joint ventures
Impaired – – – – – – – – – – – – – – – –
At 31 December 2017, receivables and other financial assets of £19m (2016: £7m) were past due by less than three months and £2m (2016: £1m) were past due by three to six months and £3m (2016: £nil) were past due by six to twelve months.
An analysis of debt securities by country based on the ultimate parent country of risk is as follows: Government, provincial and municipal1 Banks Other financial institutions Other £m £m £m £m £m £m £m £m £m £m £m £m
Greece – – – – – – – – – – – –
Portugal – – – – – – – – – – – –
Russia – – – – – – – – – – – –
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 2017, the Group had pledged £46m (2016: £30m) of cash and £103m (2016: £187m) of securities as collateral for derivative financial liabilities. At 31 December 2017, the Group had accepted £1,501m (2016: £2,016m) of cash and £947m (2016: £808m) of securities as collateral for derivatives financial assets and reverse repurchase agreements. None of the securities were sold or repledged at the year end.
Financial assets and liabilities are offset and the net amount reported on the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Other than cash and cash equivalents disclosed in Note 25, the Group does not offset financial assets and liabilities on the consolidated statement of financial position, as there are no unconditional rights to set off. Consequently, the gross amount of other financial instruments presented on the consolidated statement of financial position is the net amount. The Group’s bilateral OTC derivatives are all subject to an 226 Standard Life Aberdeen 2017
International Swaps and Derivative Association (ISDA) master agreement. ISDA master agreements and reverse repurchase agreements entered into by the Group are considered master netting agreements as they provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy.
1 Only OTC derivatives subject to master netting agreements have been included above.
(c)(v) Credit risk on loans and receivables and financial liabilities designated as at fair value through profit or loss (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 2017 was £1,444m (2016: £835m) of which £59m related to participating business (2016: £116m), £865m related to shareholder business (2016: £719m) and £520m related to unit linked funds (2016: £nil). During the year, fair value gains of £2m (2016: £27m gains) in relation to the participating and shareholder business 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 losses of £3m (2016: £9m gains). The loans and receivables relating to unit linked business consist solely of income strips (refer Note 41). Due to the long-term nature of these instruments it is not possible to identify the associated credit risk. The shareholder has no exposure to such risk.
(d) Demographic and expense risk As described in the table on page 216, the shareholder is directly exposed to demographic and expense risk from shareholder business and participating business and, as a result, quantitative demographic and expense risk disclosures are provided in respect of these categories.
Expenses The Group defines expense risk as the risk that expense levels are higher than planned or revenue falls below that necessary to cover actual expenses. This can arise from an increase in the unit costs of the Group or its businesses or an increase in expense inflation, either Group 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 profit.
(d)(ii) Sensitivity to demographic and expenses risk analysis Recognition of profit after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Group’s insurance and investment contract liabilities, as described in Note 31.
Longevity Expenses Persistency Morbidity/mortality +5% -5% +10% -10% +10% -10% +5% -5%
2016 £m £m £m £m £m £m £m £m Shareholder business Pensions and Savings: Reinsurance assets – – – – – – 1 (1) Non-participating insurance contract liabilities (136) 128 (8) 8 1 (1) – – India and China Deferred acquisition costs – – (4) – – – – – Non-participating insurance contract liabilities – – – – – – – – Non-participating investment contract liabilities – – – – – – – –
When the sensitivities presented in the tables above are applied to with profits funds other than HWPF, there are no significant impacts on net liabilities after reinsurance, equity or profit for either investment or insurance contracts. Amounts in the tables above are presented net of tax and reinsurance.
Limitations The financial impact of certain risks is non-linear and consequently the sensitivity of other events may differ from expectations based on those presented in the tables above. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously. The analysis has been assessed as at the reporting date. The results of the sensitivity analysis may vary as a consequence of the passage of time or as a consequence of changes in underlying market or financial conditions. The sensitivity analysis in respect of longevity risk has been performed on the relevant annuity business and presents, for a +5% longevity test, the impact of a 5% reduction in the underlying mortality rates (and vice versa). It has also been based on instantaneous change in the mortality assumption at all ages, rather than considering gradual changes in mortality rate.
(e) Liquidity risk As described in the table on page 216, the shareholder is exposed to liquidity risk from shareholder business, participating business and unit linked funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.
For annuity contracts, assets are held which are specifically chosen with the intention of matching the expected timing of annuity payments. Business units actively manage and monitor the performance of these assets against liability benchmarks and liquidity risk is minimised through the process of planned asset and liability matching. The Group’s assets are analysed in Section (b)(i) and Section (c)(i). For Pensions and Savings, the reinsurance treaty between the Group and Canada Life International Re provides for the cash settlement of amounts owed by Canada Life International Re.
Participating business Non-participating insurance contract liabilities 651 2,286 2,171 1,445 883 1,442 – 8,878
Unallocated divisible surplus – – – – – – 675 675
Participating business Non-participating insurance contract liabilities 618 2,263 2,324 1,685 1,105 1,801 – 9,796
Unallocated divisible surplus – – – – – – 585 585
Unit linked funds Non-participating insurance contract liabilities 6,126 669 368 123 69 79 – 7,434 Non-participating investment contract liabilities 9,951 31,696 26,705 16,024 9,118 8,565 – 102,059
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 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.
Shareholder business Non-participating investment contract liabilities 4 4 – – – – – – – – – – 4 4
The Group also had unrecognised commitments in respect of financial instruments as at 31 December 2017 with a contractual maturity of within one year and between one and five years of £411m and £36m respectively (2016: £453m and £nil).
The types of operational risk to which the Group is exposed are identified using the following operational risk categories:  Data and cyber  Change management  Third party  Process execution  Business continuity  People  Fraud and irregularities  Model
Operational risk exposures are controlled using one or a combination of the following: modifying operations to mitigate the exposure to the risk; accepting exposure to the risk; or accepting exposure to the risk and controlling the exposure by risk transfer or risk treatment. The factors on which the level of control and nature of the controls implemented are based include:  The potential cause and impact of the risk  The likelihood of the risk being realised in the absence of any controls  The ease with which the risk could be insured against  The cost of implementing controls to reduce the likelihood of the risk being realised  Operational risk appetite
The operational risks faced by each business unit and its exposure to these risks forms its operational risk profile. Each business unit is required to understand and review its profile based on a combination of the estimated impact and likelihood of risk events occurring in the future, the results of Risk CSA and a review of risk exposures relative to approved limits.
(g) Conduct risk The Group defines conduct risk as the risk that through our behaviours, strategies, decisions and actions the Group delivers unfair outcomes to our customer/client and/or poor market conduct. Conduct risk can occur across multiple areas and from multiple sources, including the crystallisation of an operational risk.
(h) Regulatory and legal risk The Group defines regulatory and legal risk as the risk arising from violation, or non-conformance with laws, rules, regulations, prescribed practices or ethical standards which may result in fines, payments of damages, the voiding of contracts and damaged reputation.
(i) Strategic risk The Group defines strategic risk as those risks which threaten the achievement of the strategy through poor strategic decision-making, implementation or response to changing circumstances. Strategic risks are considered across the Group through the business planning process. The strategic risks to which the Group is exposed are reviewed on a regular basis.
Shareholder business Participating business Unit linked funds TPICF & NCI1 Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 £m £m £m £m £m £m £m £m £m £m
Equity securities and interests in pooled investment funds 202 28 806 969 32,229 27,028 3,484 2,972 36,721 30,997 1 Third party interest in consolidated funds and non-controlling interests.
Total assets under management of structured entities in which the Group has no direct investments but has other interests in are £80,454m at 31 December 2017 (2016: £12,634m). The fees recognised in respect of these assets under management during the year to 31 December 2017 were £305m (2016: £61m).
Determination of the fair value of private equity investments and debt securities categorised as level 3 in the fair value hierarchy are key estimates. Further details on the methods and assumptions used to value these investments are set out in Section (d) below. Disclosures regarding sensitivity of level 3 instruments measured at fair value on the statement of financial position to changes in key assumptions are set out in (d)(v) below.
 Level 2 – Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
 Level 3 – Fair values measured using inputs that are not based on observable market data (unobservable inputs)
(b) Financial investments and financial liabilities An analysis of the Group’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes 19 and 33 and includes those financial assets and liabilities held at fair value.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2017 and 31 December 2016 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.
 Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit These instruments are valued using models. For unquoted bonds the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The categorisation of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.
Contingent consideration liabilities have also been recognised in respect of acquisitions. Generally valuations are based on unobservable assumptions regarding the probability weighted expected return and growth over the contractual period, discounted present value and therefore the liabilities are classified as level 3 in the fair value hierarchy.
Equity securities and interests in pooled investment vehicles 99,020 90,683 763 27 99,783 90,710 98,750 89,750 36 2 997 958
Total assets at fair value 173,474 172,147 988 263 174,462 172,410 124,970 119,315 37,004 41,036 12,488 12,059
There were no transfers between levels 1 and 2 during the year (2016: £98m). Refer to 41(d)(iii) for details of movements in level 3.
The table that follows presents an analysis of the Group’s assets measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 39.
As recognised in the consolidated statement of financial position line item Classified as held for sale Total Level 1 Level 2 Level 3 £m £m £m £m £m £m £m £m £m £m £m £m
Shareholder business Investment property – – – – – – – – – – – – Owner occupied property 2 – – – 2 – – – – – 2 –
Equity securities and interests in pooled investment vehicles 10,327 9,325 – – 10,327 9,325 9,929 8,861 – – 398 464
Equity securities and interests in pooled investment vehicles 80,099 73,057 639 – 80,738 73,057 80,483 72,857 – – 255 200
(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.
Non-participating investment contract liabilities 105,765 102,059 62 – 105,827 102,059 – – 105,827 102,059 – – Liabilities in respect of third party interest in consolidated funds 16,457 16,835 28 – 16,485 16,835 – – 15,187 15,607 1,298 1,228
Total liabilities at fair value 123,060 119,874 90 – 123,150 119,874 161 185 121,666 118,446 1,323 1,243
There were no transfers between levels 1 and 2 during the year (2016: none). Refer to 41(d)(iii) for details of movements in level 3.
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 39.
Shareholder business Derivative financial liabilities 46 12 – – 46 12 1 1 45 11 – –
Transfers in to level 33 – – – – 8 5 27 – – –
1 During 2017 income strips measured at £319m which were previously included within investment property were reclassified as debt securities to reflect the underlying nature of these instruments. 2 Purchases of investment property for the year ended 31 December 2017 includes £nil (2016: £1,289m) relating to the merger of property investment vehicles. 3 Transfers are deemed to have occurred at the end of the calendar quarter in which they arose.
In addition to the above, the Group had a contingent consideration asset with a fair value of £6m at 31 December 2017 (2016: £10m) and contingent consideration liabilities with a fair value of £25m (2016: £15m). Settlements of contingent consideration liabilities during the year were £7m (2016: £nil). Movements in the fair value of contingent consideration assets and liabilities are recognised in the consolidated income statement.
1 An adjustment is made to the valuations of private equity investments received from the investment managers of the underlying funds to estimate the effect of changes in market conditions between the date of their valuations and the end of the reporting period using market indices. The adjustment made at 31 December 2017 was £nil (2016: an increase of £40m).
Changing unobservable inputs in the measurement of the fair value of level 3 financial assets and financial liabilities to reasonably possible alternative assumptions would not have a significant impact on profit attributable to equity holders or on total assets. The alternative assumptions used in this assessment for debt securities are: Reasonably possible alternative assumptions 2017 2016
Unquoted corporate bonds Credit spread +/- 0.45% Credit spread +/- 0.45% Commercial mortgages Credit spread +/- 0.40% Credit spread +/- 0.40%
Profit attributable to non-controlling interests – ordinary shares is exposed to movements in private equity investments, predominantly those held by Standard Life Private Equity Trust plc. The Group considers that a plausible range for the fair value of such private equity investments at 31 December 2017 is -10% to +25% of the 31 December valuation. The impact on profit attributable to non-controlling interests – ordinary shares of £25m for the year to 31 December 2017 for such changes in fair value is to reduce or increase that profit by £24m or £64m respectively with no impact on profit attributable to equity holders.
Whilst not having an impact on profit for the year, the Group has also considered the plausible range for the fair value of investment property at 31 December 2017. Based on independent research that has considered the reasonableness of historic UK property values by comparing valuations with actual sales prices achieved a plausible range for the fair value of the Group’s UK property portfolio, comprising over 90% of the Group investment property portfolio is considered to be -5% to +8.5% of the 31 December valuation.
As recognised in the consolidated statement of financial position line item Fair value Level 1 Level 2 Level 3 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Notes £m £m £m £m £m £m £m £m £m £m
It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in Note 31. The carrying value of participating investment contract liabilities at 31 December 2017 was £15,313m (2016: £15,537m). The carrying value of all other financial assets and liabilities measured at amortised cost approximates their fair value.
8. Group financial statements continued 42. Statement of cash flows The tables below provide further analysis of the balances in the statement of cash flows.
Investment property (373) (116) Equity securities and interests in pooled investment funds1 (6,958) (12,453) Debt securities 7,279 63 Derivative financial instruments 305 (1,331) Reinsurance assets 568 140 Investments in associates and joint ventures accounted for using the equity method1 21 17 Receivables and other financial assets and other assets 211 118 Deferred acquisition costs 30 45
Net additions of units by third parties (5) (1,006) (1,011) (7) (1,838) (1,845)
Foreign exchange differences on translating foreign operations – (54) (54) 10 200 210 Profit in the year attributable to non-controlling interests – ordinary shares 25 – 25 51 – 51 Change in liability for third party interest in consolidated funds – 1,124 1,124 – 296 296 Movements arising from changes in control of subsidiaries and other non-cash movements (1) (157) (158) (59) 1,279 1,220
In addition to the interest paid on subordinated liabilities of £81m (2016: £81m), interest paid in the consolidated statement of cash flows includes £13m (2016: £nil) in relation to interest paid on perpetual notes classified as equity.
(a) Annuity sales practices relating to enhanced annuities As discussed in Note 38, at the request of the Financial Conduct Authority (FCA), Standard Life Aberdeen is conducting a past business review of non-advised annuity sales. The purpose of the review is to identify whether relevant customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and where appropriate provide redress to customers who have suffered loss as a result of not having received sufficient information. In relation to this review, the FCA is carrying out an investigation and it is possible that the FCA may impose a financial penalty on Standard Life Aberdeen. At this stage it is not possible to determine an estimate of the financial effect, if any, of this contingent liability.
Note 38 also provides disclosure of potential insurance recoveries relating to redress payable to customers, the costs of conducting the review and other related expenses. Any FCA levied financial penalties cannot be covered by such liability insurance.
At each period end the Group reassesses the number of equity instruments expected to vest and recognises any difference between the 246 Standard Life Aberdeen 2017
Plan Recipients Conditions which must be met prior to vesting Standard Life Long-term incentive plan (Standard Life LTIP)
All of the awards are equity-settled other than awards made under the Standard Life Investments LTIP in respect of employees in the US, France and Asia which are cash-settled.
US based executives and senior management Service conditions of one, two and three years after the date of the award (one to five years for executive management). There are no outstanding performance conditions.
Unlike share options under the Aberdeen Asset Management DSP 2009 which have a ten year exercise period, conditional shares awarded under the Aberdeen Asset Management USA DSAP have no exercise period and the employee receives the shares at the end of the award’s vesting period.
The plans include the entitlement to the receipt of dividends in respect of awards that ultimately vest between the date of grant and the vesting 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 for the Standard Life Group STIP and the exercise date for the Aberdeen Asset Management
Long-term incentive plans £nil 58,567,339 43,561,955 172p 542,526 – Short-term incentive plan £nil 28,216,634 553,038 Sharesave Less than 200p – 206,770
Share incentive plan Number of share awards granted 955,823 529,277 503,931 Number of share awards replaced 573,099 – – Share price at date of grant2 411p 396p 333p Fair value per granted instrument at grant date 411p 396p 333p 1 Included in the number of instruments granted are 9,048 (2016: 11,814) rights to shares granted to eligible employees in Germany and Austria. 2 Weighted average.
The fair value of share awards replaced under the Annual bonus deferred share awards was calculated by reference to the share price on acquisition of Aberdeen adjusted for pre-combination service. The fair value of instruments granted is calculated by reference to the share price at grant date. The plans include 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.
The liability for cash-settled share-based payments outstanding at 31 December 2017 is £3m (2016: £4m).
Deferred fund awards At 31 December 2017, the liability recognised for cash-settled deferred awards was £52m (2016: £nil). The total intrinsic value of unvested awards at 31 December 2017 was £31m (2016: £nil).
8. Group financial statements continued 46. 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.
(b) Compensation of key management personnel In 2017 key management personnel includes Directors of Standard Life Aberdeen plc (since appointment) and the Chief Executive Officer Pensions and Savings; in 2016 key management personnel included Directors of Standard Life plc only. 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.
(c) Transactions with key management personnel and their close family members All transactions between key management and their close family members and the Group during the year are on terms which are equivalent to those available to all employees of the Group.
During the year to 31 December 2017, key management personnel and their close family members contributed £nil (2016: £1m) to Pensions and Savings products sold by the Group. At 31 December 2017 the total value of key management personnel’s investments in Group Pensions and Savings products was £14m (2016: £16m). Certain members of key management personnel also hold investments in Aberdeen Standard Investments products which are managed by the Group. None of the amounts concerned are material in the context of funds managed by Aberdeen Standard Investments.
47. Capital management (a) Capital management policies and risk management objectives Managing capital is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Board considers our key stakeholders to be the providers of capital (our equity holders, policyholders and holders of our subordinated liabilities) and the Prudential Regulation Authority (PRA).
There are a number of differences to the recognition and measurement of the Group’s assets and liabilities on a SII basis compared to IFRS. These are described in (b)(iii).
The Group’s SII SCR primarily consists of the consolidated SII SCR for insurance entities (including Standard Life Aberdeen plc) which is calculated on the basis of management’s own regulator-approved internal model. In addition, the Group’s SCR also includes SII SCRs for other insurance entities whose SCRs are calculated on the basis of the standard formula within the SII regulations, and the capital requirements of other regulated entities in the Group that are set by their regulator. The SII SCRs for insurance entities are calibrated so that the likelihood of a loss exceeding the SII SCR in one year is less than 0.5%. The SII capital resources are also subject to Minimum Capital Requirements. The capital requirements of regulated non-insurance entities are included in the Group SCR on a Pillar 1 basis, with Pillar 2 and Individual Capital Guidance (ICG) requirements allowed for by a deduction to Group own funds.
This regulatory framework can be summarised as follows for the main regulated entities in the Group: Entity level Contribution to Group SII position Standard Life Investments Limited BIPRU1 BIPRU1 Aberdeen Asset Management PLC IFPRU2 IFPRU2 Standard Life Assurance Limited (SLAL) SII internal model SII internal model Standard Life International DAC SII standard formula SII standard formula Aberdeen Asset Management Life and Pensions Limited SII standard formula SII standard formula Standard Life Aberdeen plc – SII internal model Standard Life (Asia) Limited Local regime (Hong Kong) SII standard formula Heng An Standard Life Insurance Company Limited Local regime (China) SII standard formula HDFC Standard Life Insurance Company Limited Local regime (India) Excluded 1 Prudential Sourcebook for Banks, Building Societies and Investment Firms. 2 Prudential Sourcebook for Investment Firms.
Own funds 7.3 7.2 Solvency capital requirement (SCR) (3.7) (4.1) Solvency II capital surplus 3.6 3.1 Solvency cover 197% 177% 1 2017 based on draft regulatory returns, 2016 based on final regulatory returns.
(b)(iii) Reconciliation of regulatory capital own funds to IFRS equity (unaudited) A reconciliation of the Group own funds to the equity attributable to equity holders of Standard Life Aberdeen plc on an IFRS basis is as follows: £bn £bn
Own funds 7.3 7.2 Add unrecognised Solvency II capital (availability restriction) 0.2 0.2 Remove with profits funds and pension scheme contribution to own funds1 (0.7) (1.2) Remove subordinated liabilities contribution to own funds2 (2.1) (1.6) Remove value of fee business future profits3 (3.0) (2.9) Add IFRS pension scheme surplus1 1.1 1.1 Add IFRS DAC, DIR and other intangibles assets and other valuation differences4 5.8 1.5 IFRS equity attributable to equity holders of Standard Life Aberdeen plc 8.6 4.3 1 In determining Group own funds the asset recognised for a surplus in a with profits fund or a defined benefit pension scheme is restricted to their capital requirements. 2 Subordinated liabilities provide capital in SII provided certain conditions are met. 3 The measurement of technical provisions in Group own funds reflects the value of future profits on investment fee business which are not included in the measurement of IFRS
The financial effect of the transaction, if it completes, is expected to be as follows at completion:  recognition of a gain on disposal in the consolidated income statement. The magnitude of the gain will be dependent on the net asset value of the business disposed of at completion and the share price of Phoenix at completion.
 recognition of the cash proceeds as detailed above  recognition of an investment in associate relating to the 20% shareholding in the enlarged Phoenix group The sale is also expected to result in a material capital release for the Group.
The earnings of the group post completion will reflect the disposal of the majority of the Pensions and Savings reportable segment and a share of profit or loss from associates relating to the investment in associate set out above.
The particulars of the Company’s related undertakings at 31 December 2017 are listed below. For details of the Group’s consolidation policy refer to (b) Basis of consolidation in the Presentation of consolidated financial statements section.
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 financial statements with Companies House has been taken in accordance with the Partnership Accounting Regulations (2008).
Name of related undertaking Share class1 % interest held Aberdeen Asset Management Denmark A/S17 Ordinary shares 100% Aberdeen Asset Management Deutschland AG18 Ordinary shares 94% Aberdeen Asset Management Finland Oy19 Ordinary shares 100% Aberdeen Asset Management Hungary Alapkezelo Zrt20 Ordinary shares 100% Aberdeen Asset Management Inc.21 Ordinary shares 100% Aberdeen Asset Management Investment Funds Limited22 Ordinary shares 100% Aberdeen Asset Management Life and Pensions Limited5 Ordinary shares 100% Aberdeen Asset Management Limited23 Ordinary shares 100% Aberdeen Asset Management Nominees Limited24 Ordinary shares 100% Aberdeen Asset Management Norway AS25 Ordinary shares 100% Aberdeen Asset Management Norway Holding AS25 Ordinary shares 100% Aberdeen Asset Management Operations AS25 Ordinary shares 100% Aberdeen Asset Management SDN BHD26 Ordinary shares 100% Aberdeen Asset Management Services Limited27 Ordinary shares 100% Aberdeen Asset Management Sweden AB28 Ordinary shares 100% Aberdeen Asset Management US GP Control LLC29 Limited Liability Company 100% Aberdeen Asset Managers (Luxembourg) S.a.r.l.30 Ordinary shares 100% Aberdeen Asset Managers Limited4 Ordinary shares 100% Aberdeen Asset Managers Switzerland AG31 Ordinary shares 100% Aberdeen Asset Middle East Limited32 Ordinary shares 100% Aberdeen Capital Management LLC33 Limited Liability Company 100% Aberdeen Capital Managers GP LLC34 Limited Liability Company 100% Aberdeen Claims Administration, Inc.21 Ordinary shares 100% Aberdeen Direct Property (Holding) Limited5 Ordinary shares 100% Aberdeen Diversified Growth Fund5 Unit trust 62% Aberdeen Diversified-Core Adventurous Fund5 Unit trust 45% Aberdeen Diversified-Core Cautious Fund5 Unit trust 72% Aberdeen Diversified-Core Conservative Fund5 Unit trust 90% Aberdeen do Brasil Gestao de Recursos Ltda35 Limited Liability Company 100% Aberdeen Emerging Capital Limited22 Ordinary shares 100% Aberdeen Emerging Market Debt Local Currency Fund36 Commingled fund 25% Aberdeen European Infrastructure Carry GP Limited4 Ordinary shares 100% Aberdeen European Infrastructure Carry Limited4 Ordinary shares 100% Aberdeen European Infrastructure GP II Limited5 Ordinary shares 100% Aberdeen European Infrastructure GP Limited5 Ordinary shares 100% Aberdeen France S.A.37 Ordinary shares 100% Aberdeen Fund Distributors LLC29 Limited Liability Company 100% Aberdeen Fund Management II Oy19 Ordinary shares 100% Aberdeen Fund Management Ireland Limited38 Ordinary shares 100% Aberdeen Fund Management Norway AS25 Ordinary shares 100% Aberdeen Fund Management Oy19 Ordinary shares 100% Aberdeen Fund Managers Limited5 Ordinary shares 100% Aberdeen General Partner 1 Limited4 Ordinary shares 100% Aberdeen General Partner 2 Limited4 Ordinary shares 100% Aberdeen General Partner CAPELP Limited15 Ordinary shares 100% Aberdeen General Partner CGPLP Limited15 Ordinary shares 100% Aberdeen General Partner CMENAPELP Limited15 Ordinary shares 100% Aberdeen General Partner CPELP II Limited15 Ordinary shares 100% Aberdeen General Partner CPELP Limited15 Ordinary shares 100% Aberdeen Global - Asian Credit Bond Fund39 SICAV 50% Aberdeen Global - Emerging Markets Local Currency Corporate Bond Fund39 SICAV 71% Aberdeen Global - European Equity (ex-UK) Fund39 SICAV 42% Aberdeen Global - German Equity Fund39 SICAV 100% Aberdeen Global - Swiss Equity Fund39 SICAV 100% Aberdeen Global ex-Japan GP Limited15 Ordinary shares 100% Aberdeen Global II - US Dollar Credit Bond Fund39 SICAV 51% Aberdeen Global Infrastructure Carry GP Limited4 Ordinary shares 100% Aberdeen Global Infrastructure GP II Limited40 Ordinary shares 100%
Name of related undertaking Share class1 % interest held Aberdeen Standard Limited2 Ordinary shares 100% Aberdeen Sterling Long Dated Corporate Bond Fund4 OEIC 39% Aberdeen Sterling Long Dated Government Bond Fund4 OEIC 31% Aberdeen Trust Limited4 Ordinary shares 100% Aberdeen U.S. Mid Cap Equity Fund36 OEIC 98% Aberdeen UK Infrastructure Carry GP Limited4 Ordinary shares 100% Aberdeen UK Infrastructure Carry Limited4 Ordinary shares 100% Aberdeen UK Infrastructure GP Limited5 Ordinary shares 100% Aberdeen Unit Trust Managers Limited4 Ordinary shares 100% AEROF (Luxembourg) GP S.a.r.l.39 Ordinary shares 100% AFM Nominees Limited24 Ordinary shares 100% AIPP Pooling I SA39 Ordinary shares 100% Airport Industrial GP Limited5 Ordinary shares 100% Amberia General Partner Oy19 Ordinary shares 100% Andaes S.a r.l.52 Ordinary shares 59% Andean Social Infrastructure GP Limited15 Ordinary shares 100% Arden Asset Management (UK) Limited22 Ordinary shares 100% Arden Asset Management LLC34 Limited Liability Company 100% Arthur House (No.6) Limited5 Ordinary shares 100% Artio Global Investors Inc.21 Ordinary shares 100% Asander Investment Management Ltd53 Ordinary shares 100% Aspire Financial Management Limited54 Ordinary shares 25% Auris Kaasunjakelu Oy55 Ordinary shares 26% Baigrie Davies & Company Limited3 Ordinary shares 100% Baigrie Davies Holdings Limited3 Ordinary shares 100% Bardol Inversiones SL10 Ordinary Shares 59 % Bedfont Lakes Business Park (GP1) Limited22 Ordinary shares 100% Bedfont Lakes Business Park (GP2) Limited5 Ordinary shares 100% Brent Cross Partnership56 Limited Partnership 59% Castlepoint General Partner Limited57 Ordinary Shares 100% Castlepoint LP57 Ordinary Shares 50% Castlepoint Nominee Limited57 Ordinary shares 100% Cockspur Property (General Partner) Limited22 Ordinary shares 100% Crawley Unit Trust58 Unit Trust 100% DEGI Beteiligungs GmbH18 Limited Liability Company 94% Dunedin Fund Managers Limited27 Ordinary shares 100% Edinburgh Fund Managers Group Limited4 Ordinary shares 100% Edinburgh Fund Managers Plc59 Ordinary shares 100% Edinburgh Unit Trust Managers Limited4 Ordinary shares 100% Elevate Portfolio Services Limited3 Ordinary Shares
Pearson Jones & Company (Trustees) Limited73 Ordinary Shares 100% Pearson Jones Nominees Limited73 Ordinary Shares 100% Pearson Jones plc3 Ordinary A Shares
The Euro VNAV Liquidity Fund77 OEIC 100% The No.1 Fund77 OEIC 100% The Sterling VNAV Liquidity Fund77 OEIC 100%
Select Japan (GK Holdings UK) Limited Ordinary Shares 59% Select Japan (TK Holdings UK) Limited Ordinary Shares 59% Select Japan G.K. Limited by members 59% Select Malta Holdings Limited78 Ordinary Shares 59% Select Property Holdings (Mauritius) Limited79 Ordinary Shares 59% Self Directed Holdings Ltd53 Ordinary A shares
Name of related undertaking Share class1 % interest held SLCP (General Partner ESF I) Limited Ordinary Shares 100% SLCP (General Partner ESF II) Limited Ordinary Shares 100% SLCP (General Partner ESP 2004) Limited Ordinary Shares 100% SLCP (General Partner ESP 2006) Limited Ordinary Shares 100% SLCP (General Partner ESP 2008 Coinvestment) Limited Ordinary Shares 100% SLCP (General Partner ESP 2008) Limited Ordinary Shares 100% SLCP (General Partner ESP CAL) Limited Ordinary Shares 100% SLCP (General Partner Europe VI) Limited Ordinary Shares 100% SLCP (General Partner II) Limited Ordinary Shares 100% SLCP (General Partner Infrastructure I) Limited Ordinary Shares 100% SLCP (General Partner Infrastructure Secondary I) Limited Ordinary Shares 100% SLCP (General Partner NASF I) Limited Ordinary Shares 100% SLCP (General Partner NASP 2006) Limited Ordinary Shares 100% SLCP (General Partner NASP 2008) Limited Ordinary Shares 100% SLCP (General Partner Pearl Private Equity) Limited Ordinary Shares 100% SLCP (General Partner Pearl Strategic Credit) Limited Ordinary Shares 100% SLCP (General Partner SOF I) Limited Ordinary Shares 100% SLCP (General Partner SOF II) Limited Ordinary Shares 100% SLCP (General Partner SOF III) Limited Ordinary shares 100% SLCP (General Partner Tidal Reach) Limited Ordinary Shares 100% SLCP (General Partner USA) Limited Ordinary Shares 100% SLCP (General Partner) Limited Ordinary Shares 100% SLCP (Holdings) Limited Ordinary Shares 100% SLCP Infrastructure I (Holdings) S.a r.l52 Ordinary shares 26% SLCP Infrastructure I-A S.a r.l52 Ordinary shares 26% SLIF Property Investment GP Limited Ordinary Shares 100% SLIF Property Investment LP Ordinary shares 100% SLIPC (General Partner PMD Co-Invest 2017) Limited Ordinary shares 100% SLIPC (General Partner SCF 1) Ltd Ordinary shares 100% SLIPC General Partner (Infrastructure II LTP 2017) Limited Ordinary shares 100% SLIPC General Partner (Infrastructure II) S.a.r.l49 Ordinary shares 100% SLM Trust
Name of related undertaking Share class1 % interest held Standard Life International Trust Unit Trust 100% Standard Life Investment Company
American Equity Income Fund OEIC 100% American Equity Unconstrained Fund OEIC 56% Asian Pacific Growth Fund OEIC 45% Corporate Bond Fund OEIC 48% Emerging Market Debt Fund OEIC 86% Europe ex-UK Smaller Companies Fund OEIC 23% European Equity Growth Fund OEIC 48% European Equity Income Fund OEIC 31% Global Emerging Markets Equity Fund OEIC 97% Global Emerging Markets Equity Income Fund OEIC 89% Global Equity Unconstrained Fund OEIC 38% Higher Income Fund OEIC 36% Investment Grade Corporate Bond Fund OEIC 22% Japanese Equity Growth Fund OEIC 98% Short Duration Credit Fund OEIC 65% UK Equity Growth Fund OEIC 47% UK Equity High Alpha Fund OEIC 47% UK Equity High Income Fund OEIC 48% UK Equity Recovery Fund OEIC 25% UK Opportunities Fund OEIC 67% UK Smaller Companies Fund OEIC 35%
Standard Life Investment Company II Standard Life Investments Corporate Debt Fund OEIC 100% Standard Life Investments Ethical Corporate Bond Fund OEIC 68% Standard Life Investments European Ethical Equity Fund OEIC 89% Standard Life Investments Global Index Linked Bond Fund OEIC 22% Standard Life Investments Global REIT Fund OEIC 61% Standard Life Investments Short Dated Corporate Bond Fund OEIC 52% Standard Life Investments Short Duration Global Index Linked Bond Fund OEIC 39% Standard Life Investments UK Equity Income Unconstrained Fund OEIC 30% Standard Life Investments UK Equity Unconstrained Fund OEIC 46%
Standard Life Investment Company III Enhanced-Diversification Growth Fund OEIC 98% MyFolio Managed I Fund OEIC 63% MyFolio Managed II Fund OEIC 65% MyFolio Managed III Fund OEIC 75% MyFolio Managed Income I Fund OEIC 44% MyFolio Managed Income II Fund OEIC 49% MyFolio Managed Income III Fund OEIC 55% MyFolio Managed Income IV Fund OEIC 46% MyFolio Managed Income V Fund OEIC 57% MyFolio Managed IV Fund OEIC 61% MyFolio Managed V Fund OEIC 69% MyFolio Market I Fund OEIC 52% MyFolio Market II Fund OEIC 45% MyFolio Market III Fund OEIC 63% MyFolio Market IV Fund OEIC 62% MyFolio Market V Fund OEIC 70% MyFolio Multi-Manager I Fund OEIC 54% MyFolio Multi-Manager II Fund OEIC 56% MyFolio Multi-Manager III Fund OEIC 62% MyFolio Multi-Manager Income I Fund OEIC 44% MyFolio Multi-Manager Income II Fund OEIC 40% MyFolio Multi-Manager Income III Fund OEIC 53% MyFolio Multi-Manager Income IV Fund OEIC 40% MyFolio Multi-Manager Income V Fund OEIC 55%
Standard Life Investment Funds Limited2 Ordinary Shares 100% Standard Life Investments - India Advantage Fund8 Ordinary Shares 100% Standard Life Investments (Corporate Funds) Limited Ordinary Shares 100% Standard Life Investments (France) SAS84 Ordinary Shares 100% Standard Life Investments (General Partner CRED) Limited62 Ordinary Shares 100% Standard Life Investments (General Partner EPGF) Limited Ordinary Shares 100% Standard Life Investments (General Partner European Real Estate Club II) Limited85 Ordinary Shares 100% Standard Life Investments (General Partner European Real Estate Club III) Limited85 Ordinary shares 100% Standard Life Investments (General Partner European Real Estate Club) Limited85 Ordinary Shares 100% Standard Life Investments (General Partner GARS) Limited Ordinary Shares 100% Standard Life Investments (General Partner GFS) Limited Ordinary Shares 100% Standard Life Investments (General Partner Global Tactical Asset Allocation) Limited Ordinary shares 100% Standard Life Investments (General Partner MAC) Limited Ordinary Shares 100% Standard Life Investments (General Partner PDFI) Limited Ordinary Shares 100% Standard Life Investments (General Partner UK PDF) Limited Ordinary Shares 100% Standard Life Investments (General Partner UK Shopping Centre Feeder Fund LP) Limited62 Ordinary Shares 100% Standard Life Investments (Hong Kong) Limited86 Ordinary Shares 100% Standard Life Investments (Jersey) Limited58 Ordinary Shares 100% Standard Life Investments (Mutual Funds) Limited Ordinary Shares 100% Standard Life Investments (PDF No. 1) Limited58 Ordinary shares 50% Standard Life Investments (Private Capital) Limited Ordinary Shares 100% Standard Life Investments (Schweiz) AG31 Ordinary Shares 100% Standard Life Investments (Singapore) Pte. Ltd87 Ordinary Shares 100% Standard Life Investments (Trustee No. 1 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 2 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 3 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 4 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 5 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 6 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 7 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 8 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 9 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 10 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 11 UK PDF) Limited Ordinary shares 100% Standard Life Investments (Trustee No. 12 UK PDF) Limited Ordinary shares 100% Standard Life Investments (USA) Limited Ordinary Shares 100% Standard Life Investments Brent Cross General Partner Limited Ordinary Shares 100% Standard Life Investments Brent Cross LP Limited Partnership 100% Standard Life Investments Dynamic Distribution Fund Unit Trust 49% Standard Life Investments Global Absolute Return Strategies Fund Unit Trust 82% Standard Life Investments Global Real Estate Fund Unit Trust 59% Standard Life Investments Global SICAV
Standard Life Investments Global SICAV Euro Government All Stocks Fund88 SICAV 100% Standard Life Investments Global SICAV European Corporate Bond Fund88 SICAV 33% Standard Life Investments Global SICAV European Equities Fund88 SICAV 70% Standard Life Investments Global SICAV European Equity Unconstrained Fund88 SICAV 86% Standard Life Investments Global SICAV European High Yield Bond Fund88 SICAV 27% Standard Life Investments Global SICAV European Smaller Companies Fund88 SICAV 39% Standard Life Investments Global SICAV Global Absolute Return Strategies Fund88 SICAV 31%
Standard Life Investments Global SICAV II Standard Life Investments Global SICAV II Enhanced-Diversification Multi Asset Fund88 SICAV 85% Standard Life Investments Global SICAV II Global Equity Impact Fund88 SICAV 100% Standard Life Investments Global SICAV II Global Short Duration Corporate Bond Fund88 SICAV 100% Standard Life Investments Global SICAV II MyFolio Multi-Manager I Fund88 SICAV 80% Standard Life Investments Global SICAV II MyFolio Multi-Manager II Fund88 SICAV 66% Standard Life Investments Global SICAV II MyFolio Multi-Manager III Fund88 SICAV 61% Standard Life Investments Global SICAV II MyFolio Multi-Manager IV Fund88 SICAV 89% Standard Life Investments Global SICAV II MyFolio Multi-Manager V Fund88 SICAV 93% Standard Life Investments Global SICAV Indian Equity Midcap Opportunities Fund88 SICAV 81% Standard Life Investments Global SICAV Japanese Equities Fund88 SICAV 97% Standard Life Investments Global SICAV Total Return Credit Fund88 SICAV 46%
Standard Life Investments GS (Mauritius Holdings) Limited8 Ordinary Shares 81% Standard Life Investments GTAA Company15 Limited Liability Company 100% Standard Life Investments Liability Solutions ICAV
Registered offices 2 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH 3 14th Floor, 30 St Mary Axe, London, EC3A 8BF 4 10 Queen's Terrace, Aberdeen, AB10 1YG 5 Bow Bells House, 1 Bread Street, London, EC4M 9HH 6 Cranford House, Kenilworth Road, Blackdown, Leamington Spa, CV32 6RQ 7 133 Cecil Street, #13-03 Keck Seng Tower, 069535, Singapore 8 c/o Cim Fund Services Ltd, 33 Edith Cavell Street, Port Louis, Mauritius 9 2nd Floor, The Royals, Altrincham Road, Sharston, Manchester, M22 4BJ 10 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las
Mercedes, 28022 – Madrid, Spain 11 2-8 avenue Charles De Gaulle, L-1653 Luxembourg, Luxembourg 12 West Area, 2F, No.707 Zhangyang Road, China (Shanghai) Pilot Free Trade
Sathorn, Bangkok, 10120, Thailand 17 Strandvejen 58, 2, Hellerup, 2900, Denmark 18 Bockenheimer Landstrasse 25, 60325 Frankfurt am Main, Germany 19 Kaivokatu 6, Helsinki, 00100, Finland 20 6th Floor, "B" Torony, Westend Office Building, Vaci Ut 1-3, 1062 Budapest,
Hungary 21 c/o Corporation Service Company, 2711 Centerville Road, Suite 400,
Wilmington, 19808, USA 22 1 More London Place, London, SE1 2AF 23 Level 10, 255 George Street, Sydney, NSW 2000, Australia 24 Atria One, 144 Morrison Street, Edinburgh, EH3 8EX 25 Henrik Ibsens gate 100, PO Box 2882 Solli, 0230 Oslo, Norway 26 Suite 1005, 10th Floor, Wisma Hamzah-Kwong Hing No.1, Leboh Ampang 50100 Kuala Lumpur, Indonesia 27 Ten, George Street, Edinburgh, EH2 2DZ 28 Box 3039, Stockholm, 103 63, Sweden 29 c/o Corporation Service Company, 251 Little Falls Drive, Wilmington, New
Castle, 19808, USA 30 80, route d'Esch, L-1470 Luxembourg, Luxembourg 31 Schweizergasse 14, Zurich, 8001, Switzerland 32 Al Sila Tower, 24th Floor, Abu Dhabi Global Market Square, Al Maryah Island,
Barat Kav. E4.3 No. 1-2, 12950 Jakarta, Indonesia 42 6th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong 43 8F-1, No. 101, Songren Road, Taipei City, 110, Taiwan, Republic of China 44 First Floor, Sir Walter Raleigh House, 48-50 Esplanade, St Helier, JE2 3QB,
Seocho-gu, Seoul, Korea 47 Lime Grove House,Green Street, St Helier, JE1 2ST, Jersey 48 Ahtri 6a, Tallinn, 10151, Estonia 49 2 Boulevard de la Foire, L-1528 Luxembourg, Luxembourg 50 WTC, H-Tower, 20th Floor, Zuiplein 166, 1077 XV Amsterdam, The
Netherlands 51 Toranomon Seiwa Building 11F, 1-2-3 Toranomon Minato-Ku, 105-0001 Tokyo,
Mahalaxmi, Mumbai – 400011, Maharashtra, India 68 Lodha Excelus, 13th Floor, Apollo Mills Compound, N.M. Joshi Marg,
People’s Republic of China, 300051 70 ul. Emilii Plater 53, 00-113, Warszawa, Poland 71 Datum House, Electra Way, Crewe, Cheshire, CW1 6ZF 72 Dokkveien 1, P.O.Box 1400 Vika, NO-0115 Oslo, Norway 73 Clayton Wood Close, West Park Ring Road, Leeds, LS16 6QE 74 St Martin's House, LE Bordage, St Peter Port, Guernsey, GY1 4AU 75 V celnici 1031/4, Nové Město, 110 00 Praha 1, Czech Republic 76 Wesley House, Bull Hill, Leatherhead, KT22 7AH 77 70 Sir Rogerson's Quay, Dublin 2, Republic of Ireland 78 Level 2 West, Mercury Tower, The Exchange Financial & Business Centre, Elia
Hong Kong 83 90 St Stephen's Green, Dublin 2, Republic of Ireland 84 100 Avenue des Champs Elysees, 1 Rue de Berri, F- 75008, Paris, France 85 31st Floor, 30 St Mary Axe, London, EC3A 8BF 86 30th Floor, Jardine House, One Connaught Place, Hong Kong 87 8 Marina Boulevard #05-02, Marina Bay Financial Centre Tower 1 01 8981,
Singapore 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg 89 25/28 North Wall Quay, Dublin 1, Republic of Ireland 90 Elizabeth House, 9 Castle Street, St Helier, Jersey, JE4 2QP 91 Liberte House, 19-23 La Molle Street, St Helier, Jersey, JE4 5RL 92 Pulttikatu 1, 48770 Kotka, Finland 93 Citadel House, 6 Citadel Place, Ayr, KA7 1JN 94 PO Box 33, Maison Trinity, Trinity Square, St Peter Port, Guernsey, GY1 4AT
Equity Share capital H 364 242 Shares held by trusts I (36) (2) Share premium reserve H 639 634 Retained earnings
Total retained earnings 1,564 1,351 Other reserves K 6,390 2,393 Total equity 8,921 4,618
The financial statements on pages 265 to 279 were approved by the Board and signed on its behalf, by the following Directors: Sir Gerry Grimstone Bill Rattray Chairman Chief Financial Officer 23 February 2018 23 February 2018
The Notes on pages 269 to 279 are an integral part of these financial statements
Company statement of changes in equity For the year ended 31 December 2017
Profit for the year – – – 624 – 624 Other comprehensive income that may be reclassified subsequently to profit or loss Fair value losses on cash flow hedges – – – – (33) (33) Realised losses on cash flow hedges transferred to income statement – – – – 13 13 Tax effect of items that may be reclassified subsequently to profit or loss K – – – – 3 3 Total other comprehensive income for the year that may be reclassified subsequently to profit or loss – – – – (17) (17) Total comprehensive income for the year – – – 624 (17) 607 Issue of share capital H 122 – 5 – 3,972 4,099 Dividends paid on ordinary shares – – – (469) – (469) Reserves credit for employee share-based payment schemes K – – – – 96 96 Transfer to retained earnings for vested employee share-based payment schemes K – – – 86 (54) 32 Shares acquired by employee trusts – (63) – – – (63) Shares distributed or sold by employee trusts – 29 – (28) – 1 Aggregate tax effect of items recognised directly in equity – – – – – –
Profit for the year – – – 351 – 351 Other comprehensive income that may be reclassified subsequently to profit or loss Fair value gains on available-for-sale financial assets – – – – 17 17 Tax effect of items that may be reclassified subsequently to profit or loss – – – – (3) (3) Total other comprehensive income for the year that may be reclassified subsequently to profit or loss – – – – 14 14 Total comprehensive income for the year – – – 351 14 365 Issue of share capital H 1 – 6 – – 7 Dividends paid on ordinary shares – – – (370) – (370) Expiry of unclaimed asset trust claim period J – – – 36 – 36 Reserves credit for employee share-based payment schemes K – – – – 30 30 Transfer to retained earnings for vested employee share-based payment schemes K – – – 23 (23) – Shares acquired by employee trusts – (3) – – (3) Shares distributed or sold by employee trusts – 7 – (7) – – Cancellation of capital redemption reserve – – – 488 (488) – Aggregate tax effect of items recognised directly in equity – – – (7) – (7)
Cash flows from investing activities Capital injections into existing subsidiaries A (413) (208) Acquisition of subsidiaries measured at cost (60) – Interest received on loans to subsidiaries 20 20 Interest received on available-for-sale debt securities 15 17 Distributions from equity instruments 34 34 Dividends received from subsidiaries 792 457 Acquisition of subsidiaries at FVTPL A (55) (18) Disposal of subsidiaries at cost A 37 – (Purchase)/sale of debt securities and derivatives (258) 147 Disposal of investment in associates and joint ventures – 13 Net cash flows generated from investing activities 112 462
Cash flows from financing activities Proceeds from issue of subordinated liabilities 565 – Dividends paid (469) (370) Interest paid on subordinated liabilities (81) (82) Proceeds from issue of shares 5 6 Shares acquired by trusts (37) (3) Sale of shares held by trusts 4 – Expiry of unclaimed asset trust claim period – 36 Net cash flows used in financing activities (13) (413)
Net decrease in cash and cash equivalents (48) (6) Cash and cash equivalents at the beginning of the year G 55 61 Cash and cash equivalents at the end of the year G 7 55
Supplemental disclosures on cash flows from operating activities Interest received – –
The Notes on pages 269 to 279 are an integral part of these financial statements 268 Standard Life Aberdeen 2017
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018)
(a)(iv) 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. Further detail is provided in Note 35 of the Group financial statements. The pension plans are funded by payments from employees and by the Group companies, determined by periodic actuarial calculations. The Company is not the sponsoring employer for a defined benefit plan. As a result, the Company treats its participation in defined benefit plans as defined contribution plans.
For the defined contribution plans, the Company pays contributions to separately administered pension insurance plans. The contributions are recognised in profit for the year when they are due.
On 14 August 2017 the Company acquired Aberdeen Asset Management PLC (Aberdeen) and was renamed Standard Life Aberdeen plc. The Company acquired 100% of the share capital of Aberdeen, and Aberdeen ordinary shareholders received 0.757 of a share in Standard Life Aberdeen plc on the completion date satisfied through newly issued shares. The cost of the investment in Aberdeen was £4,243m consisting of £4,098m based on the fair value of the equity consideration at the date of completion including £98m for shares issued to the Aberdeen Asset Management Employee Benefit Trust 2003, £89m for replacement employee share-based payments reflecting the fair value of the preacquisition service element of the awards and transaction costs of £56m. Further details are provided in Note 1 of the Group financial statements.
On 16 August 2017 the Company increased its investment in Standard Life Assurance Limited through the purchase of 13,000,000 ordinary shares for a cash consideration of £13m.
On 13 December 2017 the Company increased its investment in Aberdeen Asset Management PLC through the purchase of 125,000,000 ordinary shares for cash consideration of £400m.
On 11 February 2016 the Company increased its investment in Standard Life Employee Services Limited through the purchase of 8,000 ordinary shares for a cash consideration of £8m.
On 11 April 2016 the Company increased its investment in Standard Life (Mauritius Holdings) 2006 Limited through the purchase of 250,300,000 ordinary shares for a cash consideration of £177m.