Intangible assets including goodwill are assessed for impairment at each reporting date. If the carrying value of an intangible asset exceeds its recoverable amount then the carrying value is written down to the recoverable amount.
The recoverable amount for intangible assets excluding goodwill is currently its value in use. In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.
Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.
The Group also considers itself to have significant influence over investment vehicles where, through its role as investment manager, it has power over the investment decisions of the vehicle. As a result the Group classifies all Group managed investment vehicles which are not subsidiaries and in which the Group holds an investment, as associates even though it may hold less than 20% of the voting rights of the investment vehicle. 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 investmentlinked insurance funds, that portion of the investment is measured at fair value through profit or loss.
(a) Investments in associates The following are particulars of the Group’s principal associates, which are both unlisted: HDFC Standard Life Insurance
HDFC Standard Life Insurance Company Limited was previously a joint venture of the Group. During the year ended 31 December 2015 changes were made to the shareholders’ agreement so that the Group no longer has joint control of this entity. As a result, this entity is now classified as an associate of the Group.
In August 2015, the Group entered into a share and purchase agreement to purchase an additional 9% of the issued share capital of HDFC Standard Life Insurance Company Limited for a consideration of Rs 1,706 crore (£175m based on INR exchange rate as at 31 December 2015), increasing the Group’s interest to 35%. The transaction is subject to satisfactory regulatory approvals.
18. Investments in associates and joint ventures continued (a) Investments in associates continued HDFC Asset Management Company Limited manages a range of mutual funds and provides portfolio management and advisory services. The Group’s share of post-acquisition movements in reserves of HDFC Asset Management Company Limited which have been recognised directly in equity, have not been reflected in the carrying value of the associate. As a result there is a difference between the carrying value of the associate and the Group’s share of net assets.
The reporting date for HDFC Asset Management Company Limited and HDFC Standard Life Insurance Company Limited is 31 March as this is their year end date. This is different from the Group’s year end date of 31 December.
The Group also has investments in associates measured at FVTPL of £5,425m (2014: £4,264m), none of which are considered individually material to the Group as the investments are primarily held by unit linked and segregated funds. These associates have no significant contingent liabilities to which the Group is exposed and there are no restrictions that would prevent the transfer of funds to the Group (2014: none).
(b) Investments in joint ventures The following are particulars of the Group’s principal joint venture which is unlisted: Heng An Standard Life
Summarised financial information of joint venture: Profit after tax 8 3
The fair value of investment property can be analysed as: The rental income arising from investment property during the year from continuing operations amounted to £487m (2014: £450m). Direct operating expenses (included within other administrative expenses) from continuing operations arising in respect of such rented property during the year amounted to £70m (2014: £73m).
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: Not later than one year 478 485
Later than one year and no later than five years 1,563 1,344
20. Property, plant and equipment Property, plant and equipment consists primarily of property owned and occupied by the Group and the computer equipment used to carry out the Group’s business and is initially recognised at cost.
At 31 December 2015 55 36 91 1 For the year ended 31 December 2015 £nil (2014: £1m) of disposals and adjustments relates to equipment with net book value of £nil which is no longer in use. 2 The impairment losses reversed in respect of owner occupied property arose due to changes in the market value of a number of properties relative to their original deemed cost.
21. Financial investments Management determines the classification of financial investments at initial recognition. Financial investments which are not derivatives and are not designated at fair value through profit or loss (FVTPL) are classified as either available-for-sale (AFS) or loans and receivables. The classification of derivatives is set out in Note 23.
Designated as at fair value through profit or loss Held for trading
Net investment hedge Cash flow hedge Total 2015 Notes £m £m £m £m £m £m £m Investments in associates and joint ventures 18 5,425 - - 2 - - 5,427
Debt securities 41 65,914 - 743 - - - 66,657 Receivables and other financial assets 24 15 - - 1,432 - - 1,447
Debt securities 41 64,085 - 356 - - - 64,441 Receivables and other financial assets 24 20 - - 1,228 - - 1,248
Estimates and assumptions 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 private equity investments and those debt securities categorised as level 3 in the fair value hierarchy are discussed in Note 43.
Loans and advances to banks with greater than three months to maturity from acquisition date 721 289
23. Derivative financial instruments A derivative is a financial instrument that is typically used to manage risk and whose value moves in response to an underlying variable such as interest or foreign exchange rates. The Group uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve efficient portfolio management. Certain consolidated investment vehicles also use derivatives to take and alter market exposure, with the objective of enhancing performance and controlling risk.
Using derivatives to manage a particular exposure is referred to as hedging. For a derivative to be considered as part of a hedging relationship its purpose must be formally documented at inception. In addition, the effectiveness of the hedge must be initially high and be able to be reliably measured on a regular basis. Derivatives used to hedge variability in future cash flows such as revenue receivable in a foreign currency are designated as cash flow hedges while derivatives used to hedge currency risk on investments in foreign operations are designated as net investment hedges.
Derivative assets of £2,098m (2014: £2,708m) are expected to be recovered after more than 12 months. Derivative liabilities of £475m (2014: £738m) are expected to be settled after more than 12 months.
(a) Cash flow hedges Forward foreign exchange contracts with an aggregate notional principal amount of £10m (2014: £1,135m) and a net fair value asset position of less than £1m (2014: £1m) were designated as hedges of future cash flows arising from revenue receivable in foreign currency. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2015 and 2014, the ineffectiveness recognised in the consolidated income statement that arises from these cash flow hedges was less than £1m.
(b) Net investment hedges Forward foreign exchange contracts with a notional principal amount of £5m (2014: £1,107m) and a net liability position of less than £1m (2014: £4m net liability) were designated as net investment hedges and gave rise to losses for the year of £1m (2014: £15m gains), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2015, the losses recognised in the consolidated income statement were less than £1m (2014: £6m). During 2015 £110m was 154 Standard Life
(d) Maturity profile The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows: Within 1 year
Net derivative financial instruments cash inflows/(outflows) 604 543 287 105 (484) 21 1,076
Estimates and assumptions Determination of the fair value of over-the-counter derivative financial instruments is a key estimate. The methods and assumptions used to determine fair value of over-the-counter derivative financial instruments are discussed in Note 43.
24. Receivables and other financial assets 2015 2014 Notes £m £m
The amount of receivables and other financial assets expected to be recovered after more than 12 months is £69m (2014: £56m).
Current tax recoverable was previously included within other assets but has now been presented separately on the face of the consolidated statement of financial position. The balance at 31 December 2015 was £168m (2014: £191m). The opening balance at 1 January 2014 was £138m.
The assets and liabilities of operations held for sale at 31 December 2015 primarily relate to the assets and liabilities of a consolidated infrastructure fund and its subsidiaries. The fund is actively seeking additional external investment and it is highly probable that the Group will no longer have control of this fund within the next 12 months. The assets and liabilities are held in the UK and Europe segment.
Other Total 31 December 2014 Notes £m £m £m £m £m £m Assets of operations held for sale
Intangible assets - - - - 13 13 Deferred acquisition costs - - - - 115 115 Investments in associates and joint ventures
Investment property - - - - 1,417 1,417 Property, plant and equipment - - - - 31 31 Deferred tax assets - - - - 54 54 Reinsurance assets - - - - 187 187 Loans - - - 2,313 - 2,313 Derivative financial assets - 44 - - - 44 Equity securities and interests in pooled investment funds
Debt securities 10,694 - 365 - - 11,059 Receivables and other financial assets
26. Assets and liabilities held for sale continued Financial instruments Other
Deposits received from reinsurers - - - - - - Third party interest in consolidated funds 953 - - - - 953
Other liabilities - - - - 32 32 Total liabilities of operations held for sale 27. Cash and cash equivalents Cash and cash equivalents include cash at bank, money at call and short notice with banks, and any highly liquid investments with less than three months to maturity from the date of acquisition, and are measured at amortised cost. For the purposes of the consolidated statement of cash flows, cash and cash equivalents also include bank overdrafts which are included in other financial liabilities on the consolidated statement of financial position.
Demand, term deposits and debt instruments with less than three months to maturity from acquisition 6,976 7,666
Cash and cash equivalents classified as held for sale 26 - 709
Total cash and cash equivalents for consolidated statement of cash flows 9,591 11,243
Issued shares fully paid 10p each 12 2/9p each £m 10p each £m
Shares issued in respect of share incentive plans 169,283 194,329 - 287,120 -
On 13 March 2015, the Company undertook a share consolidation of the Company’s share capital. Nine new ordinary shares of 12 2/9 pence each were issued for each holding of 11 existing ordinary shares of 10 pence each. As a result, the number of shares in issue reduced from 2,395,185,122 to 1,959,696,918. All ordinary shares in issue in the Company rank pari passu and carry the same voting rights to receive dividends and other distributions declared or paid by the Company.
(b) Return of value 668,370,013 ‘B’ shares were issued for nil consideration with a nominal value of 73 pence each on 19 March 2015, resulting in a total of £488m being credited to the ‘B’ share capital account. At the same time £488m was deducted from the share premium account. On 20 March 2015 the ‘B’ shares were redeemed at 73 pence each. An amount of £488m was deducted from the ‘B’ share capital account and £488m was transferred from retained earnings to the capital redemption reserve.
As noted above, 668,370,013 ‘B’ shares were issued at 73 pence each on 19 March 2015, resulting in a deduction of £488m from the share premium account.
29. Shares held by trusts Shares held by trusts relates to shares in Standard Life plc that are held by the Employee Share Trust (EST) and the Unclaimed Asset Trust (UAT).
In July 2006 Standard Life demutualised and former members of the mutual company were given shares in the new listed Company. Some former members have yet to claim their shares and the UAT holds these on their behalf. The Company has an off-setting obligation to deliver these shares which is also recognised in the shares held by trust reserve. The shares and the off-setting obligation are both measured at £nil.
29. Shares held by trusts continued The number of shares held in trust at 31 December 2015 was as follows: Number of shares held in trust
Recognised in profit for the year attributable to equity holders 1,423 503
Dividends due on unclaimed shares not held in the Unclaimed Asset Trust (2) -
31. Movements in other reserves In July 2006 Standard Life demutualised and during this process the merger reserve, the reserve arising on Group reconstruction and the special reserve were created.
Merger Reserve: At demutualisation in July 2006 the Company issued shares to former members of the mutual company. The difference between the nominal value of these shares and their issue value was recognised in the merger reserve. The reserve comprises components attaching to each subsidiary that was transferred to the Company at demutualisation based on their fair value at that date. On disposal or impairment of such a subsidiary the related component of the merger reserve is released to retained earnings.
The following table shows the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.
Capital redemption reserve Total 2015 Notes £m £m £m £m £m £m £m £m £m £m £m
The with profits fund adjustment represents the cumulative amounts transferred to the unallocated divisible surplus as they represent movements attributable to participating policyholders, which would otherwise have been included in other reserves.
Exchange differences on translating foreign operations - - (49) - - - - - - (49)
With profits funds: Associated UDS movement recognised in other comprehensive income (4) - 6 - - - - - - 2
Transfer to retained earnings on sale of owner occupied property (4) - - - - - - - - (4)
Dividends paid on ordinary shares - - - - - - - - - -
Aggregate tax effect of items recognised directly in equity - - - - - - (1) - - (1)
32. Non-controlling interests and third party interest in consolidated funds (a) Non-controlling interests The movement in non-controlling interests during the year was: Foreign exchange differences on translating foreign operations (2) (4)
Summarised financial information for SLEPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2015 and 2014 which is SLEPET’s financial reporting date and is considered indicative of the interest that non-controlling interests of SLEPET have in the Group’s activities and cash flows. The financial statements of SLEPET for the years ended 30 September 2015 and 2014 have been adjusted for market movements and any other significant events or transactions for the three months to 31 December for the purposes of consolidation into the Group’s consolidated financial statements for the years ended 31 December 2015 and 2014 respectively.
Statement of financial position: Income statement: Profit after tax 47 28
33. Insurance contracts, investment contracts and reinsurance contracts (i) Classification of insurance and investment contracts The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts.
UK and Europe Participating contract liabilities arising under contracts issued by a with profits fund falling within the scope of the Prudential Regulation Authority (PRA) realistic capital regime are measured on the PRA realistic basis. Under this approach, the value of participating insurance and participating investment contract liabilities in each with profits fund is calculated as: • With profits benefits reserves (WPBR) for the fund as determined under the PRA realistic basis, plus • Future policy related liabilities (FPRL) for the fund as determined under the PRA realistic basis, less • Any amounts due to equity holders included in FPRL, less • The portion of future profits on non-participating contracts included in FPRL not due to equity holders, where this portion can be separately identified
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 included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
(iv) Measurement – participating contract liabilities continued Applying the policy noted above: • The value of participating insurance and participating investment contract liabilities is reduced by future expected (net positive) cash flows arising on participating contracts
Canada The Group’s policy for measuring liabilities for participating contracts issued by overseas subsidiaries is to apply the valuation technique used in the issuing entity’s local statutory or regulatory reporting. Therefore, for participating contracts issued by The Standard Life Assurance Company of Canada (SLCC), the Canadian regulatory valuation technique was applied, under which for most participating business the value of participating policy liabilities was set equal to the value of the assets set aside in a separate fund for this business, unless this was insufficient to cover guaranteed benefits, in which case a higher liability was recognised.
(v) Measurement – non-participating insurance contract liabilities UK and Europe The liability for annuity in payment contracts is measured by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from yields on the underlying assets.
Canada and India and China 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.
For non-participating insurance contracts issued by SLCC, the Canadian regulatory valuation technique was applied. Under Canadian regulations, liabilities were determined according to the Canadian Asset Liability Method (CALM). Assets and liabilities were projected under a number of different economic scenarios. These scenarios included the current yield curve as at the valuation date and a number of various rising and falling interest rate environments. Under each scenario, the assets required to support the liabilities were the value of assets which would achieve zero surplus at the end of the projection period. In this valuation allowance was made for income taxes arising from differences between tax and accounting bases that were policy related. Under CALM the deferred taxes recognised under IAS 12 relating directly to policy related items included in the computation of liabilities are eliminated in the liabilities and discounted deferred taxes were added. The liability was set equal to the greatest value of the required assets.
(vii) Reinsurance contracts Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for and disclosed in a manner consistent with financial instruments.
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 financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as reinsurance contracts.
Non-economic assumptions decrease net of reinsurance of £82m includes a decrease of £43m in respect of participating business which is primarily in respect of changes in the best estimate non-economic assumptions used in calculating the value of future transfers to equity holders in respect of participating business in the HWPF. Non-economic assumptions also includes a decrease of £39m (net of reinsurance) in respect of non-participating business, which primarily relates to changes in mortality assumptions.
Economic assumptions reflects changes in fixed income yields, leading to higher valuation interest rates on non-participating business, and other market movements.
Reinsurance contracts Net 2014 £m £m £m £m £m £m At 1 January 15,060 28,312 14,707 58,079 (5,857) 52,222 Reclassified as held for sale during the year (667) (8,135) (3) (8,805) (123) (8,928) 14,393 20,177 14,704 49,274 (5,980) 43,294 Expected change (1,014) (717) (701) (2,432) 350 (2,082) Methodology/modelling changes (3) (81) 44 (40) - (40) Effect of changes in Economic assumptions 356 1,625 (344) 1,637 (410) 1,227 Non-economic assumptions 37 (65) (52) (80) 7 (73) Effect of Economic experience 2,092 207 1,319 3,618 6 3,624 Non-economic experience 79 (264) 252 67 (1) 66 New business 42 1,000 22 1,064 (12) 1,052 Total change in contract liabilities 1,589 1,705 540 3,834 (60) 3,774 Foreign exchange adjustment (585) (41) (53) (679) 4 (675) At 31 December 15,397 21,841 15,191 52,429 (6,036) 46,393 168 Standard Life
The HWPF was established as part of the demutualisation transaction on 10 July 2006. Under the Scheme certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders, and the component related to contracts whose future cash flows will remain in the HWPF, to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining policies invested in the fund.
Participating insurance contracts 14,283 16,099 Participating investment contracts 14,716 15,193 Participating contract liabilities after apportionment 28,999 31,292
Unallocated divisible surplus before apportionment 1,639 1,712 Apportionment of non-participating PVFP (984) (1,024) Unallocated divisible surplus after apportionment 655 688
(e) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 41. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
Estimates and assumptions The determination of the valuation interest rates and investment returns, longevity and mortality assumptions, and expense assumptions are all key accounting estimates.
The principal assumptions are shown in the tables below: (i) Non-participating insurance contracts UK and Europe For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation. The basis is considered prudent in each aspect. In particular, options and guarantees have been provided for on prudent bases.
Individual and group in deferment Males: 67.0% AMC00 Males: 71.5% AMC00
Individual after vesting (business written after 10 July 2006) Males: 92.6% RMC00 Males: 92.2% RMC00
Individual after vesting (business written prior to 10 July 2006) Males: 97.1% RMC00 Males: 96.7% RMC00
Group after vesting (business written after 10 July 2006) Males: 112.1% RMV00 Males: 111.1% RMV00
In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. This is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.8% for males and 1.5% for females in 2015 (1.8% for males and 1.5% for females in 2014). The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2013 is a model that was published towards the end of 2013.
The SLAL parameterisation of the CMI_2013 model makes 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)
Assumes that cohort improvements dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model).
(ii) Assumptions used in the calculation of the present value of future profits on non-participating insurance and investment contracts in the HWPF were as follows: Investment returns
(iii) Sensitivity analysis Refer to Note 41 for sensitivity analysis for the shareholder business.
34. Non-participating investment contracts Unit linked non-participating investment contracts are separated into two components being an investment management services component and a financial liability. All fees and related administrative expenses are deemed to be associated with the investment management services component (refer to Note 5, Note 17 and Note 38). The financial liability component is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets.
Financial liabilities measured at amortised cost Total 2014 Notes £m £m £m £m £m Non-participating investment contract liabilities 41 88,203 - - 4 88,207 Deposits received from reinsurers 41 - - - 5,642 5,642 Third party interest in consolidated funds 41 15,805 - - - 15,805 Subordinated liabilities 36 - - - 1,612 1,612 Derivative financial liabilities 23 - 1,681 12 - 1,693 Other financial liabilities 39 3 - - 3,731 3,734 Total 104,011 1,681 12 10,989 116,693 172 Standard Life
36. 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. All of the Group’s subordinated liabilities are classified as liabilities on the consolidated statement of financial position as 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.
Subordinated notes 5.5% Sterling fixed rate due 4 December 2042 £500,000,000 499 £500,000,000 499 3.938% Canadian dollar fixed/floating rate due 21 September 2022
Mutual Assurance Capital Securities 6.546% Sterling fixed rate perpetual £300,000,000 317 £300,000,000 317 5.314% Euro fixed/floating rate perpetual - - €360,000,000 294
Less: Subordinated liabilities classified as held for sale 3.938% Canadian dollar fixed/floating rate due 21 September 2022 26 - - CA$400,000,000 (223) Total subordinated liabilities 41 1,318 1,612
Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. On 6 January 2015 the Company redeemed in full the 5.314% Euro fixed/floating rate perpetual Mutual Assurance Capital Securities at their outstanding principal amount of €360,000,000. Accrued interest of £15m relating to these securities was also settled. The principal amount of all other subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on the remaining subordinated liabilities, excluding those classified as held for sale, of £37m (2014: £37m) is expected to be settled within 12 months.
Subordinated notes The Sterling subordinated notes were issued by the Company on 4 December 2012 pursuant to its EUR3,000,000,000 Euro Medium Term Note Programme dated 10 May 2012. The maturity date of the notes is 4 December 2042. Interest is payable each six months in arrears. The Company has the option to redeem the notes at par on 4 December 2022 and on every interest payment date thereafter until maturity. If the notes are not redeemed the interest rate payable will be reset on 4 December 2022 and on each fifth anniversary thereafter to 4.85% over the five year gilt rate. The notes are direct, unsecured obligations of the Company that rank subordinate to all senior creditors of the Company.
Subordinated guaranteed bonds The subordinated guaranteed bonds were issued on 12 July 2002. The payment of principal and interest in respect of the bonds has been irrevocably and unconditionally guaranteed by SLAL. The claims of the bondholders to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders.
36. Subordinated liabilities continued Mutual Assurance Capital Securities (MACS) The MACS were issued on 4 November 2004. The payment of principal and interest in respect of the MACS is irrevocably and unconditionally guaranteed by SLAL. The claims of the holders of the MACS to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders. The MACS are perpetual securities and as such have no fixed redemption date. The Sterling denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 6.546% per annum payable annually in arrears on 6 January each year, commencing on 6 January 2006. The Euro denominated MACS started accruing interest from 4 November 2004 at a rate of 5.314% per annum and were redeemed in full on 6 January 2015.
37. Pension and other post-retirement benefit provisions The Group operates two types of pension plans for staff employed by the Group: • Defined benefit plans where the scheme is obligated to provide pension payments upon retirement to members as defined by the scheme rules
Net interest income (if the plan is in surplus) or interest expense (if the 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.
Defined benefit Defined contribution UK The Group’s largest defined benefit plan is for employees based in the UK. It closed to new entrants in November 2004 and changed from a final salary basis to a revalued career average salary basis in 2008. In December 2014, following a staff consultation, the Group announced that the UK defined benefit plan would be closed to future accrual effective April 2016.
At the last actuarial valuation effective 1 January 2013 the plan was 99% funded on an ongoing basis. The effective date of the next valuation is 1 January 2016.
37. Pension and other post-retirement benefit provisions continued (a) Analysis of amounts recognised in the consolidated income statement The amounts recognised in the consolidated income statement for defined contribution and defined benefit plans are as follows: Current service cost (80) (60)
(b) Analysis of amounts recognised in the consolidated statement of financial position 2015 2014
Present value of funded obligation (2,525) (85) (2,610) (2,816) (98) (2,914) (242) Present value of unfunded obligation - (8) (8) - (8) (8) (73) Fair value of plan assets 3,936 60 3,996 3,990 62 4,052 214 Effect of limit on plan surplus (514) - (514) (414) - (414) - Net asset/(liability) 897 (33) 864 760 (44) 716 (101) 1 The net liability for the Canada plan was classified as held for sale at 31 December 2014.
Return on plan assets, excluding amounts included in interest income - (73) (73) - (73) Gain from change in demographic assumptions - - - - - Gain from change in financial assumptions 225 - 225 - 225 Experience gains 115 - 115 - 115 Change in effect of limit on plan surplus - - - (100) (100)
Remeasurement gains/(losses) recognised in other comprehensive income 340 (73) 267 (100) 167 Exchange differences 5 (3) 2 - 2 Employer contributions - 4 4 - 4 Benefit payments 115 (115) - - - At 31 December (2,618) 3,996 1,378 (514) 864 176 Standard Life
Interest (expense)/income (108) 129 21 - 21 Total expense recognised in consolidated income statement (153) 129 (24) - (24)
Loss from change in demographic assumptions (56) - (56) - (56)
Loss from change in financial assumptions (375) - (375) - (375)
Change in effect of limit on plan surplus - - - (181) (181) Remeasurement (losses)/gains recognised in other comprehensive income (423) 896 473 (181) 292
Defined benefit plans also use pooled investment vehicles to access a variety of asset classes in an efficient way. The underlying assets of the pooled investment vehicles include, but are not limited to, equity securities, property, debt securities and absolute return portfolios.
37. Pension and other post-retirement benefit provisions continued (e) Estimates and assumptions Determination of the valuation of plan liabilities is a key estimate as a result of the assumptions made relating to both economic and non-economic factors.
Male, age today Female, age today 2015 Table Improvements NRA 40 NRA 40 UK Plan specific basis
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%
Male, age today Female, age today 2014 Table Improvements NRA 40 NRA 40 UK Plan specific basis
(f) Duration of defined benefit obligation The graph below provides an illustration of the undiscounted expected benefit payments included in the valuation of the UK plan obligations.
38. Deferred income 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.
The amount of other financial liabilities expected to be settled after more than 12 months is £79m (2014: £65m).
40. Other liabilities Provisions are obligations of the Group which are of uncertain timing or amount. They are recognised when the Group has a present obligation as a result of a past event, it is probable that a loss will be incurred in settling the obligation and a reliable estimate of the amount can be made.
41. Risk management (a) Overview (a)(i) Application of the risk management framework The Group’s risk management activities support the creation of long-term value by ensuring well-informed risk-reward decisions are taken in pursuit of the Group’s business plan objectives and by ensuring capital is delivered to areas where most value can be created for the risks taken.
The risk management framework used by the Group in 2015 to identify, assess, control and monitor risks is set out in the Strategic report. This includes information on the use of qualitative risk appetite statements and quantitative risk limits in order to manage the Group’s risks.
Liquidity The risk that the Group is unable to realise investments and other assets in order to settle its financial obligations when they fall due, or can do so only at excessive cost.
Risk segments The assets and liabilities on the Group’s consolidated statement of financial position can be split into four categories (risk segments) which give the shareholder different exposures to the risks listed previously. These categories are: Shareholder business Shareholder business refers to the assets and liabilities to which the shareholder is directly exposed. For the purposes of this note, the shareholder refers to the equity holders of the Company.
Unit linked and segregated funds Unit linked and segregated funds refers to the assets and liabilities of the unit linked and segregated funds of the life operations of the Group. It does not include the cash flows (such as asset management charges or investment expenses) arising from the unit linked or segregated fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked or segregated fund contracts. Such cash flows and liabilities are included in shareholder business or participating business.
SLAL – PBF (excluding unit linked funds and Canadian branch) SLS
Interests in Indian and Chinese associates and joint ventures n/a SLIL unit linked funds3 SLA unit linked funds
2 Related to SLIL’s International Bond business. 3 Related to SLIL’s business excluding International Bond business. 4 For the purposes of this table, Dubai and Singapore businesses are included in India and China and not Discontinued operations as they do not meet the definition of a discontinued operation under IFRS 5.
41. Risk management continued (a) Overview continued (a)(i) Application of the risk management framework continued 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 and segregated funds
Third party interest in consolidated funds and non-controlling interests (TPICF & NCI)
The shareholder is exposed to the credit risk on the assets which could cause the with profits funds to have insufficient resources to meet their obligations. If this situation occurred the shareholder would be exposed to the full shortfall in the funds.
Third party interest in consolidated funds and noncontrolling interests (TPICF & NCI)
The shareholder is exposed to longevity and mortality risk on annuity contracts held by UK and Europe, and mortality risk on contracts held in nonparticipating funds by UK and Europe and India and China 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.
The shareholder receives recourse cash flows and certain other defined payments in accordance with the Scheme of Demutualisation and other relevant agreements. The recourse cash flows are based on several different components of which some are sensitive to demographic and expense risk.
Investments in associates and joint ventures 313 260 531 535 4,561 3,568 314 145 5,719 4,508
Pension and other post-retirement benefit assets 897 760 - - - - - - 897 760
Non-participating insurance contract liabilities 5,197 5,276 9,556 10,753 6,453 5,812 - - 21,206 21,841
Liabilities of operations held for sale - 8,725 37 858 - 17,492 46 958 83 28,033
(b) Market risk As described in the table on pages 184 to 185, the shareholder is exposed to market risk from the shareholder and participating businesses and as a result the following quantitative market risk disclosures are provided in respect of the financial assets of the shareholder and participating businesses.
The key considerations in the asset and liability management of the participating business are: • The economic liability and how this varies with market conditions • The need to invest the assets in a manner consistent with participating policyholders' reasonable expectations and, where appropriate, the Scheme of Demutualisation and the Principles and Practices of Financial Management (PPFM) • The need to ensure that regulatory and capital requirements are met
Information on the methods used to determine fair values for each major category of financial instrument and investment property measured at fair value is presented in Note 43 and Note 19.
(b)(i)(i) Group exposure to equity risk The Group is subject to equity price risk due 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
41. Risk management continued (b) Market risk continued (b)(i) Elements of market risk continued Exposures to equity securities are primarily controlled through the use of investment mandates including constraints based on appropriate equity indices.
(b)(i)(ii) Group exposure to property risk The Group is subject to property risk due to changes in the value and return on holdings in investment property. This risk arises from: • Direct property holdings in the shareholder business • Burnthrough from the with profits funds where adverse movements in the market values and returns on investment property in 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 property held in funds from which management charges are taken
Exposures to property holdings are primarily controlled through the use of portfolio limits which specify the proportion of the value of the total property portfolio represented by: • Any one property or group of properties • Geographic area • Property type • Development property under construction 188 Standard Life
The tables below show the shareholder and the participating businesses’ direct exposure to investment property analysed by country and sector: Shareholder business Office Industrial Retail Other Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 £m £m £m £m £m £m £m £m £m £m
41. Risk management continued (b) Market risk continued (b)(i) Elements of market risk continued (b)(i)(iv) Group exposure to foreign currency risk The Group’s financial assets are generally held in the local currency of its operational geographic locations, principally to assist with the matching of liabilities. However, foreign currency risk arises where financial assets are held in other currencies, for example to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The Group manages this risk through the use of limits on the amount of foreign currency risk that is permitted.
Non designated derivatives relate to foreign exchange forward contracts that are not designated as cash flow hedges or net investment hedges.
There are no net investment hedges or cash flow hedges in the participating business. Other currencies include assets of £3m (2014: £29m) and liabilities of £27m (2014: £14m) in relation to the fair value of derivatives used to manage currency risk exposures.
The recourse cash flows have been determined in accordance with the Scheme and consider the extent to which shareholders participate in the investment returns and surpluses of the HWPF. The Scheme, and in particular the Capital Support Mechanism, requires the financial state of the HWPF to be considered before recourse cash flows are transferred to the Shareholder Fund and, under certain circumstances, the payment of recourse cash flow can be withheld to support the financial strength of the HWPF. Therefore, the HWPF has been treated as a whole for the purpose of this sensitivity analysis.
For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The sensitivities presented in the table are not sufficiently severe to have restricted recourse cash flows in 2015 and 2014. When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant Principles and Practices of Financial Management (PPFM).
Participating business UK and Europe: 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement. 3 The interest rate sensitivity is a parallel shift subject to a floor of -30bps.
The Company within other shareholder business classifies certain debt securities as available-for-sale (AFS). The Group’s sensitivity of profit after tax of continuing operations to changes in interest rates does not include the impact of changes in interest rates for these AFS assets.
Other’s equity sensitivity to a 1% increase in interest rates is (£14m) (2014: (£15m)) and to a 1% decrease in interest rates is £15m (2014: £15m). The sensitivity of the Group’s total equity from continuing operations to a 1% increase in interest rates is (£61m) (2014: (£53m)) and a 1% decrease in interest rates is £80m (2014: £45m).
The Group’s credit risk exposure mainly arises from its investments in its 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.
The Group’s policy is to place reinsurance only with highly rated counterparties. The policy restricts the Group from assuming concentrations of risk with few individual reinsurers by specifying certain limits on ceding and the minimum conditions for acceptance and retention of reinsurers.
The objective evidence that is taken into account in determining whether any impairment of debt securities has occurred includes: • A default against the terms of the instrument has occurred • The issuer is subject to bankruptcy proceedings or is seeking protection from creditors through bankruptcy, individual voluntary arrangements or similar process
Neither past due nor impaired: At 31 December 2015, receivables and other financial assets of £19m (2014: £17m) were past due by less than three months and £1m (2014: £3m) were past due by three to six months.
Neither past due nor impaired: At 31 December 2015, receivables and other financial assets of £15m (2014: £15m) were past due by less than three months.
The shareholders’ exposure to credit risk arising from investments held in the HWPF and other with profits funds is similar in principle to that described for market risk exposures in section (b). As at 31 December 2015, the financial assets of the HWPF include £5,134m (2014: £5,642m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been structured in this manner specifically to mitigate credit risks associated with default of the reinsurer. Any credit losses and defaults within the portfolio of assets are borne by the external reinsurer.
(c)(iii) Collateral accepted and pledged in respect of financial instruments Collateral in respect of bilateral over-the-counter (OTC) derivative financial instruments is accepted from and provided to certain market counterparties to mitigate counterparty risk in the event of default. The use of collateral in respect of these instruments is governed by formal bilateral agreements between the parties. The amount of collateral required by either party is determined by the daily bilateral OTC exposure calculations in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Under the terms of these agreements, collateral is posted with the ownership captured under title transfer of the contract. With regard to either collateral pledged or accepted, the Group may request the return of, or be required to return, collateral to the extent it differs from that required under the daily bilateral OTC exposure calculations. Furthermore, alternative collateral such as securities may be provided if acceptable to both parties.
41. Risk management continued (c) Credit risk continued (c)(iv) Offsetting financial assets and liabilities 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. 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 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 International Swaps and Derivative Association (ISDA) master agreement, which provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy. An ISDA master agreement is considered a master netting agreement.
As at 31 December 2015 £m £m £m £m Financial assets Derivatives1 1,752 (549) (1,176) 27 Total financial assets 1,752 (549) (1,176) 27 Financial liabilities Derivatives1 (1,070) 549 466 (55) Total financial liabilities (1,070) 549 466 (55) 1 Only OTC derivatives subject to master netting agreements have been included above.
As at 31 December 2014 £m £m £m £m Financial assets Derivatives1 3,051 (1,057) (1,863) 131 Total financial assets 3,051 (1,057) (1,863) 131 Financial liabilities Derivatives1 (1,260) 1,057 194 (9) Total financial liabilities (1,260) 1,057 194 (9) 1 Only OTC derivatives subject to master netting agreements have been included above.
(d) Demographic and expense risk As described in the table on pages 184 to 185, 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.
Demographic and expense risk is managed by assessing certain characteristics based on experience and statistical data and by making certain assumptions on the risks associated with the policy during the period that it is in force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing demographic and expense risk exposures, the Group considers: • Historic experience of relevant demographic and expense risks • The potential for future experience to differ from that expected or observed historically • The financial impact of variances in expectations • Other factors relevant to their specific markets, for example obligations to treat customers fairly
(d)(i) Elements of demographic and expense risk The main elements of demographic and expense risk that give rise to the exposure are discussed below. (d)(i)(i) Components of insurance risk as defined by IFRS 4 Insurance Contracts Longevity The Group defines longevity risk as the risk that the policyholder lives longer than expected and therefore gives rise to a loss. This risk is relevant for contracts where payments are made until the death of the policyholder, for example, annuities. This may arise from current experience differing from that expected, more volatility of experience than expected, or the rate of improvement in mortality being greater than anticipated.
Variances in persistency will affect equity holder profit to the extent that charges levied against policies are dependent upon the number of policies in force and/or the average size of those policies. The policies primarily relate to unit linked and unitised with profits business. Profit may also be at risk if it is considered necessary, or prudent, to increase liabilities on certain lines of business.
41. Risk management continued (d) Demographic and expense risk continued (d)(i) Elements of demographic and expense risk continued Profit is directly exposed to the risk of expenses being higher than otherwise expected. They can be further affected if it is considered necessary, or prudent, to increase provisions to reflect increased expectations of future costs of policy administration.
+5% -5% +10% -10% +10% -10% +5% -5% 2015 £m £m £m £m £m £m £m £m Shareholder business UK and Europe Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (111) 104 (7) 7 1 (1) (1) 1 India and China Deferred acquisition costs - - (5) 3 (1) 1 - - Non-participating insurance contract liabilities - - - - - - - - Non-participating investment contract liabilities - - - - - - - - Total shareholder business (111) 104 (12) 10 - - - -
+5% -5% +10% -10% +10% -10% +5% -5% 2014 £m £m £m £m £m £m £m £m Shareholder business UK and Europe Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (117) 110 (7) 6 1 (1) (1) 1 India and China Deferred acquisition costs - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - Non-participating investment contract liabilities - - - - - - - - Total shareholder business (117) 110 (7) 6 1 (1) - -
For the participating business, the tables above illustrate the impact of demographic and expense risk on the recourse cash flows from the HWPF, which have been determined in accordance with the Scheme and take into account the need to consider 200 Standard Life
the impact of risk on the financial position of the HWPF before any recourse cash flows can be transferred to the SHF. The terms of the Scheme provide for the retention of recourse cash flows under certain circumstances to support the financial position of the HWPF. Refer to Section (b)(ii).
(e) Liquidity risk As described in the table on pages 184 to 185, the shareholder is exposed to liquidity risk from shareholder business, participating business and unit linked and segregated funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.
The shareholder is not exposed to the liquidity risk from the assets held by third party interests in consolidated funds and noncontrolling interests and therefore these have been excluded from the following quantitative disclosures.
For non-participating unit linked contracts, a core portfolio of assets is maintained and invested in accordance with the mandates of the relevant unit linked funds. Policyholder behaviour and the trading position of asset classes are actively monitored. The unit price and value of any associated contracts would reflect the proceeds of any sales of assets. If considered necessary, deferral terms within the policy conditions applying to the majority of the Group’s contracts are invoked. As at 31 December 2015 and 31 December 2014, none of the funds under management were subject to deferral.
41. Risk management continued (e) Liquidity risk continued (e)(i) Maturity analysis The tables that follow present the expected timing of the cash flows payable on the amounts recognised on the consolidated statement of financial position for the participating and non-participating contract liabilities of the Group as at the reporting date. To align with the risk management approach towards liquidity risk and existing management projections, the analysis that follows facilitates consideration of the settlement obligations of both insurance and investment contracts.
Non-participating insurance contract liabilities 316 1,078 1,165 949 717 972 - 5,197
Non-participating investment contract liabilities 1 1 1 1 - - - 4
Total unit linked and segregated funds 14,422 30,048 24,713 14,453 8,129 7,578 - 99,343
Non-participating insurance contract liabilities 723 2,597 2,597 1,852 1,194 1,790 - 10,753
Non-participating investment contract liabilities 8,060 26,779 23,034 14,152 8,271 7,907 - 88,203
Total unit linked and segregated funds 12,688 27,423 23,412 14,236 8,309 7,947 - 94,015 202 Standard Life
Other financial liabilities 793 907 37 25 2 2 - - - - - - 832 934 Total shareholder business 878 1,301 361 349 379 377 345 341 208 206 700 449 2,871 3,023
Other financial liabilities 481 860 12 14 10 9 8 7 8 7 16 99 535 996 Total unit linked and segregated funds 93,371 89,063 12 14 10 9 8 7 8 7 16 99 93,425 89,199
Deposits received from reinsurers reflect the liability to repay the deposit received from an external reinsurer under the reinsurance transaction referred to in Section (c). The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty, under which there is no defined contractual maturity date to repay the deposit as at 31 December 2015 or 31 December 2014.
Control Self Assessment (CSA) is a monitoring activity where business managers assess the operation of the controls for which they are responsible and the adequacy of these controls to manage key operational risks and associated business processes. The assessment completed by business managers is validated and challenged by the risk function in its role of ‘second line of defence’. Independent assurance as to the effectiveness of the CSA process is provided by Group Internal Audit in its role of ‘third line of defence’. The results of CSA are reported through the risk governance structure. The assessment of operational risk exposures is performed on a qualitative basis using a combination of impact and likelihood, and on a quantitative basis using objective and verifiable measures. The maximum amount of operational risk the Group is willing to retain is defined using both quantitative limits, for example financial impact, and also qualitative statements of principle that articulate the event, or effect, that needs to be limited.
(g) Strategic risk The Group defines strategic risk as those risks which threaten the achievement of the strategy through poor strategic decisionmaking, 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.
42. Structured entities A structured entity is an entity that is structured in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity. The Group has interests in structured entities through investments in a range of investment vehicles including: • Pooled investment funds managed internally and externally, including OEICs, SICAVs, unit trusts and limited partnerships • Debt securitisation vehicles which issue asset-backed securities
(b) Unconsolidated structured entities As at 31 December 2015 and 31 December 2014, the Group has not provided any non-contractual financial or other support to any unconsolidated structured entities and there are no current intentions to do so.
The asset value of unconsolidated structured entities which are managed by the Group and in which the Group’s holding is classified as an investment in associate is £28,150m (2014: £28,266m). There are no interests in pooled investment funds managed by the Group other than those classified as investments in associates. The total issuance balance relating to unconsolidated structured debt securitisation vehicles in which the Group has an investment is £54,214m (2014: £31,046m).
The Group’s maximum exposure to loss in respect of its investments in unconsolidated structured entities is the carrying value of the Group’s investment. As noted in Note 41, the shareholder is not exposed to market or credit risk in respect of investments held in the unit linked and segregated funds, and third party interests in consolidated funds and non-controlling interests risk segments.
Estimates and assumptions Determination of the fair value of private equity investments, debt securities categorised as level 3 in the fair value hierarchy, over-the-counter derivatives and investment property 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)(iv) below.
(a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used: Level 1 Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 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).
In UK and Europe valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RICS) valuation standards and predominantly an income capitalisation method is used. In Canada all valuations were completed in accordance with International Valuation Standards (IVS) and predominantly a discounted cash flow method was used. Both valuation techniques are income approaches as they consider the income that an asset will generate over its useful life and estimate fair 206 Standard Life
Where it is not possible to use an income approach a market approach will be used whereby comparisons are made to recent transactions with similar characteristics and locations to those of the Group’s assets. Where appropriate, adjustments will be made by the valuer to reflect any differences.
Derivative financial assets and derivative financial liabilities The majority of the Group’s derivatives are over-the-counter derivatives which are fair valued using a range of valuation models including discounting future cash flows and option valuation techniques. The inputs are observable market data and over-thecounter derivatives are therefore categorised as level 2 in the fair value hierarchy.
Exchange traded derivatives are valued using prices sourced from the relevant exchange. They are considered to be instruments quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.
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 2015 and 31 December 2014 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.
For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy.
• Commercial mortgages These instruments are valued using models. The models use a discount rate adjustment technique which is an income approach. The key inputs for the valuation models are contractual future cash flows, which are discounted using a discount rate that is determined by adding a spread to the current base rate. The spread is derived from a pricing matrix which incorporates data on current spreads for similar assets and which may include an internal underwriting rating. These inputs are generally observable with the exception of the spread adjustment arising from the internal underwriting rating. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending on whether the spread is adjusted by an internal underwriting rating.
Contingent consideration asset A contingent consideration asset was recognised during 2014 in respect of a purchase price adjustment mechanism relating to the acquisition of Ignis as discussed in Note 1. The fair value of the asset is calculated using a binominal tree option pricing model. The main inputs are management fee income and expected probabilities of payouts. These are considered unobservable and as a result the asset is classified as level 3 in the fair value hierarchy.
43. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued Non-participating investment contract liabilities The fair value of the non-participating investment contract liabilities is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets and liabilities in which these funds are invested. The underlying assets and liabilities are predominately categorised as level 1 or 2 and as such, the inputs into the valuation of the liabilities are observable. Therefore, the liabilities are categorised within level 2 of the fair value hierarchy.
(d)(i) Fair value hierarchy for assets measured at fair value in the statement of financial position The table below presents the Group's assets measured at fair value by level of the fair value hierarchy.
Investments in associates at FVTPL 19 16 33 14 52 30 36 30 2 - 14 -
Total shareholder business 7,672 7,323 50 6,788 7,722 14,111 1,187 1,265 5,868 11,120 667 1,726 Participating business
Equity securities and interests in pooled investment vehicles 8,187 9,658 - 232 8,187 9,890 7,840 9,526 - - 347 364
Equity securities and interests in pooled investment vehicles 56,307 55,471 - 11,909 56,307 67,380 56,117 67,200 - 1 190 179
Total unit linked and segregated funds 94,320 89,570 68 17,164 94,388 106,734 66,951 76,781 21,216 23,527 6,221 6,426
Liabilities in respect of third party interest in consolidated funds 17,196 15,805 - 953 17,196 16,758 - - 15,889 15,419 1,307 1,339
Classified as held for sale Total Level 1 Level 2 Level 3
Non-participating investment contract liabilities 92,890 88,203 - 13,734 92,890 101,937 - - 92,890
Total unit linked and segregated funds 93,726 89,390 - 13,736 93,726
Total gains recognised on revaluation of owner occupied property within other comprehensive income - - - - 5 5 - - - - - -
Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions For level 3 investments, other than commercial mortgages and unquoted corporate bonds, the Group does not use internal models to value the investments but rather obtains valuations from external parties. The Group reviews the appropriateness of these valuations on the following basis: • For investment property and owner occupied property (including property that is classified as held for sale), the valuations are obtained from external valuers and are assessed on an individual property basis. The principle assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the following table using knowledge of the investment property market.
• Unquoted corporate bonds are valued using internal models on an individual instrument basis. Sensitivities are determined by adjusting internally estimated credit spreads.
• Contingent consideration asset valuation is provided by an external valuer using a binominal tree option pricing model. Sensitivities are determined through adjusting probabilities applied to expected payout patterns.
The table below presents quantitative information about the significant unobservable inputs for level 3 instruments: Fair value 2015 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 9,496 Income capitalisation Equivalent yield
Investment property (hotels) 515 Income capitalisation Equivalent yield Estimated rental value per room per annum
1 Restated. 2 A Group level adjustment is made for significant movements in private equity values. 3 Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices.
As recognised in the consolidated statement of financial position line item Classified as held for sale
Liabilities Non-participating investment contract liabilities 35,26 4 4 - 2,118 4 2,122 4 2,285
Non-participating investment contract liabilities - - - - 4 2,285 4 2,285
(c) Non-cash items relating to investing and financing activities 2015 2014 £m £m Gain on sale of subsidiaries excluding transaction costs and provision recognised on disposal (1,136) -
Other assets of operations disposed of excluding cash and cash equivalents 1,354
The outcome and consequences of our further analysis and the FCA review are uncertain but it is possible that, for relevant components of our annuity population, these consequences could include requirements to compensate customers who could have obtained a more favourable annuity rate. Ahead of Standard Life completing further analysis and learning the outcome of the FCA’s review, it is not practicable to determine an estimate of the financial effect of this contingent liability. In addition, it is possible that any financial impact may be mitigated by the Group’s professional indemnity insurance.
46. Commitments The Group has contractual commitments in respect of expenditure on investment property, funding arrangements and leases which will be payable in future periods. These commitments are not recognised on the Group’s statement of financial position at the year end but are disclosed to give an indication of the Group’s future committed cash flows.
Included in other commitments of £343m (2014: £300m) is £291m (2014: £300m) committed by consolidated private equity funds. These commitments will be funded through contractually agreed additional investments both by the Group, through its controlling interests, and the funds’ non-controlling interests. The level of funding provided by each will not necessarily be in line with the current ownership profile of the funds.
The future aggregate minimum lease payments under non-cancellable operating leases from continuing operations are as follows: 2015 2014 £m £m
For all share-based payments services received for the incentive granted are measured at fair value.
At each period end the Group reassesses the number of equity instruments expected to vest and recognises any difference between the revised and original estimate in the consolidated income statement with a corresponding adjustment to the equity compensation reserve.
Service and performance conditions as set out in the Directors’ remuneration report
Service, or service and performance conditions. These are tailored to the individual award
Employees may forfeit some or all of awards made under any of the above share-based payment schemes if they leave the Group prior to the end of the awards’ vesting periods.
47. Employee share-based payments continued (a) Options granted The number, weighted average exercise price and weighted average remaining contractual life for options outstanding during the year are as follows: Long-term incentive plans (excluding
Exercisable at 31 December - - - 84,517 220p 10,365 9,931 - 227,318 157p Weighted average remaining contractual life of options outstanding (years) 2.18 1.96 1.31 2.34 2.40 1.81 1.19 2.76
Grant date 27 March 2015 and 30 March 2015 Throughout 27 March 2015 9 October 2015
Share price at grant date 480p 457p 477p 425p Fair value at grant date 480p 457p 477p 81p Exercise price Nil Nil Nil 328p-330p
Option term (years) 3.38 2.63 3.24 3.42 Options exercised during the year Share price at time of exercise 469p 473p 468p 424p
In addition to the amounts shown above, the Group’s defined benefit pension plans have assets of £579m (2014: £1,553m) invested in investment vehicles managed by the Group.
The summary of compensation of key management personnel is as follows: 2015 2014 £m £m
49. Capital statement Capital management policies and risk management objectives Capital can be measured on a number of different bases, which are set out in the Strategic report Section 1.3 – Chief Financial Officer’s overview. The capital statement shows capital based on definitions used for regulatory reporting purposes.
The capital requirements of each business unit are forecast on a periodic basis, and the requirements are assessed against both forecast available capital and local regulatory capital requirements. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment. The capital planning process is the responsibility of the Chief Financial Officer. Capital plans are ultimately subject to approval by the Board.
Until 31 December 2015, the PRA required all insurance companies and financial conglomerates to maintain capital resources in excess of their capital resources requirement (CRR). From 1 January 2016, the Group will be required to maintain and report capital under the Solvency II regime. This note sets out the Group’s capital resources under the regulatory requirements in place at 31 December 2015.
In addition to the requirement to maintain capital resources in excess of its CRR, under the regulatory regime at 31 December 2015, each regulated company in the Group was required to identify the major risks it faces and, if appropriate, quantify the amount and type of capital it believed was appropriate to mitigate those risks. This individual capital assessment (ICA) reflects each company's view of the adequacy of its capital resources.
There are many factors which affect the Group’s capital resources. The determination of the liabilities includes various assumptions including potential changes in market conditions and the actions management might take as a result of those changes. Changes in market conditions and other variables have the potential to significantly affect the capital position. Poor investment returns could depress capital resources, but this could be mitigated by changing the asset portfolio and by the level of bonuses declared. Future annuitant longevity could be significantly different from that assumed in the calculation of the liabilities.
49. Capital statement continued The HWPF’s capital resources of £4,044m at 31 December 2015 (2014: £4,317m) and future surplus arising can be used to provide support for the HWPF, enhance payments to with profits policyholders or, in relation to the recourse cash flows (as explained in accounting policy (iv) Note 33), transfer defined amounts out of the fund to accrue to the benefit of equity holders. Additional restrictions are placed on the HWPF by the Scheme of Demutualisation (the Scheme), which provides that the recourse cash flows will be subject to a solvency test which restricts transfers of the recourse cash flows if, as a result of the transfer, the HWPF would have a realistic deficit or would have a regulatory surplus below the level which the board of SLAL considers necessary to declare bonuses, in accordance with reasonable benefit expectations of with profits policyholders, without creating a regulatory deficit.
Held outside life assurance funds - - 834 834 236 1,070 1,323 2,393 Held within life assurance funds - 1,609 - 1,609 - 1,609 - 1,609
Adjustments onto regulatory basis Changes to the valuation of contract liabilities 3,514 (69) - 3,445 - 3,445 - 3,445 Exclusion of deferred acquisition costs and other inadmissible assets (39) (584) (109) (732) (24) (756) (546) (1,302) Exclusion of deferred income 51 182 - 233 - 233 - 233 Changes to the valuation of other assets and liabilities 46 (1,099) (87) (1,140) (55) (1,195) 258 (937) 3,572 (1,570) (196) 1,806 (79) 1,727 (288) 1,439
Total available capital resources to meet regulatory requirement 4,227 39 1,457 5,723 157 5,880 1,534 7,414
Analysed as follows: Capital not subject to constraints - - 1,437 1,437 63 1,500 1,369 2,869 Capital subject to constraints 4,227 39 20 4,286 94 4,380 165 4,545 Total available capital resources 4,227 39 1,457 5,723 157 5,880 1,534 7,414 Restricted assets within the longterm business fund (1,109) Regulatory capital resources 6,305 Regulatory capital resources requirement 3,484 94 3,578 73 3,651 Regulatory capital surplus 2,654
Held outside life assurance funds - - 884 884 1,418 2,302 931 3,233 Held within life assurance funds - 1,439 - 1,439 - 1,439 - 1,439
Equity attributable to ordinary equity holders of Standard Life plc - 1,439 884 2,323 1,418 3,741 931 4,672
Adjustments onto regulatory basis Changes to the valuation of contract liabilities 3,593 (67) - 3,526 - 3,526 - 3,526 Exclusion of deferred acquisition costs and other inadmissible assets (47) (572) (287) (906) (271) (1,177) (475) (1,652) Exclusion of deferred income 60 211 - 271 1 272 - 272 Changes to the valuation of other assets and liabilities 206 (797) (268) (859) 84 (775) 269 (506) 3,812 (1,225) (555) 2,032 (186) 1,846 (206) 1,640
Analysed as follows: Capital not subject to constraints - - 1,132 1,132 538 1,670 1,039 2,709 Capital subject to constraints 4,500 214 16 4,730 917 5,647 185 5,832 Total available capital resources 4,500 214 1,148 5,862 1,455 7,317 1,224 8,541 Restricted assets within the longterm business fund (1,172) Regulatory capital resources 7,369 Regulatory capital resources requirement 3,637 747 4,384 73 4,457 Regulatory capital surplus 2,912
Unit linked Insurance contracts - 5,512 - 5,512 3,936 9,448 - 9,448 Investment contracts - 88,151 - 88,151 13,794 101,945 - 101,945 Total unit linked liabilities - 93,663 - 93,663 17,730 111,393 - 111,393
2 Contract liabilities include the contract liabilities of the Canadian business classified as held for sale. Refer to Note 26.
Methodology/modelling changes 300 12 - 312 - 312 - 312 Change in assumptions used to measure life assurance contract liabilities and experience differences 294 56 - 350 - 350 - 350
Methodology/modelling changes 351 (2) - 349 15 364 - 364 Change in assumptions used to measure life assurance contract liabilities and experience differences 26 55 - 81 10 91 - 91
Equity holder/inter-fund transfers (37) 22 40 25 14 39 (39) -
Intra-group transactions The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Hong Kong, India and China. The Group also provides such services in Ireland and Germany. With the exception of the requirements of the Scheme and the intra-group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.
Group capital requirement The Group must also calculate a group regulatory capital position under the Insurance Groups Directive (IGD). The IGD calculation is a prudent aggregate value for the Group’s capital resources. The capital held within the long-term business funds of approximately £4,266m (2014: £4,714m) is restricted to the level of the CRR of those funds of £3,484m (2014: £3,637m). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
On an IGD basis, the estimated regulatory capital position at 31 December 2015 is a surplus of £2,654m (2014: £2,912m).
In respect of Group IGD regulatory reporting there were no breaches of regulatory capital requirements at any time during the year.
% interest held 15 Ramirez de Arellano SA Spain Ordinary Shares 100%
ESP II General Partner Limited Partnership United Kingdom Limited Partnership 46%
Gallions Reach Shopping Park Limited Partnership United Kingdom Limited Partnership 100%
Genesis Business Park (Freehold) Nominee 3 Limited United Kingdom Ordinary Shares 100%
North American Strategic Partners GP, LP United Kingdom Limited Partnership 80%
Pace Financial Solutions Limited United Kingdom Ordinary A Shares Ordinary B Shares Ordinary C Shares
Pace Mortgage Solutions Limited United Kingdom Ordinary A Shares Ordinary B Shares
Parnell Fisher Child Holdings Limited United Kingdom Ordinary A Shares Ordinary B Shares
Scottish Mutual PEP and ISA Managers Limited United Kingdom Ordinary Shares 100%
Select Japan (TK Holdings UK) Limited United Kingdom Ordinary Shares 60%
SLA Belgium No. 1. SA Luxembourg Ordinary Shares 100% SLA Germany No. 1 S.a.r.l Luxembourg Ordinary Shares 100%
SLCP (General Partner ESF I) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner ESP 2006) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner ESP 2008 Coinvestment) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner ESP CAL) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Europe VI) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Infrastructure I) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner NASP 2006) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Pearl Strategic Credit) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner SOF I) Limited United Kingdom Ordinary Shares 60%
SLCP (General Partner Tidal Reach) Limited United Kingdom Ordinary Shares 60%
Standard Life Investments Ethical Corporate Bond Fund United Kingdom OEIC 54%
Standard Life Investments Short Duration Global Index Linked Bond Fund United Kingdom OEIC 50%
Standard Life Investments European Ethical Equity Fund United Kingdom OEIC 95%
Standard Life Investment Company III: Enhanced-Diversification Growth Fund United Kingdom OEIC 95%
Standard Life Investments (General Partner CRED) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (General Partner European Real Estate Club II) Limited
Standard Life Investments (General Partner MAC) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (General Partner PDFI) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (General Partner UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (PDF. No 1) Limited Jersey Ordinary Shares 50%
Standard Life Investments (Trustee No 10 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 11 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 2 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 3 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 5 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments (Trustee No 7 UK PDF) Limited United Kingdom Ordinary Shares 100%
Standard Life Investments Brent Cross LP United Kingdom Limited Partnership 100%
Standard Life Investments Dynamic Distribution Fund United Kingdom Unit Trust 49%
Standard Life Investments European Real Estate Club II (Offshore Feeder) Limited
Standard Life Investments Global Absolute Return Strategies Fund United Kingdom Unit Trust 71%
Standard Life Investments Global Real Estate Fund United Kingdom Unit Trust 60%
Liability Solutions ICAV: Standard Life Investments Liability Aware Absolute Return III Fund Ireland ICAV 100%
Standard Life Investments Liability Aware Absolute Return III Real Profile Fund
Standard Life Investments Strategic Bond Fund United Kingdom Unit Trust 63%
Standard Life Investments UK PDF Investment Limited Partnership United Kingdom Limited Partnership 100%
Standard Life Investments UK Property Feeder Trust: Standard Life Investments UK Property Accumulation Feeder Fund United Kingdom Unit Trust 68%
Standard Life Investments UK Retail Park Trust Jersey Unit Trust 54%
Standard Life Master Trust Co. Ltd United Kingdom Ordinary Shares 100%
Standard Life UK Government Bond Trust United Kingdom Unit Trust 100%
The Standard Life Assurance Company of Europe (Nederland) BV Netherlands Ordinary Shares 100%
All subsidiaries in the table above are consolidated in the Group financial statements. Refer to Basis of consolidation for details of the consolidation assessment.
SL Capital SOF I Feeder LP United Kingdom Limited Partnership 0.4%
SL Capital SOF II Feeder LP United Kingdom Limited Partnership 0.5%
Standard Life Investments Emerging Market Debt Unconstrained Fund United Kingdom OEIC <0.01%
Standard Life Investments Ignis Real Estate Funds ICVC: Standard Life Investments Ignis UK Property Fund United Kingdom OEIC 6%
Standard Life Investments Ignis Real Estate Trust: Standard Life Investments Ignis UK Property Feeder Fund United Kingdom Unit Trust 4%
Standard Life Investments Liquidity Fund plc: Sterling Liquidity Fund Ireland OEIC 0.08%
Standard Life Investment Property Income Trust Limited Guernsey Ordinary Shares 9%
Standard Life Strategic Investment Allocation Fund United Kingdom Unit Trust <0.01%
Standard Life UK Smaller Companies Trust plc United Kingdom Ordinary Shares 6%
Heng An Standard Life Insurance Company Limited China Equity Shares 50%
(d) Significant holdings The Group has no significant holdings in entities other than subsidiaries, associates and joint ventures.
9. Independent auditors’ report to the members of Standard Life plc Report on the Company financial statements
 Have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union
What we have audited The financial statements, included within the Annual report and accounts, comprise:  The Company statement of financial position as at 31
December 2015  The Company statement of comprehensive income for the year then ended  The Company statement of cash flows for the year then ended  The Company statement of changes in equity for the year then ended  The accounting policies  The Notes to the financial statements, which include other explanatory information
Certain required disclosures have been presented elsewhere in the Annual report and accounts, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union.
 The financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
Directors’ remuneration Directors’ remuneration report - Companies Act 2006 opinion In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
We have reported separately on the Group financial statements of Standard Life plc for the year ended 31 December 2015.
Loss on sale of available-for-sale financial assets recycled to profit and loss (2) -
Total other comprehensive (loss)/income for the year that may be reclassified subsequently to profit or loss (7) 22
The financial statements on pages 239 to 260 were approved by the Board and signed on its behalf, by the following Directors: Sir Gerry Grimstone, Chairman Luke Savage, Chief Financial Officer 19 February 2016 19 February 2016
Other comprehensive (loss)/income for the year - - - - (7) (7)
Total comprehensive income for the year - - - 1,090 (7) 1,083
Dividends paid on ordinary shares - - - (343) - (343)
Transfer between reserves on disposal of subsidiary Q, R - - - 1,028 (1,028) -
Shares distributed by employee trusts Q - 6 - (6) - -
Other comprehensive (loss)/income for the year - - - - 22 22
Shares distributed by employee trusts Q - 10 - (10) - -
(a)(i) Investment in subsidiaries, associates and joint ventures The Company has certain subsidiaries which are investment vehicles such as open-ended investment companies (OEIC’s), unit trusts and limited partnerships whose primary function is to generate capital or income growth through holding investments. This category of subsidiary is held at FVTPL since they are managed on a fair value basis.
Other administrative expenses include an impairment of the investment in Standard Life Oversea Holdings Limited of £70m (2014: £nil) as detailed in note G.
The aggregate remuneration payable in respect of employees was: Wages and salaries 28 35
The average number of staff during the year was: Group corporate centre 297 443
Further information on the Group’s pension plans and the changes agreed during the year to the employee pension the Group provides, is given in Note 37 of the Group financial statements.
(b) Tax relating to components of other comprehensive income 2015 2014 Notes £m £m
F. Tax credit continued (c) Reconciliation of tax credit 2015 2014 £m £m
(b) Investments in joint ventures The Company has a 50% (2014: 50%) interest in Heng An Standard Life Insurance Company Limited, a company incorporated in China. Further details on this joint venture are provided in Note 18 of the Group financial statements.
The amount of deferred tax liabilities expected to be settled after more than 12 months is £1m (2014: £1m).
The Company has surrendered the benefit of its tax losses to underlying subsidiaries for a consideration of £19m (2014: £11m) which will be receivable within one year. The Company has provided for deferred tax amounting to £1m (2014: £1m) in respect of unrealised gains on equity securities.
The amount of loans and receivables expected to be recovered or settled after more than 12 months is £322m (2014: £634m).
Included within derivative financial instruments held for trading in 2014 were certain forward foreign exchange contracts, which for the Group, hedged part of the currency translation risk of net investments in foreign operations and a portion of the expected cash proceeds of the sale of the Canadian business received on 30 January 2015. For details refer to Note 23 of the Group financial statements. 2015 2014 Contract amount Fair value assets Fair value liabilities
The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows: Within 1 year 2-5 years Total 2015 £m £m £m
Transfer between reserves on disposal of subsidiary (1,028) - - - - (1,028)
Fair value losses on available-for-sale financial assets - - - - (7) (7) Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - 2 2
Reserves credit for employee share-based payment schemes - 27 - - - 27 Transfer to retained earnings for vested employee share-based payments - (27) - - - (27)
Fair value gains on available-for-sale financial assets - - - - 28 28 Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - (6) (6)
Financial liabilities measured at amortised cost Total 2014 Notes £m £m £m
The amount of other financial liabilities expected to be settled after more than 12 months is £nil (2014: £6m).
V. Other liabilities The amount of other liabilities expected to be settled after more than 12 months is £nil (2014: £nil).
W. Risk management (a) Overview An overview of the Group risk management framework and policies is provided in Note 41 of the Group financial statements.
(b) Market risk The Group defines market risk as the risk that arises from the Group’s exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by different amounts.
The following table provides information regarding the market risk exposure of the Company at 31 December 2015 and 31 December 2014, showing diversification by asset type and geographic region.
The Company’s equity sensitivity to a 1% increase in interest rates is (£16m) (2014: (£17m)) and to a 1% decrease in interest rates is £16m (2014: £17m).
Credit risk is managed through the Group credit risk policy. The Company is required to manage risk in accordance with the Group policy and to take mitigating action as appropriate to operate within defined risk appetites.
(c)(i) Credit exposure of financial assets The following table provides an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. For those financial assets with credit ratings assigned by external rating agencies, classification is within the range of AAA to BBB. AAA is the highest possible rating and rated financial assets that fall outside the range of AAA to BBB have been classified as below BBB. For those financial assets that do not have credit ratings assigned by 254 Standard Life
external rating agencies but where the Company has assigned internal ratings for use in managing and monitoring credit risk, the assets have been classified in the analysis that follows as ‘internally rated’. If a financial asset is neither rated by an external agency nor ‘internally rated’, it is classified as ‘not rated’. The total amounts presented represent the Company’s maximum exposure to credit risk at the reporting date without taking into account any collateral held. The analysis also provides information on the concentration of credit risk.
The Investments in subsidiaries at FVTPL of £257m (2014: £131m) includes £200m (2014: £nil) invested in absolute return funds and £57m (2014: £131m) relating to a holding in a money market fund. These funds are managed by a subsidiary company and are not rated. The money market fund invests in a range of counterparties that are externally rated, and uses concentration limits and maturity limits in managing its exposures.
Assets are deemed to be past due when a counterparty has failed to make a payment when contractually due. An allowance account is not used by the Company to record separately the impairment of assets by credit losses. Instead, the carrying amount of an asset subject to any impairment charge is directly reduced by the amount of the impairment. At 31 December 2015 and 31 December 2014, all financial assets were neither past due nor impaired.
Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 31 December 2015, the Company had pledged £nil (2014: £9m) of debt securities and £2m (2014: £nil) of cash as collateral for derivative financial liabilities and accepted £nil (2014: £3m) of cash as collateral for derivative financial assets.
Financial assets Derivatives1 24 - 24 - (10) 14 Total financial assets 24 - 24 - (10) 14 Financial liabilities Derivatives1 (25) - (25) - 16 (9) Total financial liabilities (25) - (25) - 16 (9) 1 Only derivatives subject to master netting agreements have been included above.
Liquidity risk is managed by the Company in consultation with the central Group Treasury function. Liquidity risk is primarily managed by placing limits on the value of financial assets held which are neither quoted nor regularly traded on a recognised exchange and by maintaining a portfolio of committed bank facilities. In May 2015, the Company reduced its syndicated revolving credit facility which it holds as part of its contingency funding plans, to £400m (2014: £500m) in line with a lower risk profile following the sale of the Canadian business. The maturity date for this facility was extended until 2020 and is currently undrawn. The Company is also responsible for the definition and management of the contingency funding plan which operates on a continuous basis and is fully documented.
(b) Unclaimed asset trust The details of the expiry of the Unclaimed Asset Trust are given in Note 45 of the Group financial statements.
Under the trust deed in respect of the Group’s UK defined benefit pension plan, Standard Life Employee Services Limited (SLESL), the principal employer, must pay contributions to the pension plan as the trustees’ actuary may certify necessary. The Company has guaranteed the obligations of SLESL to the UK defined benefit pension plan for a period of 15 years from 10 July 2006, which gave rise to a liability of £nil at 31 December 2015 (2014: £nil).
Y. Related party transactions (a) Transactions with and balances from/(to) related parties In the normal course of business, the Company enters into transactions with related parties. The year end balances arising from such transactions are as follows: Due from related parties: Subsidiaries 63 49 Loans to subsidiaries 322 634 385 683
(c) Methods and assumptions used to determine fair value of assets and liabilities Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given in the following note: 258 Standard Life
Investments in subsidiaries at FVTPL Investments in subsidiaries at FVTPL comprises £200m (2014: £nil) of investments on a recognised exchange which are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore treated as level 1 investments within the fair value hierarchy.
The remaining investments in subsidiaries at FVTPL relate to a short term investment fund which is valued daily at net asset value (NAV) adjusted for accrued interest. Although the price is not quoted in an active market the valuation is based on observable market data and as a result has been classified as level 2 in the fair value hierarchy.
Investments in associates at FVTPL Investments in associates at FVTPL listed on a recognised exchange are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore treated as level 1 investments within the fair value hierarchy.
These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are treated as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.
• Corporate bonds (listed or quoted in an established over the counter market including asset-backed securities) These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are treated as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote the instruments are treated as level 3 instruments. For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Company performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are treated as level 3 instruments within the fair value hierarchy.
Investment in subsidiaries at FVTPL 200 - 57 131 - - 257 131 Investment in associates at FVTPL 13 13 - - - - 13 13 Derivative financial assets - - - 24 - - - 24 Debt securities 31 78 711 413 1 1 743 492 Total 244 91 768 568 1 1 1,013 660
2015 2014 2015 2014 Carrying value Carrying value Fair value Fair value Notes £m £m £m £m
Loans to subsidiaries J 322 634 348 666 Liabilities Subordinated notes T 499 499 530 561 Subordinated guaranteed bonds T 502 502 579 580 Mutual Assurance Capital Securities T 317 611 345 643
Assets Loans to subsidiaries - - 343 643 5 23 348 666 Liabilities Subordinated notes - - 530 561 - - 530 561 Subordinated guaranteed bonds - - 579 580 - - 579 580 Mutual Assurance Capital Securities - - 345 643 - - 345 643 260 Standard Life
11. Supplementary information 11.1 Group assets under administration and net flows Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included on the consolidated statement of financial position. In addition, certain assets are excluded, for example deferred acquisition costs, intangibles and reinsurance assets. Continuing operations excludes the Canadian business assets sold on 30 January 2015 and includes Ignis assets acquired on 1 July 2014 (£60.5bn) which were reflected within market and other movements in 2014.
Standard Life Investments third party F 161.3 31.6 (26.1) 5.5 3.3 170.1
Associate and joint venture life businesses O O 2.1 0.4 (0.2) 0.2 - 2.3
Group AUA – continuing operations 296.6 43.0 (36.7) 6.3 4.5 307.4 1 Wrap AUA is reported predominantly within Retail: £23.4bn, (2014: £19.2bn). Offshore bond is reported within Europe fee business: £2.1bn, (2014: £1.7bn). 2 Certain products are included in both Pensions and Savings AUA and Standard Life Investments third party AUM. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments. Comprises £17.9bn (2014: £15.2bn) related to fee business eliminations and £0.5bn (2014: £0.4bn) related to other eliminations.
UK and Europe Pensions and Savings 135.1 13.1 (11.0) 2.1 8.7 145.9
Group AUA – continuing operations 214.7 34.0 (33.0) 1.0 80.9 296.6 1 Wrap AUA is reported predominantly within Retail: £19.2bn. Offshore bond is reported within Europe fee business: £1.7bn. 2 Certain products are included in both Pensions and Savings AUA and Standard Life Investments third party AUM. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments. Comprises (£15.2bn) related to fee business eliminations and (£0.4bn) related to other eliminations.
Closing AUA at 31 Dec 2014 £bn £bn £bn £bn £bn £bn
11.3 Additional analysis – Group 15 months net flows Group assets under administration net flows 15 months ended 31 December 2015
Standard Life Investments third party F 0.2 2.3 0.6 2.4 (3.8)
UK and Europe Pensions and Savings 0.8 0.6 0.4 0.9 0.6
Associate and joint venture life businesses O O - 0.1 - 0.1 0.1
Group net flows - continuing 0.5 2.4 0.5 2.9 (3.3) 1 Wrap net flows are reported predominantly within Retail and offshore bond net flows are reported within Europe fee business. 2 Certain products are included in both Pensions and Savings AUA and Standard Life Investments third party AUM. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments. Net flows eliminations relate entirely to fee business and growth channels, FY15: £2.2bn (FY14: £1.5bn).
Standard Life Investments net flows – continuing operations (0.2) 1.9 (0.1) 1.9 (4.3) 1 Excluding strategic partner life business. 2 Comprises absolute return strategies, enhanced diversification strategies, risk-based portfolios and traditional balanced portfolios. 3 Comprises cash, private equity and Wealth. Net inflows from India cash funds, FY15: £0.6bn (FY14: net inflow £0.3bn). 4 Includes net inflows from Ignis liquidity funds, FY15: £0.7bn (FY14: net outflows £1.0bn).
12 Reports from the Committees of Standard Life Assurance Limited 268 14 Shareholder information 276
Whilst the management of its with profits business is the direct responsibility of the board of Standard Life Assurance Limited (SLAL), FCA regulations require that a with profits firm’s governance arrangements should make provision for independent judgement and advice. The SLAL board has established a With Profits Committee (WPC) for this purpose.
Membership All members of the WPC are independent of Standard Life. Their attendance at WPC meetings was: Member Attendance Clifton Melvin*, Chairman 10/10 Graham Aslet 10/10 Ross Ainslie 10/10 Former member Niall Franklin*, Chairman 5/5 *the Chairmanship changed on 1 June 2015
The Committee’s work in 2015 An indicative breakdown as to how the Committee spent its time is shown below: During 2015, the Committee’s work focussed on these key areas: Customer
Service – the WPC reviewed an annual paper summarising with profits customer complaints and was pleased to note a reducing trend. Balance of Interests A fundamental responsibility of the WPC is to ensure an appropriate balance of interests between the shareholder and the with profits customers, as well as between different cohorts of customers.
Germany SLAL took the decision to close the German WP Fund to new business in March. The WPC had been closely involved in the discussions and rationale leading to this major step and was fully supportive, recognising that keeping the fund open to new with profits business would have run the risk of conferring unfair advantage on new customers at the expense of existing customers.
Capital and Risk management During the year the WPC approved a number of proposals to manage the finances of the with profits funds and to control risks appropriately. These included setting distribution rates for the Inherited Estate, adjusting Equity Backing Ratios, reviewing the effectiveness of hedging strategies and making changes to German interest rate and equity hedges, and reviewing the scenarios for testing investment risk.
 It had continued to challenge management on the exercise of discretion
12.2 Report from the Independent Governance Committee of Standard Life Assurance Limited
During 2015, the board of Standard Life Assurance Limited (SLAL) established its Independent Governance Committee (IGC). The Committee acts solely in the interests of scheme members by providing credible and effective challenge on the value for money of workplace personal pension schemes
 The results of a subsequent 2014 report (the legacy audit) by the Independent Project Board (the IPB) which looked at legacy pension schemes at risk of being exposed to charges over an equivalent of one percent annual management charge (AMC)
The IGC intends to meet at least four times a year but as often as necessary to fulfil its obligations. This first year has required more meetings than would be expected on an ongoing basis, in terms of establishing the Committee and its operations, considering how to assess VfM, understanding the Standard Life business and products, reviewing how Standard Life conducts its relationship with relevant members, and reaching agreement on the steps to be taken in response to the IPB legacy audit
Membership The majority of the members of the Independent Governance Committee are independent of Standard Life. Their attendance at meetings to the year ending 31 December 2015 was: Member Attendance
Richard Butcher 12/12 Ingrid Kirby 12/12 Roger Mattingly 12/12 Michael Craig (nonindependent member) 12/12
The Committee’s role is to advance the Financial Conduct Authority’s (FCA) statutory objectives of securing an appropriate degree of protection for consumers by assessing the value for money of relevant schemes, raising concerns, where necessary, and reporting on the VfM of the relevant schemes operated by SLAL. The Committee acts solely in the interests of scheme members by providing credible and effective challenge on the VfM of workplace personal pension schemes.
 After giving the SLAL board an opportunity to address those concerns, if the Committee remains concerned, it can escalate these to the FCA, and has the option to alert relevant scheme members and employers, and make its concerns public as it sees fit
 Produce an annual report of its findings by 5 April 2016 and annually thereafter
The Chairman is responsible for the production of an annual report which will be publicly available on the website below by 5 April 2016.
The Committee provides information on its composition at the following website www.standardlife.co.uk/igc 270 Standard Life
Feedback The IGC recognises the importance of gathering the views of scheme members as customers and is trialling a number of channels for gathering feedback, including a dedicated web page with a link to email the IGC. The IGC has also encouraged Standard Life to publicise the IGC via direct policyholder communications. The IGC has engaged with policyholders directly by IGC attendance at workplace seminars and retirement roadshows. The IGC has also discussed with Standard Life the commissioning of research with representative groups of policyholders from different workplace schemes.
Standard Life Master Trust Co. Ltd. During 2015, Standard Life Master Trust Co. Ltd (SLMTC) was established as a subsidiary of Standard Life Assurance Limited. Its role is to act as trustee and to work in the interests of members of the Standard Life Defined Contribution Master Trust and Stanplan A pension schemes, both of which are trust based schemes designed for multiple employers.
The board of SLMTC consists of five members, all of whom are independent of Standard Life. They also meet regularly throughout the year. Pitmans Trustees Limited have been appointed as chair of the board of directors of the Company. Richard Butcher is their representative.
Global absolute return strategies (GARS) A discretionary multi-asset fund provided under several regulated pooled and segregated structures globally by Standard Life Investments. The investment objective is to target a level of return over a rolling 3 year period equivalent to cash plus 5% a year (gross of fees), and to do so with as little risk as possible.
Non-participating/non-profit policy A policy, including a unit linked policy, which is not a participating/with profits policy.
Wrap platform An investment platform which is essentially a trading platform enabling investment funds, pensions, direct equity holdings and some life assurance contracts to be held in the same administrative account rather than as separate holdings.
Group underlying cash generation adjusts Group underlying performance for non-cash items. Adjustments are made for deferred acquisition costs/deferred income reserve, fixed/intangible assets and the Asian joint ventures and associates. Depreciation/ amortisation that would normally be included in operating profit is replaced with the cash movement in the period. The measure is stated net of current (cash) tax on Group underlying performance. A reconciliation of Group underlying performance to Group underlying cash generation is included in the Strategic report. Reconciliations between Group underlying performance, Group operating profit and profitability on an IFRS basis are also included in this report.
International Financial Reporting Standards (IFRS) International Financial Reporting Standards are accounting standards issued by the International Accounting Standards Board (IASB). The Group's consolidated financial statements are required to be prepared in accordance with IFRS.
 Impairment of intangible assets  Profit or loss arising on the disposal of a subsidiary, joint venture or associate
 Items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group
UK workplace UK workplace pensions, savings and benefits to UK employers and employees. These are sold through corporate benefit consultants, independent financial advisers, or directly to employers.
Constant currency Eliminates the effects of exchange rate fluctuations and is used when calculating financial performance on a range of measures.
Discounting The reduction to present value at a given date of a future cash transaction at an assumed rate, using a discount factor reflecting the time value of money. The choice of a discount rate will usually greatly influence the value of insurance provisions, and may give indications on the conservatism of provisioning methods.
Heritage With Profits Fund (HWPF) The Heritage With Profits Fund contains all business – both with profits and nonprofit – written before demutualisation in the UK, Irish or German branches, with the exception of the classes of business which the Scheme of Demutualisation allocated to the Proprietary Business Fund. The HWPF also contains increments to this business.
Proprietary Business Fund The Proprietary Business Fund in Standard Life Assurance Limited (SLAL) contains, amongst other things, most new insurance business written after demutualisation in the UK, Ireland and Germany and certain classes of business written before demutualisation – pension contribution insurance policies, income protection plan policies and a number of SIPP policies.
Subordinated liabilities Subordinated liabilities are debts of a Company which, in the event of liquidation, rank below its other debts but above share capital.
For shareholder services call: 0345 113 0045* Secretary Kenneth A Gilmour Registrar Capita Registrars Limited Auditors PricewaterhouseCoopers LLP Solicitors Slaughter and May Brokers JP Morgan Cazenove Goldman Sachs
 Voting instructions for the Annual General Meeting will be sent to you electronically
You can find more information about share scams at the Financial Conduct Authority website www.fca.org.uk/consumers/scams
Germany and Austria phone +49 (0)69 97533 030 email fragen@standardlifeshares.de visit www.standardlifeshareportal.com/de
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