Please remember that the value of shares can go down as well as up and you may not get back the full amount invested or any income from it. All figures and share price information have been calculated as at 31 December 2017 (unless otherwise indicated). This document has been published by Standard Life Aberdeen plc for information only. It is based on our understanding as at February 2018 and does not provide financial or legal advice.
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IFRS profit after tax attributable to equity holders £699m (2016: £368m)
Our vision and purpose In August 2017 Standard Life plc and Aberdeen Asset Management PLC merged to become Standard Life Aberdeen, one of the world’s largest investment companies. Our purpose is to invest for a better future. We do it to make a difference – to the lives of our clients and customers, our people and our shareholders. To achieve our purpose, we aim to build a world-class investment company. We have a commitment to excellence in everything that we do – supported by innovation and collaboration from our talented people. We aim to develop products and services for evolving client needs, create a culture of inclusion and respect, and build beneficial relationships with all of our stakeholders. Wherever we are in the world we strive to make a positive long-term impact. This means delivering worldclass investment solutions that help clients achieve their long-term objectives. It also means operating ethically, encouraging good practices among companies we invest in, and providing support and expertise for the benefit of the communities in which we operate. The proposed transaction with Phoenix Group Holdings (Phoenix), announced on 23 February 2018, completes our transformation to a fee based, capital light business.
I’m happy to say we’re on track to deliver on the plan we set out for you last year as our integration progresses at pace. Pooling our expertise has shown us that neither of the two predecessor companies was fully realising its true potential when serving its customers and clients around the world and we are determined to make the most of this opportunity to become even more clientfocused, more expert and more proficient.
Developing our strategy We are building a business which operates on a world-wide scale. Across the company, we continue to pursue a strategy for growth, expanding our global distribution channels while broadening and deepening our customer and client offerings. Good businesses can never stand still but with so much change having occurred in recent years, the occasional pause for breath to strengthen our core offerings is of course appropriate. We are very conscious in our asset management business of the need to make our core offerings world class to increase value for our clients, customers and shareholders.
The news that that we did not reach an agreement with Lloyds Banking Group to continue to manage their assets on existing terms was disappointing. We will be discussing the implications of this with Lloyds Banking Group and Scottish Widows.
Final dividend of 14.30p I am pleased to announce a final dividend for 2017 of 14.30p per share. This will give shareholders a total 2017 dividend of 21.30p per share, should they vote to approve it at our next Annual General Meeting, and will be paid on 30 May 2018. We are committed to a progressive dividend policy as dividends are a very real demonstration of our financial strength and how well our business has performed.
With the uncertainties of Brexit overhanging the UK, globalisation, for a British company, is one of the most effective responses. Asset managers are now some of the UK’s most global businesses and we are no exception to that, with offices in 50 locations serving clients and customers from over 80 countries. We will certainly be developing our overseas activities further. Our own businesses in India and China where we operate alongside distinguished local partners go from strength to strength. In India our life business, HDFC Life, had a very successful IPO and now, somewhat pleasingly, trades on the Indian stock market as one of the most highly-rated insurance companies in the world. I’m very optimistic about the outlook for both India and China.
A strong Board and management Strong management and a competent, involved Board are key ingredients in any company’s success. The decision to appoint two Co-Chief Executives of the merged company raised some eyebrows. However, this was a deliberate Board decision because of the breadth and depth of effort that was needed to take full advantage of the opportunities presented by the merger and to allow us to drive the very important cost and operating synergies across the business. We were very fortunate to have two very talented individuals to take up these roles who have vastly complementary skills and who work very well together. I’m very pleased how well it has worked out in practice, and it has also enabled us to streamline and simplify the senior management structures that sit below this level. This relationship is serving the business well and I see no reason why it will not be in place for a number of years.
Lastly, I’m very conscious that we asked an awful lot of all our people in 2017 and that they responded magnificently. To achieve a merger as complex as the one we did in a relatively short space of time takes a huge amount of effort, not just from those directly involved but also from those keeping the rest of our businesses operating safely and also growing. I’m very grateful to everyone involved. We know there is a lot to do in 2018 to reap the benefits of the merger, to implement our new partnership with Phoenix, to strengthen our proficiency in the solutions we offer and to improve our service to our clients and customers. We are all determined to do this.
Key responsibilities • Investment management • Pensions and Savings • India and China insurance business • Support functions – Finance, HR, Operations, Risk and Regulatory
We continue to innovate, launch new funds and win new mandates. Our pensions and savings business has had a particularly strong year with record flows. The successful IPO of HDFC Life and proposed IPO of HDFC Asset Management in India, as well as our recent registration as a private securities fund manager in China, further demonstrate the strength and diversity of our business.
Under the proposed transaction we are selling our capital heavy insurance business which will complete our transformation to a fee based, capital light investment company. Importantly, we will have retained our fast growing retail platforms, financial advice, and access to Workplace distribution.
Phoenix is a market-leader in their specialist role of administering long-standing life and pension policies. We are excited about the potential to combine our expertise and capabilities with the significant experience they have in delivering efficient administration of products for millions of customers.
Phoenix has made it clear that Standard Life's management team and its depth of talent will be essential to the transaction and the future success of its business. It has also committed to maintaining operational headquarters in Edinburgh.
We have also reached agreement with Phoenix to significantly expand our strategic partnership which reinforces our marketleading insurance asset management capabilities, while the proposed sale releases material capital for future reinvestment.
One of the things that was important to do early on was give our people a chance to influence how our company and its culture should look in the future. We have sought our people’s feedback in a number of different ways – both positive elements and areas causing concern – and I’m very pleased that most people can see the opportunity the merger presents. From reading the responses, it’s clear that there is a genuine sense of optimism, but also a strong desire to hear directly from leaders along the way. Senior leadership engagement with our people is an ongoing priority.
MG Trust in financial services continues to be pretty low. The recommendations that the Financial Conduct Authority published last year, in terms of improving simplicity and transparency in what financial services companies offer, were sensible and balanced. I believe that developments like this can help rebuild trust and encourage businesses to look for opportunities to improve things even further.
Collaboration within our business is also hugely important. If we are to continue to innovate and keep up with the pace of change in our industry, we need to work together and find effective ways of sharing our ideas and insights.
Some short-term fund performance has been challenging. What is the longer-term outlook? KS
We recognise that passive investment does have a place for some investors too, and the quantitative expertise that Aberdeen has brought in this area helps to diversify the capabilities we offer to clients who choose passive investing, either as a standalone approach, or as a component of a wider investment strategy.
In the UK, the Standard Life brand has a strong heritage and reputation in the pensions and savings arena. It’s a brand name, for example, that four out of five adults in the UK recognise. We felt that it was important to preserve that and continue to build on its strengths.
Getting the integration right will let us focus on what’s always been the priority for our businesses: execution of strategy and continuing to do the best we can for our clients to deliver longterm investment performance. When you consider that we now have clients in 80 countries, they expect us to be able to provide a very broad range of capabilities. An important area of focus in 2018 will be on finding the most effective ways to share skills and insights, so we can continue to diversify the capabilities that we offer.
Getting the integration right also means creating an inclusive culture for our employees. An important element of this is improving our gender balance at all levels – which includes consideration of both the pay gap between men and women, and how we fill roles across the company. It’s important that we make progress in this area over the year ahead. We believe this can have a positive impact for our business and our people, as well as on our industry and wider society
A key priority will be to ensure the successful completion of the proposed transaction with Phoenix. The sale is expected to complete in H2 2018 and is subject to shareholder, regulatory and other necessary approvals. However, we also recognise the importance of continued focus on business as usual activities during this process.
Global distribution capability with enhanced proximity to clients We have customers and clients in 80 countries, served by offices worldwide. We also have a range of strategic relationships across the world. Our local insight helps us meet clients’ and customers’ evolving needs.
Well positioned to take advantage of trends shaping the savings and investment landscape globally We operate in a complex market environment that reflects the changing needs of our clients. We have a strong strategic focus on reacting and adapting effectively to these changes and trends.
However challenging the market environment is in the long term, one of the things that will influence our ability to achieve our long-term goals is staying close to client needs. The work that Martin leads on the client engagement front, and the insight this gives us, plays a really important role. Our approach will always be centred around creating a market-leading business for clients, one that sets the pace for innovation and for adapting to global market movements.
MG Being world class is about being a company that understands its responsibilities and knows how to think and act to create the best outcomes, for all stakeholders. As a global business, this includes building a brand that resonates with clients and customers – with products and services to match – while also growing value for shareholders. As an employer, it includes creating an environment that supports meaningful careers, promotes inclusion and attracts talented people from all backgrounds.
Everything we do is built around trying to have a positive longterm impact on the lives of our stakeholders.
Standard Life Investments and Aberdeen Asset Management have combined under the Aberdeen Standard Investments brand with the scale to deliver the innovation, market insight and responsiveness needed in today’s competitive and fast-changing market.
With our increasingly global reach, we have the resources and expertise to transform new investment ideas into practical investment solutions that deliver positive outcomes for clients.
Standard Life is a leading provider of long-term savings and investment propositions and has established a market-leading position through a long-term commitment to support the needs of our customers. We are primarily based in the UK, with operations also in Ireland and Germany. In total, we serve around 4.5 million customers. We continue to invest in our distribution capability and adviser platform offering and also in product and service innovation.
Close collaboration with Aberdeen Standard Investments allows us to support customers across the value chain and enhance our ambition to become a truly world-class investment company.
India and China life Through a combination of associate and joint venture life businesses, we have extensive reach in two of the fastest growing savings markets – India and China.
Standard Life Pensions and Savings In our UK business, products and services are offered through two main channels: • Retail: pensions and savings where the relationship is either directly with the customer, or with their financial adviser • Workplace: pensions, savings and flexible benefits to employees through their employers
India and China life HDFC Life sells individual and group life insurance policies in India via a network of around 400 branches along with access to partner branches of over 130 bancassurance relationships.
Standard Life (Asia) sells insurance and savings products via insurance brokers in Hong Kong.
Aberdeen Standard Investments 29% Standard Life Pensions and Savings 33% India and China life 38%
Str ateg ic r epo r t 9Standard Life Aberdeen 2017
We expect to see diversity in our revenue streams increase further as we progress through our integration and deliver the broader investment proposition to a growing global market.
See pages 32 to 39 for further details on our financial performance and also Note 2 of the Group financial statements section of this report for details of our performance on an IFRS basis
Broad and compelling client offering As a result of the merger, we have been able to transform the investment capabilities we offer to clients, with complementary skills and capabilities across all major asset classes. We are also better positioned to offer increasingly sophisticated investment products to meet evolving client needs.
We now benefit from increased strength in developed and emerging markets across equities, fixed income, multi-asset, private markets/alternatives, real estate and quantitative investing. Within each of the asset classes there is a low level of overlap between the products we offer, allowing the combined Group’s clients to choose from a broader range of investment capabilities.
In addition to our broad investment skills, we also believe that the complementary nature of our distribution networks give us a significant competitive advantage as we look to make the most of opportunities to grow our business and generate further revenue.
See pages 42 to 43 for further information on the asset classes detailed above
In India and China, we have well-established associate and joint venture life businesses, HDFC Life and Heng An Standard Life (HASL). These life and pensions businesses benefit from the local expertise of our partners, and our experience in the UK pensions and savings market, in order to serve a growing demand for life and pensions products. In addition, through our investment in HDFC Asset Management, one of India’s largest and most profitable asset managers, we are well positioned in the Indian asset management sector where the growth potential is also significant.
In Japan, we have built an important relationship with Mitsubishi UFJ Trust and Banking Corporation (MUTB), one of the largest retail and commercial banking groups in the country.
Japan has a strong and growing defined contribution market and we will continue to explore how we can deliver expanded client solutions to meet this demand. We also have a strong strategic alliance in Japan with Sumitomo Mitsui Trust Bank, one of the country’s largest asset managers.
We also benefit from a partnership with Phoenix, one of the largest closed life insurance consolidators in the UK. The announcement on 23 February will further strengthen this mutually beneficial strategic relationship.
Our global locations Headquartered in Scotland, we have a global presence that allows us to stay close to customer and client needs wherever we operate.
Asia Pacific Bandung Bangkok Beijing Hong Kong Jakarta Kaohsiung Kuala Lumpur Melbourne
2 Rebuilding trust in financial services The global financial crisis damaged trust in financial services organisations. We must play our part in helping to rebuild this trust by demonstrating we are committed to doing the right thing, being transparent in the way we operate and, through our products and services, offering value to our customers and clients.
Recent regulatory developments aim to help address this challenge. The Financial Conduct Authority (FCA) announced how it proposes to tackle the issues identified in its study of the UK asset management market, with a focus on the need to consider value for money for investors. The updated Markets in Financial Instruments Directive (MiFID) legislative framework – which comprises both a directive (MiFID II) and a regulation (MiFIR) – is one of the most impactful and wide-reaching pieces of financial regulation to affect our industry to date. It aims to significantly improve transparency and investor protection in financial markets. This includes improving how market participants – from investment banks, asset managers and advisers, to trading venues and distributors – report on their trading processes, costs and charges, and the measures that they are taking to achieve the best results for clients.
Our response We aim to act responsibly in all of our investment activities – and as stewards of our clients’ investments we have a duty to do this. This involves assessing the risks and opportunities that could have a material impact on financial performance – including ESG issues, which we believe can have a big influence on investment returns. You can read more about this on page 45.
We have a responsibility to ensure our customers have easy access to the services, information, and support they need to grow their life savings. Through auto enrolment we have helped to make a positive difference to the life savings of people in the UK.
Financial market context “2017 was a year that saw good economic growth with low volatility in financial markets, while political factors did not cause the problems that many expected.” Rod Paris, Chief Investment Officer
Equity investors benefited from a surprising lack of market volatility, particularly in the US and many emerging markets. The Standard & Poor’s 500 Index for example, which includes the largest US companies, saw consecutive monthly increases throughout 2017 – an outcome last achieved in the early 1950s. Asset flows were also strong into corporate bonds, real estate and private equity, compressing yields yet further.
Political tensions, such as election results across Europe, have been important considerations for investors in recent years. However, the improving economic backdrop, combined with continued support from central bank policy, helped to reduce the extent to which political factors impacted investment decisions during 2017.
Markets are anticipating central banks raising interest rates and scaling back ‘quantitative easing’ – a policy that's helped to increase the amount of money in the financial system. However, amidst an environment of strong global economic growth and healthy balance sheets, persistently low inflation makes central banks’ decision-making far from straightforward. We must continue to watch actions closely as unexpected, or hasty, moves could have a significant impact on markets.
Overall, we continue to operate against a complex backdrop. To date, both interest rates and household income growth remain low, while corporate governance, technological disruption, and the need for people to take greater responsibility for their investment decisions are areas of increasing importance and all in an increasingly politicised world. Against this backdrop, the need for clients to have innovative investment solutions that will help them achieve growth, income and preserve capital effectively becomes ever more important.
Our response We aim to give people the confidence and expertise to make the right financial decisions. Our focus on active investment management helps us to meet the growing demand for outcomeoriented products.
In the UK, policymakers are focused on ensuring that reforms including auto enrolment and pension freedoms are working well for consumers. This means a focus on fair charging structures and ensuring people can properly compare and understand their options.
Clients and customers want innovative products and services to improve the way they access, invest and keep track of their assets, and it’s important for our business that we keep up with this trend. As they take on more responsibility for their financial decisions, our services need to make the process of doing this as simple as possible – whether online, by phone or face to face.
We listen, understand and then act on a wide variety of operational, people and environmental issues to help move our business forward.
• Senior leaders in our investment business stay close to our clients’ needs worldwide by prioritising meetings in person with them
• We have a programme of regular meetings with institutional investors and analysts around the world
• Along with more informal discussions, our teams interact via email through our intranet sites and at regular face-to-face events
• Our employee intranet is based on the principle of conversation, allowing employees to engage and share views and information
• We have a range of executive-sponsored people networks that champion inclusion
• We meet with the boards of companies we invest in to discuss their approach to a variety of environmental, social and governance topics and to encourage best practice
In evaluating the rationale for the merger we first considered what benefits it could deliver for customers and clients – and we identified that the value Aberdeen Asset Management brings in emerging markets and Asia could be combined with the strength of Standard Life Investments in developed markets and multi-asset. The bringing together of our investment componentry and distribution channels will help us to deliver innovative investment and savings solutions that meet evolving customer and client needs.
This, alongside the synergies we have identified, allows us to deliver the financial benefits for our shareholders.
Our merger gives us global scale and, as a large employer in Scotland and around the world, we take seriously our responsibility to the communities in which we operate. We know it is important to all our stakeholders that we use our scale to have a positive impact, so our combined teams continue to work closely on aligning and enhancing our approach to being a sustainable, ethical business.
As most costs are relatively fixed and revenue can be impacted by market volatility, we aim to control our costs to be efficient over different cycles.
Driving profit Increasing assets, growing revenue and lowering unit costs enables us to drive our profit and cash flow that allow us to further invest in growing our business.
Investment capabilities The scale of our business allows us to deliver positive outcomes for our customers and clients through an increasing breadth and depth of investment capabilities. We aim to build on our successful track record of delivering longterm investment performance.
Talented people The management and performance of our business, including funds and solutions, is down to our talented people across the globe, who collaborate and strive for excellence in all they do. As well as ensuring our people are engaged and rewarded appropriately, we offer a range of personal development programmes to help progress their skills, knowledge and careers.
Financial strength and our heritage We are a well-capitalised business. We operate efficiently and effectively – actively managing our balance sheet to ensure we hold enough capital to allow us to invest for future business growth, while aiming to continue to deliver a progressive dividend to shareholders. We use our experience to make sure we continue to do the right thing for all our stakeholders.
Through developing strong relationships and delivering a range of investment capabilities we aim to increase assets and grow our revenue. By building an efficient and effective business, we can continue to lower our unit costs and optimise our balance sheet.
• Integration progressing well and now expect to deliver at least £250m of annual cost savings
Cost/income ratio1,3 66% (2016: 64%) AUMA1,3 £654.9bn (2016: £647.6bn) Adjusted profit before tax1,3 £1,039m (2016: £1,054m)
• Strategic transition and delivery • Distribution and client management • Political change • Change management • IT failure and security • Oversight of third parties • Process execution failure • Regulatory and legal • Liquidity risk
Attracting, retaining and developing talented people 18 Standard Life Aberdeen 2017
• Investment performance • Strategic transition and delivery • Client and customer preferences and demand • Talent management
• Completed IPO of HDFC Life in November 2017, generating £359m from the sale of part of our stake
Adjusted profit before tax1,3 £1,039m (2016: £1,054m) IFRS profit after tax attributable to equity holders4 £699m (2016: £368m) Full year dividend per share1 21.30p (2016: 19.82p)
• Investment performance • Strategic transition and delivery • Distribution and client management • Market risk • Counterparty failure • Longevity risk
Named as one of the UK’s best employers for race by Business in the Community
• Strategic transition and delivery • Political change • Talent management
Read more on key risks on pages 54 to 59 1 KPI. 2 Professional Pensions UK Pension Awards 2017. 3 Pro forma basis. 4 Reported basis.
Across our asset management business, the key to this relationship is knowing our clients’ ambitions and delivering the investment outcomes they expect. In our Pensions and Savings business, we aim to develop relationships with our customers which make us their first choice for their life savings.
Market forces Customers are increasingly taking on more responsibility for their financial future and this drives a need for clear and supportive financial guidance and advice, as well as products and services they understand.
Industry regulation focused on improving the transparency of client transactions and value is a positive development and we are focused on adapting our operations to not only meet but, where possible, exceed requirements.
In our Pensions and Savings business, we have continued to engage with pension customers in the lead-up to retirement to help them understand their options as a result of the pensions freedoms legislation. Following improvements in our process, 80% of people who sign up to access their plan details online now complete the registration, up from just 27% last year, allowing them to have a more meaningful digital relationship with us.
Outlook and 2018 objectives With the expanded set of investment capabilities resulting from integration, the combined strength of both companies’ existing brands, and the combined global distribution platform, we expect meaningful opportunities to deepen client relationships and grow assets.
• Continue to grow our advice capability through 1825, to help the growing number of customers who face significant complexity when planning their future
• Fully integrate our Elevate platform proposition, giving advisers the full benefit of our leading platform franchise 20 Standard Life Aberdeen 2017
As an active asset manager throughout the risk spectrum, we offer market-leading investment products that have clear investment outcomes to match our clients’ ambitions. Our approach is supported by a team of investment experts and a philosophy which is focused on anticipating market change and carefully managing risks.
Objective Broadening and deepening our investment capability gives us the potential to attract a wider range of future customers and clients while enhancing existing relationships.
Success is measured by delivering investment performance that meets the desired outcomes of our customers and clients over the long term. We’re committed to active investment management throughout the risk-return spectrum, and our focus on offering ‘new active’ investment solutions helps us to achieve the outcomes that clients want.
The complementary investment capabilities and solutions that our combined business bring together also demonstrate our breadth as a forward-looking, responsible investor. The merger also allows our business to generate scale for continuing investment and innovation in product design.
Market forces We are well positioned to benefit from global trends that are shaping the savings and investments landscape. This includes the potential for slower economic growth and a compressed return environment over the longer term, which we expect will drive demand for active asset management.
2017 performance Investment performance was mixed over the year, with 70% of assets under management ahead of benchmark. Strength across most fixed income and tactical asset allocation products contrasted with mixed performance in equities. 63% of assets were ahead of benchmark over three years. Our investment processes and performance results are actively monitored and evaluated by our Investment Governance and Oversight Function.
The integration of investment teams and capabilities is progressing well, with a focus on building a forward-looking and collaborative investment platform to deliver outcomes that our clients expect. Bringing together the broad and deep capabilities of the combined business, and sharing insight across these, will enable us to deliver strong and consistent investment performance over the long term. As we integrate and position our business we are focused on evolving investment processes to address performance challenges.
Across the combined business, we launched 22 new funds across a range of different asset classes, including equities, multi-asset, fixed income and private markets. New funds, with specific investment objectives, are part of our ongoing aim to meet the changing investment needs of our customers and clients.
We take our responsibilities as an investor seriously, and the merger brings together significant resource and expertise to improve our approach to stewardship. You can read more about this on page 45.
Outlook and 2018 objectives After very strong gains for risk assets in 2017, we expect more subdued market returns in 2018. Our main objectives are to integrate investment capabilities as well as innovate and seek new, diverse investment opportunities: • Maximise investment insight from broad nature of investment activities globally – including active fundamental approaches, and systematic and quantitative approaches
• Take advantage of increased collaboration across our different investment capabilities, to provide effective outcome-oriented solutions for clients
• Further strengthen our private markets capabilities such as private equity, real estate and illiquid credit
We have a very experienced team leading the merger integration of our businesses.
We also aim to reduce overlap in our distribution networks – combining operations that are close together geographically – and to merge some of the common functions that have been part of each business before the merger.
Cost savings will also come from a phased reduction of around 900 roles over three years from a total of around 9,000 employees. This has increased from our original estimate of 800 roles. We continue to aim to manage much of this through natural employee turnover, and to do everything we can to minimise compulsory redundancies.
Market forces Our clients, customers and advisers expect a modern and consistent user experience through the different channels they use to interact with companies.
2017 performance We’re supportive of industry changes that will improve regulation. We’ve run significant programmes of work to deliver against the requirements of European Union regulations brought in to improve the quality and transparency of transaction reporting on different types of product. These include the updated Markets in Financial Instruments Directive legislation MiFID II, and the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, ahead of their January 2018 deadline.
• Successfully complete the proposed transaction with Phoenix. This will significantly simplify the Group, supporting extraction of further efficiencies across the business.
• Continue our investment in emerging technologies to unlock a competitive advantage and transform the way we provide information to our clients
Str ateg ic r epo r t 25Standard Life Aberdeen 2017
Market forces We expect ‘new active’ investment solutions will be the main driver of global client demand. We are well positioned as the combined business brings together our respective strengths in the provision of next generation solutions.
As people take more responsibility for their financial futures, we’ve continued to see a growing demand for financial advice and guidance. This presents an opportunity for us to diversify and grow our sources of revenue – in particular, through our financial advice business 1825.
2017 performance Our range of investment capabilities continues to expand and we are also increasing our penetration across global markets. The merger accelerated this diversification in 2017 in terms of investment capabilities, talent, client types and geographic reach.
Revenue generation in 2017 was impacted by outflows in our asset management business reflecting mixed short-term investment performance.
Outlook and 2018 objectives • Deliver the cost synergy benefits following the merger with a continued focus on achieving growth in financial performance • Pursue a structured programme to seek further opportunities to grow and diversify our business, including by selective bolt-on acquisitions
Revenue enhancement opportunities Enhanced opportunities to grow and diversify our revenue and profit following the merger include: • Asset and revenue growth opportunities through specifically leveraging complementary investment capabilities. This includes Standard Life Investments’ capabilities in multiasset and risk managed return products being deployed into Aberdeen’s institutional client base; and Aberdeen’s capabilities across various product categories (in particular emerging market equities, Asia Pacific equities and in quantitative strategies) being deployed into Standard Life’s Pensions and Savings retail business and the Phoenix business.
Objective Investing in our employees’ development is crucial to our long-term success. Having people who bring a diverse range of talents and perspectives, and who feel engaged in their roles, is fundamental to building lasting customer and client relationships, contributing to our businesses’ performance, reputation and long-term shareholder value.
Market forces As a company operating on a global scale, the marketplace for talented people is very competitive. A priority for us is ensuring that we provide opportunities and a culture that can attract a diverse pipeline of talent at all levels.
This includes investing in mentoring, coaching and development programmes for our people as part of their career development. We also have a robust succession planning process in place, which includes ongoing talent management for people who have the potential and drive to become our future business leaders.
2017 performance Through the increase in scale that the merger has created, the opportunities we have to attract talent from across the globe have grown. At the same time, change on this scale can create uncertainty – so to help retain talent, we have a responsibility to all of our people to address issues that may arise.
During our three-year integration we need to make sure that everyone, from new recruits through to leadership teams, has the capabilities to support our company’s objectives. We began work on the organisational restructure in late August, with consultation processes starting across many areas of the business. Throughout this process we’ve kept employees regularly updated.
Since the merger we have integrated our employee networks, expanding their global reach to include over 1,900 members. Our networks support their members and raise awareness of issues which affect the communities they represent. There’s more about their areas of focus on page 30.
Outlook and 2018 objectives • Continue to invest in our people – providing learning and development opportunities and further improving our strong talent pipeline
• Develop a shared company culture relevant to all of our stakeholders, and promote the importance of cooperation and collaboration in achieving this
• Support employees as we progress through the proposed transaction with Phoenix. Phoenix has indicated that they intend to maintain operational headquarters in Edinburgh.
• Work across our global locations to build and sustain a more diverse and inclusive workplace
• Continue reviewing and improving our approach to how we measure engagement and enablement, and how we respond to our people’s views 28 Standard Life Aberdeen 2017
Developing our culture Successful cultural integration following the merger is vital to our strategy. After we completed the merger we asked employees to take part in a survey to measure their mood and sentiment, to describe how it currently feels to work for us and how they would like it to feel in the future.
• When asked to choose from a selection of words to describe the current company culture, 70% chose positive words, 7% chose neutral words and 23% selected negative words
While the results showed positivity towards the opportunities that the merger presents, they also highlighted that there are still improvements to be made. During 2018, one of our priorities will be to demonstrate that we’re listening to our people’s views and taking the right action, particularly in light of the proposed transaction with Phoenix.
We will also continue gathering insight to build a culture that fits with the needs of all of our stakeholders. This will include making mood, sentiment and culture an area we measure as part of our full employee engagement survey.
You can read more about our work to create an effective organisational culture on pages 30 to 31.
Improving diversity and inclusion Our business leaders have created an inclusion strategy that defines our priorities over the next three to five years. It aims to embed inclusion in everything we do, and improve transparency in how we talk about and report on diversity in our business. While this will take time to implement, we have made this a priority.
Our employee networks support the members of the diverse groups and communities our employees represent, and raise awareness of issues that affect them. The areas of focus for our networks include: • Cultural issues facing black, Asian and minority ethnic communities • People living with disabilities, and with issues around mental health and wellbeing • Issues around gender balance and equality • Issues affecting the lesbian, gay, bisexual and transgender communities – the LGBT+ Network • Support for employees who are carers • Support for current and former members of the armed forces and their families • Professional and personal development for young employees In addition to supporting employees, these networks also work with the company to deliver business outcomes. In 2017, for example, we partnered with the LGBT+ Network to develop and launch a new transgender policy.
• In recognition of our support to employees who are also carers, we were accredited by Carer Positive – an initiative funded by the Scottish Government – as an ‘Established’ employer in Scotland. Our carers’ network also won the ‘Network of the Year’ award in the UK from the Employers Network for Equality and Inclusion.
• We were named as one of the UK’s Best Employers for Race by Business in the Community, a charity that engages businesses in helping to build a fairer society
Inspiration Awards In September we held our Inspiration Awards event. The awards recognise the contribution our people make in their local communities, as well as the achievements of individuals and teams in helping to make our business innovative and sustainable.
We support physical wellbeing in a number of ways – from offering employee benefits such as private health care and discounted sports club membership, to hosting guest speakers covering topics including nutrition, sleep and cancer awareness. In 2017 we also launched a financial wellness programme in the UK, which included presentations and webinars to help employees better understand how they can make the most of their personal finances.
Engaging through charitable giving and volunteering We have a combined history of engaging with the communities in which our people and customers live and work. We collaborate with charities in these communities, across the UK and globally.
Our funding is directed to have a meaningful and measurable impact that aligns with our company’s strategic objectives. We seek partnerships that engage employees and provide an opportunity for them to use their time and skills to create additional value. We offer paid volunteering leave to our people in support of this.
As at April 2017, men were paid on average 34% more than women at Aberdeen, and 42% more than women in the Standard Life Group. This is an area in which we want to perform better. Our pay gap is primarily driven by the fact that we have more men than women in our senior roles. We are committed to improving our gender balance, and we believe progress here will positively impact our business, our industry and our society.
We also believe in working across our industry to support actions that will address gender equality for our sector. We were among the first signatories to the HM Treasury’s Women in Finance Charter, pledging to improve gender balance in our senior management populations with specific targets, and so help to reduce the gender pay gap across our industry. In October 2017 we publicly reported the actions taken and committed to next steps in making progress over the next 12 months.
Our gender targets Making sustainable progress in achieving a better gender balance at all levels takes time – and an enduring commitment and focus. To help us address this, we have a long-term plan that focuses on three main areas: • Our culture: understanding and removing the barriers for women reaching senior management or which result in many leaving our industry altogether
• Our people: providing every opportunity for our people to reach their potential, regardless of gender
As part of our Women in Finance Charter commitments, we have published the following targets for women in our different roles: Level
Entire UK workforce 502 47 3,634 of 7,803 1 People employed in roles across the two leadership levels below CEO, excluding admin employees. 2 Target has a tolerance of 3%. 3 Data is prepared in accordance with our reporting methodology and the KPIs are within KPMG’s limited assurance scope. Both KPMG’s limited assurance report and our reporting methodology can be found at www.standardlifeaberdeen.com/annualreport
To demonstrate progress in developing our talent pipeline we will continue to track the gender balance in the succession pool, for those ready for our most senior roles within the next three to five years. At February 2018, women were in 44% of these roles, and we expect this figure to increase each year.
Str ateg ic r epo r t 31Standard Life Aberdeen 2017
A The merger gives the business the scale and reach needed to compete globally, evidenced by adjusted profit before tax on a Pro forma basis now exceeding £1bn. The announcement that Lloyds Banking Group and Scottish Widows are seeking to terminate arrangements for the assets we manage for them was disappointing. However, revenues from these assets represent less than 5% of our full year 2017 pro forma fee based revenue. We have recognised an impairment charge of £40m relating to this intangible asset in our 2017 results. When we announced the merger we originally targeted annual cost savings of approximately £200m and expected that these synergies would result in integration costs of approximately £320m in aggregate. The integration is progressing well and we have now increased this target to at least £250m of annual cost savings. The estimated integration costs have increased to around £370m in order to achieve these higher synergies. As at 31 December 2017, actions have been taken to deliver £73m of annualised cost savings, which will begin to take effect in 2018.
Q How is Aberdeen’s performance reflected within the combined Group results and is it disclosed separately?
A The Aberdeen Standard Investments business segment reflects the combined performance of Standard Life Investments and Aberdeen Asset Management. The substance of the transaction to create Standard Life Aberdeen plc was that of a merger between Standard Life Group and Aberdeen. However, under IFRS, the transaction is viewed as an acquisition of Aberdeen by Standard Life Group. Therefore, the Group’s results on an IFRS basis include Aberdeen only from the merger date onwards. The estimated 2017 results for Aberdeen since the merger are provided in the commentary where they are appropriate to help explain financial performance. We have also provided Pro forma basis results, where appropriate, to help explain how 2017 compares to 2016. Aberdeen Standard Investments already operates as a single business and will become increasingly integrated in the coming months.
Definitions of key financial terms are included in the Glossary 32 Standard Life Aberdeen 2017
Growth channel AUMA increased by 2% to £410.3bn (2016: £401.2bn) and now accounts for 63% (2016: 62%) of total AUMA.
Eliminations represent AUMA which is administered by Pensions and Savings and also managed by Aberdeen Standard Investments, and is therefore included in both the Pensions and Savings and Aberdeen Standard Investments segments. At a Group level an elimination adjustment is therefore required. Total eliminations increased to £113.7bn (2016: £109.2bn).
The movement in AUMA also includes £4.3bn of corporate actions, including £3.7bn of business rationalisation outflows relating to the closure of an uneconomic multi-manager fund range and the rationalisation of Aberdeen’s US fixed income business.
Gross and net flows Gross inflows on a Pro forma basis remained strong at £80.1bn (2016: £80.4bn), with record gross flows in UK Retail driven by our Wrap and Elevate platforms, and continued strong inflows in Aberdeen Standard Investments.
Standard Life Pensions and Savings growth channels delivered increased net inflows of £8.1bn (2016: £5.9bn) as a result of record net inflows in UK Retail. This was driven by strong demand for our Wrap and Elevate platforms, boosted by transfers from defined benefit to defined contribution pension schemes, which helped the UK Retail channel achieve a 73% increase in net flows to £6.4bn (2016: £3.7bn).
India and China life net inflows increased to £0.5bn (2016: £0.4bn) with higher flows for both HDFC Life and Heng An Standard Life.
Further information on AUMA and net flows is included in the Supplementary information section of this report. Definitions of growth channels and mature books are included in the Glossary.
Pro forma fee based revenue up 3% to £2,763m, driven by Pensions and Savings asset growth. Fee based revenue On a Reported basis, fee based revenue increased by 28% to £2,111m (2016: £1,651m) mainly due to the inclusion of Aberdeen revenue of £407m in the period since the merger completed. Pensions and Savings fee based revenue increased to £964m (2016: £861m) as AUA benefited from strong net inflows and positive market movements, as well as a full year of ownership of Elevate (acquired Q4 2016).
Spread/risk margin Spread/risk margin in our Pension and Savings business, which mainly relates to income earned on annuities, increased to £165m (2016: £134m). Operating assumption and actuarial reserving changes provided a benefit of £91m (2016: £42m) primarily relating to mortality assumptions. 2017 also benefited from favourable mortality experience, including a £7m reserve release in H1 in respect of overseas annuitants.
The cost/income ratio deteriorated to 66% (2016: 64%) reflecting the higher costs noted above, although this ratio is inflated by the impairment charge which we would not expect to recur. When we announced the merger we originally targeted annual cost savings of approximately £200m and expected that these synergies would result in integration costs of approximately £320m in aggregate. The integration is progressing well and we have now increased this target to at least £250m of annual cost savings. The estimated integration costs have increased to around £370m in order to achieve these higher synergies.
Adjusted profit before tax (Pro forma basis) and IFRS profit (Reported basis)
Growth (includes Hong Kong) Mature £654m £2,032m £609m £2,077m £621m £2,142m £276m
IFRS profit attributable to equity holders of Standard Life Aberdeen plc 34 Standard Life Aberdeen 2017
Our share of profit before tax from associates and joint ventures’ continued to grow and included benefit of favourable exchange rate movements. Profit from HDFC Life increased to £48m (2016: £34m) and HDFC Asset Management rose to £41m (2016: £35m).
Adjusted profit before tax on a Pro forma basis decreased by 1% to £1,039m, driven by lower profitability at Aberdeen Standard Investments which saw additional costs compared to 2016 and flat revenue.
On a Pro forma basis capital management generated a gain of £6m (2016: £11m) and includes fair value gains on investment securities in Aberdeen Standard Investments of £30m (2016: £22m) largely offset by coupons paid on perpetual capital securities of £27m (2016: £26m). 2017 was also impacted by a lower net interest credit from the pension scheme surplus and the interest expense on the new $750m debt instrument.
Adjusting items (40) (269) Share of associates’ and joint ventures’ tax expense (41) (13) Profit attributable to non-controlling interests (preference shares and perpetual notes) (8) – Total tax (66) (68) Profit for the year attributable to equity holders of Standard Life Aberdeen plc 699 368
Following the merger with Aberdeen, the Group renamed ‘operating profit before tax’ as ‘adjusted profit before tax’ and changes to the basis of calculation were also made. Comparatives have been restated. See Note 2 of the Group financial statements for more information. For further details on our IFRS results, see the Group’s IFRS consolidated income statement on page 147.
Short-term fluctuations in investment return and economic assumption changes generated a profit of £67m (2016: £13m) in the Pensions and Savings business, including a benefit from a narrowing of credit spreads.
Adjusting items also includes £100m (2016: £175m) relating to an increase in the provision for historic annuity sales practices, following further analysis and an update to assumptions based on sample testing following the receipt of the FCA redress calculator in early 2018. Other adjusting items include the £24m impairment recognised in H1 2017 relating to the proposed sale of our wholly owned Hong Kong insurance company to our Chinese life joint venture company, Heng An Standard Life.
Profit on disposal of interests in associates 319 – Short-term fluctuations in investment return and economic assumption changes 67 13 Restructuring and corporate transaction expenses (173) (67) Amortisation and impairment of intangible assets acquired in business combinations (138) (38) Provision for annuity sales practices (100) (175) Coupon payments on perpetual notes classified as equity 10 – Other (25) (2) Total adjusting items (40) (269)
Share of associates and joint ventures tax expense increased to £41m (2016: £13m) largely relating to a change in our treatment of tax on Indian dividends.
Earnings per share On a Reported basis adjusted diluted earnings per share has increased to 29.9p (2016: 29.3p). On a Pro forma basis adjusted diluted earnings per share was flat at 28.9p (2016: 28.8p).
• Our share of profits from our associate and joint venture holdings is shown on a post-tax basis and no further tax charge is then applied to this profit, reducing the effective tax rate
Tax policy Understanding tax risk, how to manage it, and how it impacts all our stakeholders are important elements of running our business responsibly. The Group proactively manages tax risks and employs an experienced in-house tax team to oversee the tax affairs of the Group. We have a tax risk management policy that is approved annually by the Board.
We continue to maintain strong liquidity and solvency positions. Adjusted cash generation This measure provides insight into our ability to generate cash that supports further investment in the business and the payment of dividends to our shareholders. Adjusted cash generation has decreased to £841m, driven by lower profitability at Aberdeen Standard Investments partly offset by higher cash generation in Pensions and Savings.
As explained on page 281, the methodology for calculating adjusted cash generation has been revised following the merger. This change better aligns adjusted cash generation for the Aberdeen Standard Investments segment with the IFRS statement of cash flows.
Aberdeen Standard Investments 551 643 Standard Life Pensions and Savings 332 267 India and China life 10 8 Other (52) (25) Adjusted cash generation 841 893
In addition, the Regulatory view solvency cover is diluted by the inclusion of £0.7bn (2016: £1.2bn) of capital requirements for with profits funds and our defined benefit pension scheme. These capital requirements are covered in full by capital resources in those funds.
Liquidity management Standard Life Aberdeen plc, the group holding company, holds substantial cash and liquid resources. At 31 December 2017 Standard Life Aberdeen plc held £1.2bn (2016: £0.9bn) of cash and liquid resources, comprises £693m (2016: £395m) of cash and short-term debt securities, £298m (2016: £304m) of bonds and £204m (2016: £201m) of holdings in pooled investment funds.
Note 47 of the Group financial statements of this report includes a reconciliation between regulatory capital own funds and IFRS equity and also details of our capital management policies
Str ateg ic r epo r t 37Standard Life Aberdeen 2017
The Board is recommending a final dividend for 2017 of 14.30p per share which is an increase of 7.1% on last year’s final dividend. Subject to shareholder approval, this will be paid on 30 May 2018 to shareholders on the register at close of business on 20 April 2018.
The final dividend, combined with the 2017 interim dividend of 7.00p, brings the total dividend for the year to 21.30p – an increase of 7.5% on the 2016 full year dividend.
Viability statement The Group's prospects are primarily assessed through the strategic and business planning process. Strategic planning is a continuous process which underpins business planning. It considers our business model and how this is designed to be sustainable and resilient in the long term as described on pages 14, 15, 17 and 18 of this report. Responding to market trends, and the robust assessment of principal risks, is key to ensuring our business model remains viable. Business planning is an annual process which projects the performance, regulatory capital and liquidity of the Group over a three-year period, and considers multiple scenarios including a severe downside scenario. The Directors’ assessment of prospects takes into account the Group’s current capital and liquidity position, as set out on page 37, which shows a Solvency II regulatory capital surplus of £3.6bn and substantial cash and liquid resources held by Standard Life Aberdeen plc. Assessment of viability: The Directors confirm that they have a reasonable expectation that Standard Life Aberdeen (SLA) will be able to continue in operation and meet its liabilities as they fall due over the next three years. The assessment process is overseen by the Risk function and is subject to challenge from executive management and the Risk and Capital Committee, as well as Board consideration. The key processes used by the Board to assess viability are set out below. In particular, the stress and sensitivity analysis performed by each of Standard Life Group, Aberdeen and the combined Group provides insight into the exposures to our principal risks over the defined viability period. Business plan scenarios: The severe downside used in 2017 assumes that the global economy tips into a severe recession; global equities and bond yields fall in 2018 and 2019 before increasing slightly in 2020. Our projected capital positions are a measure of the capital we need in the business to cover our risks, including financial and operational risks, under such stress scenarios. Our analysis shows that, whilst capital is eroded under this severe downside scenario, the strength and quality of our capital base means that regulatory solvency is maintained and our business remains viable. Quantitative stress and scenario testing looks at plausible, negative individual and combined stresses that could adversely impact profits, capital and liquidity. Stresses are calibrated up to a 1-in-200 year probability level, or more extreme in certain scenarios. In addition to the business plan scenarios, a broad range of quantitative stress and scenario testing was performed separately pre-merger by Standard Life Group and Aberdeen, looking at the respective resilience to market, credit, expense and demographic shocks. We also considered the effects of the merger and the subsequent changes in risk profile and concluded that SLA remains solvent under a range of stresses and can support potential cash outflows that may occur. Reverse stress testing gives a quantitative and qualitative understanding of plausible but severe risk scenarios which could threaten business model viability. This analysis assists in determining if mitigating actions can be taken at the current time or if triggers should be put in place for future actions, should they be required in extreme stressed conditions. Both businesses carried out separate reverse stress testing prior to the merger. This analysis explored the potential failure due to significant reputational damage, loss of operations and/or insolvency across the following scenarios: Fraudulent behaviour involving insider trading; Loss of key personnel in key investment-related areas (e.g. equity products); Cyber Attack/Breach of security information; Failure of key third party service providers; Major shock to financial markets; and Market pressure on fund charges, flows and investment performance. The analysis and projections completed as part of the due diligence gave consideration to the effects of the merger, and concluded that it is reasonable to expect the results of the combined entity to be consistent with the individual stress testing results. Reverse stress testing results confirmed that both entities are resilient to extreme stresses due to the embedded risk management framework, including monitoring, triggers and actions. Oversight of risk within the business is delivered through the Internal Capital Adequacy Assessment Process (ICAAP) and the Own Risk and Solvency Assessment (ORSA) processes described in the Risk management section. We consider that three years is an appropriate period for this viability assessment, which is in line with our core business planning process. It is the period over which major strategic actions, such as the launch of new investment propositions, are typically delivered. It also takes into account the uncertain economic environment and changing political and regulatory environment, and the timescale over which changes to major regulations and the external landscape affecting our business typically take place. We consider that the severe scenarios assessed as part of our reverse stress testing are appropriate over this three-year period.
Fee based revenue 1,260 885 964 861 12 17 – – (125) (112) 2,111 1,651 Spread/risk margin – – 165 134 – – – – – – 165 134 Total adjusted operating income 1,260 885 1,129 995 12 17 – – (125) (112) 2,276 1,785 Total adjusted operating expenses (811) (534) (769) (655) (11) (22) (61) (57) 125 112 (1,527) (1,156) Adjusted operating profit 449 351 360 340 1 (5) (61) (57) – – 749 629 Capital management 2 – 21 22 – – (17) (9) – – 6 13 Share of associates’ and joint ventures’ profit before tax 41 35 – – 58 41 – – – – 99 76 Adjusted profit before tax 492 386 381 362 59 36 (78) (66) – – 854 718
Under the Aberdeen Standard Investments brand, we aim to create a world-class asset management business, with the scale to deliver the innovation, market insight and responsiveness needed in today’s competitive and fast-changing market.
A global network with local expertise The breadth and depth of our investment talent increased significantly as a result of the merger. We now have over 1,000 investment professionals across 24 investment centres, together with 50 distribution offices servicing clients in 80 countries. We also have a broad range of powerful strategic relationships across the world with major banks, insurers and other investment firms to support the needs of institutional, wholesale, pension and retail investors.
Prepare for Brexit The UK Government continues to negotiate the exit of the UK from the European Union. Changes to arrangements in Europe would have an effect on how we provide access to investment opportunities for our European based clients. We will continue to work with all responsible for negotiating future arrangements in Europe in order to help develop solutions that will best serve our clients in the UK and the rest of Europe.
Integrating two complementary investment businesses While historically, the investment philosophies and processes adopted by Aberdeen and Standard Life Investments were distinct, we share a set of common investment beliefs. These will continue to be the foundations for our investment approaches: • Fundamentals driven • Micro and macro research • Long term • Team-based ethos • Stewardship embedded • Shared asset class insight
Pro forma basis Reported basis 65% 62% (2016: 63%) (2016: 58%)
1 Percentage of total AUM ahead of benchmark over three years. Investment performance reporting has been aligned for the combined asset management business and therefore no comparative information is available on a combined basis.
2 IFRS profit after tax attributable to equity holders of Standard Life Aberdeen plc.
Equities 16.2 15.0 (8.2) (13.9) 104.5 97.4 Fixed income 8.4 9.4 (3.3) (5.3) 51.4 55.1 Multi-asset 13.9 16.7 (6.9) (3.6) 72.4 79.1 Private markets/alternatives 1.9 1.6 (0.8) (1.2) 24.5 25.7 Real estate 3.6 4.3 (1.0) (1.6) 28.5 27.5 Quantitative 0.2 0.3 (0.5) (0.2) 2.2 2.4 Cash/liquidity 6.7 7.8 (1.4) (0.3) 20.4 21.9 Total growth 50.9 55.1 (22.1) (26.1) 303.9 309.1 Total mature 15.6 16.4 (15.2) (13.6) 271.8 271.5 Total Aberdeen Standard Investments 66.5 71.5 (37.3) (39.7) 575.7 580.6
Total AUM on a Pro forma basis decreased 1% to £575.7bn as the impact of net outflows during the year was significantly offset by positive investment returns. Growth channel, which comprises Institutional, Wholesale and Wealth/Digital AUM decreased 2% to £303.9bn, and accounts for 53% of total AUM. Aberdeen total AUM as at 14 August 2017, the date of the merger, was £304.9bn.
Of the growth channel net outflows, £8.2bn (2016: £13.9bn) relates to equities. Sentiment improved towards Asia and Emerging Markets but our flows continue to be impacted by a period of weaker investment performance. Overall, demand for equities increased in 2017, whilst the rate of outflows continued to reduce, resulting in a 41% improvement in net outflows.
Multi-asset (excluding GARS) generated net inflows of £3.8bn (2016: £0.7bn). This included continued demand for MyFolio and Parmenion products which delivered net inflows of £2.0bn and £1.3bn respectively.
Mature books Mature channel, which comprises Standard Life Pensions and Savings and third party strategic partner life business, including Lloyds Banking Group and Scottish Widows. AUM remained stable at £271.8bn. Our mature books business, which is in natural run-off, saw net outflows of £15.2bn (2016: £13.6bn) which were offset by positive investment returns. We consider these outflows to be structural and we expect this level of attrition from the insurance book. Fees associated with the mature AUM are lower margin.
Further information on AUM and net flows are included in the Supplementary information section of this report
Total AUM asset class split Quarterly growth net flows (Pro forma basis) £575.7bn
Review of the year Equity markets continued to reach new highs in 2017, fuelled by increasing confidence in global growth and strong corporate earnings. Correlations declined, and in some regional markets the rally was fuelled in concentrated numbers of sectors and stocks. Against this backdrop, relative performance of our key equity strategies was mixed over the year.
Risk oversight is fundamental as a means to reduce losses and help protect income. Our robust approach to risk monitoring ensures our portfolios are positioned to withstand a wide array of market conditions.
Multi-asset management lies at the heart of our business, enabling us to provide outcome-based solutions that meet a diverse range of client needs, such as growth, regular income, capital preservation and liability management. Core to our multi-asset approach is genuine diversification which we achieve by actively managing the blend of traditional and alternative asset class exposures, as well as advanced strategies in interest rates, inflation, currencies and volatility, that can respond to a broader range of economic drivers. Key features of our multi-asset solutions are: • Breadth of investment coverage • Experienced, skilled and collaborative team • Portfolio risk and construction insight • Access to long-term investing opportunities
Our diversified growth and income portfolios enjoyed a successful year, performing well versus their peers and also gaining momentum in terms of flows.
Developed markets £16.3bn Emerging markets £37.0bn Asia Pacific £27.7bn Global £23.5bn Total growth £104.5bn
Absolute return £39.8bn Diversified growth/income £1.5bn MyFolio £13.3bn Other multi-asset £6.5bn Parmenion £4.4bn Standard Life Wealth £6.9bn Total growth £72.4bn
Review of the year 2017 proved to be a year when exposure to a diverse set of alternative factors proved to be an optimal risk adjusted strategy. Financially sound companies with strong balance sheets, good price momentum and earnings momentum proved to be a valuable hedge against generally underwhelming returns from value stocks. During the year our multi-factor approach to both index relative and absolute returns, which considers factors such as value, momentum, and quality among others, enhanced our already demonstrable track record of success in managing both active and passive systematic strategies.
Liquidity funds are a particularly effective tool used by cash managers throughout the world, as they aim to preserve capital and often provide a return ahead of their cash benchmark. As a result, institutional investors have used them as a flexible solution for their working capital for many years. Liquidity funds can also help to diversify risk and potentially offer instant access.
The alternative investment strategies business enjoyed industry recognition in winning the Institutional Firm of the Year at the Global HFM InvestHedge Awards, and fund raising success with a strong maiden calendar year for the Aberdeen Alternative Risk Premia Fund and the delivery of a number of customised programmes for institutional investors.
Looking forward, we have a number of new product offerings that are entering the market and will look to capitalise on growth and diversification opportunities across the full range of our capabilities.
Real estate has a track record of delivering robust, risk-adjusted returns over the long term, and can act as an effective portfolio diversifier. We offer global strategies and sector specific investment opportunities including direct real estate, listed real estate, hybrid real estate solutions, real estate debt and real estate multi-manager. High-quality original research is essential to our strategies, allowing us to select assets and markets offering the best solutions for clients based on their risk appetite and desired outcome. Following acquisition, we look to create further value by actively managing the asset. This includes ensuring operational efficiency, letting vacant space, negotiating favourable lease terms and redevelopment. Review of the year The UK market proved significantly more resilient than many predicted in 2017. Open ended funds experienced more stability in cash flows, while liquidity in the market remained elevated and underpinned valuation uplifts. Against this market context, demand from clients was increasingly focused on income solutions and derisking of portfolios. In a global context, the wider European market was particularly strong over the year. Increased tenant demand translated into robust income growth across our European funds. Across most of the markets, the logistics sector continues to benefit from a structural change in the delivery of goods from retailers increasing online sales. This theme underpinned our successful fund launch of the European Logistics Income plc in December 2017.
As a consequence of these market conditions, our UK funds provided robust performance for clients, while European funds generally delivered returns above client expectations.
Private equity £12.4bn Alternative investment solutions £8.0bn Infrastructure equity £3.8bn Private credit and solutions £0.3bn Total growth £24.5bn
Revenue Fee based revenue On a Reported basis, fee based revenue increased by £375m to £1,260m (2016: £885m), including £407m of revenue from Aberdeen Asset Management in the period since the merger. This was partly offset by lower fee based revenue in Standard Life Investments reflecting the impact of net outflows in 2016 and 2017 combined with a change in the underlying asset mix.
On a Pro forma basis, fee based revenue remained stable at £1,912m. Aberdeen revenue year-on-year was relatively stable with the impact of net outflows broadly offset by favourable market and foreign exchange movements. Standard Life Investments revenue decreased as noted above. Performance fees represent 1% of total revenue at £26m (2016: £33m).
The average growth channel fee revenue yield has decreased slightly to 51bps (2016: 52bps), driven by a change in asset mix.
The revenue yield on the mature books remained stable at 14bps.
Equities 667 637 68 68 Fixed income 145 163 29 32 Multi-asset 432 458 58 59 Private markets/ alternatives 119 108 41 41 Real estate 153 165 54 57 Quantitative 3 3 12 14 Cash/liquidity 14 18 7 9 Total growth channels 1,533 1,552 51 52 Total mature books 379 368 14 14 Total 1,912 1,920 33 34
Costs Adjusted operating expenses On a Reported basis, adjusted operating expenses increased by £277m to £811m (2016: £534m). This reflects the inclusion of £276m of adjusted operating expenses from Aberdeen in the period since the merger, and stable expenses in Standard Life Investments due to a focus on costs in response to pressure on fee based revenue.
The cost/income ratio stands at 65%, compared to 63% in 2016, with the deterioration due to the increase in adjusted operating expenses and the reduction in fee based revenue.
Capital management On a Pro forma basis capital management items generated a gain of £2m (2016: loss of £2m) consisting of fair value gains on investment securities of £30m (2016: £22m) largely offset by coupons paid on perpetual capital securities of £27m (2016: £26m) and net interest expense of £1m (2016: income £2m).
As at 31 December 2017, actions have been taken to deliver £73m of annualised cost savings, which will begin to take effect in 2018.
Investment performance (Pro forma basis) 3 years 5 years % of AUM ahead of benchmark 1 year
Stewardship and Environmental Social and Governance (ESG) integration across all asset classes Both Aberdeen Asset Management and Standard Life Investments were committed to the belief that the assessment of material ESG factors adds value to investment performance, through both risk mitigation and opportunity identification. Now, as a combined business, we believe this is an area in which we can be an industry leader and, over the coming year, we will seek to build on our capabilities and our engagement with clients and wider stakeholders. While approaches differ by asset class, a review of the material ESG considerations impacting every investment decision is a fundamental element of all our investment processes. In addition to the integration of material factors, we also offer clients bespoke ESG and screened solutions to meet their investment needs. As an illustration of our integrated approach, in our direct real estate portfolio we achieved 21 ‘Green Star’ ranked funds in the GRESB Real Estate Assessment, the global sustainability benchmark for real estate. Our overall performance in the assessment placed us in the top 20% of our peers.
Our equity impact offering In October we launched our Global Equity Impact Fund which uses the 17 UN Sustainable Development Goals as a framework to invest in companies which have a positive impact on the environment and society, while generating strong financial returns. Each company included in the portfolio must intentionally direct resources towards addressing the challenges identified in the Goals. Our managers analyse the ways in which deployed resources contribute to company growth and the measurable outcomes achieved for those most affected by the problem. Stock selection involves in-depth analysis, robust peer review and active engagement. Our sponsorship of Good Money Week provided a platform for raising awareness of our new offering and our broader stewardship capabilities, together with engaging with stakeholders on these issues.
Standard Life Pensions and Savings is an important source of assets for Aberdeen Standard Investments and has distributed 84% of total MyFolio AUM. Aberdeen Standard Investments currently manage 71% of our Workplace AUA and 17% of our Wrap assets.
Build our advice capability Recent regulatory changes including pension freedoms mean that customers increasingly need information, advice and guidance. In response to this, we continue to grow our 1825 financial advice business which offers a full financial planning and tax advice service. 1825 aims to offer an engaging and high quality experience, focused on our clients’ goals as they plan for their futures. We have completed the acquisition of four quality adviser firms to date, bringing total assets under advice in 1825 to £3.6bn, and continue to increase our national footprint having recently announced two further acquisitions.
Under the proposed transaction we are selling our capital heavy insurance business. Importantly, we will have retained our valuable and fast growing UK retail platforms and financial advice businesses, as well as maintaining Standard Life’s very important financial adviser relationships.
In the UK we offer products and services through two broad growth channels: • Retail: pensions and savings where the relationship is either directly with the customer, or with their financial adviser
Prepare for Brexit When the UK leaves the EU, we aim to provide continuity of service for our existing 600,000 European customers. Our Brexit programme is complex and we are preparing for all potential scenarios. Standard Life has a strong track record of successfully adapting to changing markets and regulation and significant progress has been made so far. Our current plan is to use our subsidiary company in Dublin as a base from which to serve our existing European customers and to write new business in Ireland and Germany.
Gross inflows increased by 59% to £12.9bn (2016: £8.1bn) driven by strong demand for our Wrap and Elevate platforms. This included the benefit from growth in the pension market, boosted by individuals looking to take advantage of high defined benefit transfer values by moving to products providing the flexibility offered by drawdown and pensions freedoms. Total assets in our drawdown propositions increased by 21% to £19.8bn (2016: £16.4bn) reflecting both net inflows and positive market movements.
Retail gross outflows increased to £6.5bn (2016: £4.4bn). This is expected as the size of our proposition grows and customers make use of the drawdown functionality. However, gross outflows remain broadly stable as a percentage of opening AUA (2017: 10%, 2016: 10%).
UK Workplace UK Workplace AUA increased by 7% to £40.2bn (2016: £37.4bn), with net inflows of £1.4bn (2016: £1.7bn). Net inflows, although positive, were lower than 2016 due to higher redemptions of £2.8bn (2016: £2.4bn). Gross inflows have increased to £4.2bn (2016: £4.1bn). As a result of auto enrolment, regular premiums have increased by 5% to £3.2bn. They provide a steady long-term source of income and account for 76% of total Workplace inflows.
Our Workplace business continues to be a source of growth for our Retail channels. In 2017, £2.2bn of Workplace AUA transferred to Retail in respect of customers leaving their company pension schemes.
Spread/risk AUA decreased by 6% to £15.1bn (2016: £16.1bn). Net outflows from scheduled annuity payments were £0.9bn (2016: £0.9bn).
Mature £85.0bn £60.2bn £111.1bn £56.8bn £127.9bn £60.5bn £xxx £12.9bn £8.1bn £7.5bn £26.5bn £54.0bn £44.2bn
Spread/risk margin UK spread/risk margin increased by £40m to £159m. Operating assumption and actuarial reserving changes provided a benefit of £79m (2016: £38m), primarily relating to mortality assumption changes. The asset and liability management benefit in 2017 is £23m (2016: £25m) and the 2017 result also benefits from favourable mortality experience, including a £7m reserve release in respect of overseas annuitants. The 2016 result benefited from an £18m payment from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II.
Costs Adjusted operating expenses UK adjusted operating expenses increased by £112m to £599m. The acquisition of Elevate in October 2016 and the growth of 1825 increased adjusted operating expenses by £42m. 2017 also includes a £31m impairment of intangible assets, which arose due to the discontinuation of part of our IT transformation project, and a £16m cost of specific remediatons. Investment expenses payable to Aberdeen Standard Investments of £96m increased by £9m, in line with higher AUA.
The UK cost/income ratio rose to 65% (2016: 62%). Excluding Elevate and 1825 the cost/income ratio rose to 62% (2016: 60%) reflecting the intangibles impairment and customer remediation.
UK fee based revenue £757m UK cost/income ratio 48 Standard Life Aberdeen 2017 £631m £757m £664m
Total IFRS profit Standard Life Pensions and Savings total IFRS profit increased by £140m to £270m (2016: £130m) mainly due to a lower loss from adjusting items of £80m (2016: £207m). Adjusting items in 2017 mainly relates to an increase in the provision for historic annuity sales practices of £100m (2016: £175m), following further analysis work and an update to assumptions based on sample testing following the receipt of the FCA redress calculator in early 2018. Restructuring and corporate transaction expenses of £38m (2016: £38m) included £24m of costs relating to the integration of Elevate, and other expenses were £9m (2016: £7m). These items were partially offset by favourable short-term fluctuations in investment return and economic assumption changes of £67m (2016: £13m).
The increased tax expense of £31m (2016: £25m) reflects higher profitability partly offset by a deferred tax credit due to revalued tax assets relating to the German business. The revalued tax assets reflect an updated transfer pricing approach based on the changed economics of that business and the expected impact of Brexit restructuring.
Supporting saving Over the last decade the pensions landscape has fundamentally changed, from the introduction of auto enrolment to pension freedoms. These changes moved risk and responsibility to employees and employers – increasing flexibility but also complexity. With our knowledge, guidance, products and services, we want to help give people confidence in navigating through their financial decisions and support them in saving for their future.
Five years of auto enrolment During 2017 we celebrated an important milestone in our journey – five years of auto enrolment. Of the nine million UK employees now auto-enrolled in a pension, one in eight are saving with us. Auto enrolment requires employers to automatically set up pensions for their employees with an option to opt out, rather than in – helping to encourage people into a saving habit.
Standard Life Foundation The Standard Life Foundation is a registered charity that operates separately from Standard Life Aberdeen plc. It is funded by a donation of assets remaining from Standard Life Group’s demutualisation in 2006. Its activities focus on supporting independent research to help strengthen financial wellbeing and resilience in the UK.
India remains of strategic importance to Standard Life Aberdeen. It is currently one of the fastest growing economies in the world, with the IMF expecting GDP to grow at 7.4% in 2018 and 7.8% in 2019. We continue to be encouraged by the future outlook for the life insurance market in India. Demographic factors such as a growing middle class, young insurable population and increasing awareness of the need for protection and retirement planning are anticipated to support the growth of the life insurance and pensions industry in India.
The Chinese insurance market has grown in recent years to become the second largest in the world and we believe that the prospects for future growth remain very positive, driven by an expanding middle class and wealthy population who are living longer. Heng An Standard Life (HASL), through its extensive sales network and product range, is well positioned to meet this need. It also continues to investigate opportunities to increase its presence in the growing pensions market and has now submitted an application to the China Insurance Regulatory Commission for a new pension insurance company licence.
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HDFC Life Heng An Standard Life (HASL) Hong Kong £3.5bn £0.6bn £0.7bn £27m £59m £36m
Our approach to effective risk management is predicated on strong risk awareness and risk accountability across all lines of defence in our business. We believe this approach will deliver long-term value for our clients, customers and shareholders, and protect their interests.
Our risk framework operates through a well-embedded risk culture, effective risk control processes, robust risk governance, sound financial management and active monitoring of risks. The pace of change in the business and risk environment, and the threats and opportunities arising from it, mean we regularly review and adapt our methods to ensure we are well placed to anticipate future areas of risk and prepare appropriately.
As a result of the increased asset management focus of our business, the Internal Capital Adequacy Assessment Process (ICAAP) now plays a larger part in our risk management processes for the Group.
The regulatory agenda continues to evolve with increasing focus from UK and EU regulators on value for money and competition. The FCA Asset Management Market Study and Investment Platforms Market Study have potential to impact core growth areas for the Group. We are directly engaged with our regulators to make sure that our knowledge and experience are considered in the decisions taken.
Our ambition is to be an industry leader in conduct governance and delivery of fair client and customer outcomes. This will be achieved through a strong conduct risk culture. In 2017, management and the Board worked with an external party to benchmark our conduct risk management framework. We are working on the actions identified to help us meet our conduct ambition. We have continued to address the outcomes of the FCA thematic review of annuity sales and the past business review will be fully operational during 2018.
Due to our increased profile and global footprint, the possibility that we fall victim to cyber-attacks has increased. However, we maintain heightened vigilance and continue to enhance our cyber defence capabilities.
Our principal risks and uncertainties The specific risks we face as a business are driven by what we choose to do and how we do it, as well as the wider environment in which we operate. We group these risks into six categories: Strategic, Operational, Conduct, Regulatory and legal, Financial market and Demographic experience.
From these categories we identify our principal risks. These are not an exhaustive list of all the risks Standard Life Aberdeen faces, but rather those we currently believe have the greatest potential to affect our business model, future performance, solvency or liquidity. The principal risks give consideration to those previously identified by Standard Life Group and Aberdeen Asset Management PLC and were subject to robust assessment by the Board.
• Risk control process: The practices by which we manage financial and non-financial risks within Standard Life Aberdeen. They are used to identify, assess, control and monitor risk.
Internal risk and capital assessment process Our ERM framework is underpinned by our internal risk and capital assessment processes. As required under Solvency II, the Group and its European Insurance entities carry out Own Risk and Solvency Assessment (ORSA) processes. As mandated under the Capital Requirements Directives, ICAAP processes are also conducted and these now play a larger part in the Group post-merger.
• Second line: Risk oversight is provided by the Chief Risk Officer and supported by the specialist Risk and Compliance function across Standard Life Aberdeen, as well as through established risk committees such as the Enterprise Risk Management Committee (ERMC) and with reporting to the Risk and Capital Committee (RCC). The majority of members of the ERMC are senior first line representatives. Independent oversight is provided by nonexecutive Directors on the RCC.
Strategic risk Our definition and appetite We define strategic risk as any risk which threatens the achievement of our strategy through poor strategic decision making, implementation or response to changing circumstances. We recognise that core strategic activity brings with it exposure to strategic risk. However, we seek to proactively manage and control these exposures.
Investment Performance Our strategy relies on generating sustainable long-term value for our clients and customers. This is underpinned by strong long-term investment performance through active management. The investment management industry is very competitive. The increased size of our asset management business means that any sustained period of actual or perceived underperformance may have an adverse impact on our ability to grow assets under management and administration, retain existing assets, and could increase the level of outflows across our business. Merger integration poses an additional risk to performance in the short term as teams are reconfigured and systems integrated. We believe these enhancements to our operating model will help deliver long-term performance outcomes for our clients and customers. Whilst investment performance delivered by our asset management business was mixed in 2017, our continued focus on enhancing our processes aims to stabilise investment performance over 2018.
• Our investment philosophy is driven by rigorous, robust and well-tested investment processes and approaches
• Our Investment Management Committee provides strong leadership and direction, combined with strong governance and oversight of investment processes
• We regularly engage with our clients and customers on service and performance
Strategic Transition and Delivery The integration of our asset management businesses and proposed sale of our capital heavy insurance business are accelerating delivery of our strategic vision to create a world-class investment company. There is a risk that we fail to deliver long-term value for shareholders because we are unable to successfully deliver through the significant complexities introduced by merger integration. Our strategic transition is underpinned by our ability to meet market expectations of a successful merger, swift cultural integration of the investment business, and achieving the cost benefits committed to without encountering material dis-synergies. There is a risk that delivery of merger integration distracts us from business as usual activities, such as successfully delivering our business plan and delivering fair outcomes for our clients and customers.
• Our Board and executive committee have responsibility for our corporate strategy and execution of a single strategic plan
• Our Chief Strategy Officer has responsibility to support further development of our strategy
• Inorganic growth opportunities are assessed for alignment with strategic priorities
• We have a track-record in running corporate change programmes that are well-governed where there is active engagement and oversight from second and third lines of defence
Distribution and Client Management There are elevated client retention risks for Aberdeen Standard Investments immediately post-merger. Merger-related uncertainty may continue for longer than expected and could impact on net flows, profits and client retention. We provide fund management for many clients where the funds or client contracts permit investors to withdraw a proportion or all of their investment with no, or short periods of, notice. Material withdrawals by large clients can have adverse effects on profits of the Group, although the magnitude of any impact would be dependent on the margins associated with the funds withdrawn. The changing profile and requirements of clients, coupled with uncertainties generated by the merger, is a trend which may continue to have a significant impact on our business.
• We have a global network of offices with business development and product specialist teams focused on local client relationships, sales and capabilities
• Across the Group, there are a range of committees responsible for protecting client and customer interests covering a range of issues including Conduct, Conflicts and Pricing
• We are investing in digital technology to enhance our overall service proposition and deepen our client and customer relationships
• We will communicate clearly to our distribution partners the benefits of our reshaped firm and our strategic partnership with Phoenix
Attracting, retaining and developing talented people 54 Standard Life Aberdeen 2017
Client and Customer Preferences and Demand Continuing client and customer demand for our propositions is fundamental to achieving the flows and margins anticipated in our business plan. We are therefore exposed to the risk that our propositions fail to meet the needs and expectations of clients and customers. Growth in passively-run index trackers continues to gain pace, which has the potential to impact on our asset management business; however, our proposition offering continues to grow, with developments on existing and new propositions being informed by client demand. The evolving preferences and demands of clients and customers for a varied proposition offering and high-quality level of service will continue to have a significant impact on our business.
• The development of our new and existing propositions start from the customer or client need
• The Aberdeen Standard Investment Solutions team works with all investment divisions and distribution to provide bespoke client solutions and strategic research, enabling us to meet the growing demand for outcome driven propositions
• Political risks are considered under our stress and scenario testing programme (which includes both quantitative and reverse stress testing) and emerging risk process
• We operate a global model thereby reducing the reliance on single pools of talent and individuals
Str ateg ic r epo r t 55Standard Life Aberdeen 2017
• Project and change management governance processes are well embedded in our business
• In recent years, our business has built up significant experience of successfully responding to change, whilst continuing to develop market-leading propositions for customers
• Our outsourcing and third party management policies set out the service standards to which we hold our outsource providers
• We maintain strong relationships with external providers to ensure that the risks arising are well understood
• Outsourcing risks are considered under our stress and scenario testing programme
• We continue to refine our approach to oversight of third parties as their changing business models affect the risk profile of the Group
Building an efficient and effective business 56 Standard Life Aberdeen 2017
Operational risk continued The risks to our business and how they have evolved in 2017 Our approach in managing these risks Link to strategy
• Self-assessment of the design and performance of controls by managers on a quarterly basis helps strengthen accountability in the first line
Conduct risk Our definition and appetite We define conduct risk as the risk that through our behaviours, strategies, decisions and actions the business delivers unfair outcomes to our customers/clients and/or poor market conduct. We have no appetite for unfair customer outcomes or poor market conduct, whether through deliberate or negligent actions. Where unfair outcomes arise, the Group will put it right in a fair and prompt manner.
Client and Customer Outcomes We are exposed to the risk of delivering unfair client and customer outcomes as a result of our business not acting in their best interests. This can also lead to significant reputational damage and material financial losses for our business. Fair customer outcomes remained the subject of close regulatory scrutiny in 2017. We support the regulatory agenda to drive better customer outcomes. Our ambition to be an industry leader in conduct governance and delivery of fair customer outcomes will be tested by the constantly changing expectations of customers and by the expectations of regulators and third parties. As we progress through the merger integration process, proposed sale of our capital heavy insurance business and transition to a world-class investment company we must ensure that we support the integrity of financial markets and effectively manage any conflicts of interest across different parts of our business to support fair outcomes for customers. As outlined on page 52, over 2018 we will continue to address the outcomes of the FCA thematic review of annuity sales. Our next step is to engage with our customers to obtain all relevant information to aid the review of in-scope non-advised annuity sales, in order to deliver timely and fair outcomes for our customers. Determination of this provision is a critical accounting estimate. Further details on this judgement are discussed in the Audit Committee report and in Note 38 of the Group financial statements section. Striving to achieve higher standards in delivering fair customer outcomes could expose the Group to the risk that achieving them will take longer than planned, leading to our assessment that this risk is increasing.
• The Board annually reviews the Risk Appetite Framework which sets out our key controls and mitigants for Conduct Risk
• We maintain a strong and open relationship with the FCA and other regulators
• Ensuring fair treatment of our clients and customers is continually reinforced through the culture of Standard Life Aberdeen
• We operate a programme of ongoing monitoring to provide assurance of regulatory compliance
• Regulatory changes are considered under our stress and scenario testing programme and emerging risk process
Financial market risk Our definition and appetite We define financial market risk as the risk of adverse financial market movements resulting in a financial loss. We have appetite for market risk exposures where exposures arise as a consequence of core strategic activity. We have limited appetite for significant losses arising from counterparty failures, but have an appetite for credit risk to the extent that acceptance of this risk optimises our risk adjusted return. We will maintain sufficient balance sheet capital and liquidity to be able to meet our liabilities when due, under both normal and stressed conditions.
• We are strongly capitalised and able to withstand increased capital costs due to Brexit and the merger
• Hedging is used to manage market risks faced by policyholders in our with profits funds where appropriate
Financial market risk continued The risks to our business and how they have evolved in 2017 Our approach in managing these risks Link to strategy
Counterparty Failure The Group has substantial exposures to a number of counterparties and is exposed to the risk that counterparties we hold money, bonds or commercial real estate loans with fail, which could cause immediate financial loss or a reduction in future profits. Exposure to counterparties predominantly originates in our Pensions and Savings business. The merger creates no material change in this risk, and hence this risk has reduced in relative size. The proposed sale of our capital heavy insurance business will significantly reduce this risk to the Group. We have effective processes in place to manage counterparty risk.
• Our credit risk management policy sets out the standards that must be complied with
Demographic experience risk Our definition and appetite We define demographic experience risk as the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. We have limited appetite to fail to meet business plan targets due to increased outflows, reduced margin or new business, expenses exceeding planned spend or revenue falling below that necessary to cover actual expenses. We have an appetite for longevity, mortality and morbidity risks since we expect acceptance of these risks to be value additive.
Longevity Risk There is a risk that our annuity customers live longer than we expect. The large back-book of annuities in our Pensions and Savings business means we still have a material exposure to longevity risk. In 2017, our annuity sales continued to fall due to the impact of Pension Freedoms and our decision in November 2016 to restrict annuity sales to existing customers only. Our longevity risk continues to decrease over time as our existing annuity book steadily runs off and we continue to experience a weakening of historic trends for the rate of improvement in average UK life expectancy. The proposed sale of our capital heavy insurance business will remove this source of longevity risk. We are also exposed to longevity risk from our legacy defined benefit pension arrangements. This risk will decrease over time because these arrangements are closed to new membership and, with the exception of a small plan in Ireland, no longer allow further build-up of defined benefit pension entitlement by existing members. Determination of longevity assumptions is a critical accounting estimate. Further details on this judgement are discussed in the Audit Committee report and in Notes 31 and 35 of the Group financial statements section.
• We set thresholds, based on Solvency II Risk Capital for Pensions and Savings, for longevity risk exposure
• We have a robust governance process for setting our longevity assumptions using the latest data sources
• Where appropriate, counterparty exposures are collateralised and internal credit assessments used
• Reverse stress testing is used to understand the risk associated with counterparty exposures
• Exposures are proactively monitored with mitigation action taken where necessary
Str ateg ic r epo r t 59Standard Life Aberdeen 2017
We must ensure the practices we expect of the companies we invest in are reflected in our own business too. It is not only the right thing to do, it adds value for shareholders, clients and customers, employees and wider stakeholders. Sustainability at Board level Updates on internal and external environmental, social and governance issues and our performance on non-financial measures are provided regularly at Board meetings.
Modern slavery statement As a global investment company, we want to do all we can to help tackle human trafficking, forced labour, bonded labour and child slavery. We focus on our operations, supply chain and investment processes. We have published our first statement as a newly merged business, reinforcing our commitment to this important issue.
We are also supporting the new Transitional Pathway Initiative, an online data analysis tool which enables investors to assess how effectively companies are addressing climate related risks, and we are a founding signatory of Climate Action 100+.
You can read more on these topics and also find our Corporate sustainability and stewardship report 2017 on our website www.standardlifeaberdeen.com/annualreport
Greenhouse gas emissions (tonnes CO2e) Scope 1 3,518 2,880 3,518 Scope 2 14,717 14,687 8,694 Scope 3 17,543 17,743 17,117 Total 35,7781 35,3102 29,329
Tonnes CO2e/m2 (net lettable area) ratio 14.3 18.8 9.5 1 Data prepared in accordance with our reporting methodology and the KPI is within KPMG’s limited assurance scope. Both KPMG’s limited assurance report and our reporting methodology can be found at www.standardlifeaberdeen.com/annualreport 2 Data presented for 2016 represents the combined CO2e emissions previously published for Standard Life Group and Aberdeen Asset Management. The 2016 reporting methodologies differ from our 2017 methodology. Details of the prior year methodologies can be found in respective 2016 Annual Reports. 3 Emissions have been calculated using renewable energy contracts, residual mix emissions factors for European sites, and grid mix emissions factors for all other sites. 4 Those owned by Standard Life Assurance Limited. Scope details can be found in our reporting methodology which is available on our website.
The Group continues to meet Group and individual entity capital requirements and day-to-day liquidity needs. The Company has a revolving credit facility of £400 million as part of our contingency funding plans and this is due to mature in 2022. The Group has considerable financial resources together with a diversified business model, with a spread of business and geographical reach. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.
Forward-looking statements This document may contain certain ‘forward-looking statements’ with respect to the Company’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategy and objectives. For example, statements containing words such as ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘pursues’, ‘seeks’, ‘targets’ and ‘anticipates’, and words of similar meaning, may be forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they are based on information available at the time they are made, including current expectations and assumptions, and relate to future events and circumstances which may be or are beyond the Company’s control, including among other things: UK domestic and global political, economic and business conditions (such as the UK’s exit from the EU); market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the impact of inflation and deflation; experience in particular with regard to mortality and morbidity trends, lapse rates and policy renewal rates; the impact of competition; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; default by counterparties; information technology or data security breaches; natural or manmade catastrophic events; the failure to attract or retain necessary key personnel; the policies and actions of regulatory authorities; and the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which the Company and its affiliates operate as well as other factors described in the Risk management section of this Strategic report. These may for example result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. As a result, the Company’s actual future financial condition, performance and results may differ materially from the plans, goals, strategy and expectations set forth in the forwardlooking statements. Persons receiving this document should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make. Past performance is not an indicator of future results and the results of the Company in this document may not be indicative of, and are not an estimate, forecast or projection of the Company’s future results.
Contents 2. Board of Directors 64 3. Directors’ report 66 4. Corporate governance statement 72 5. Directors’ remuneration report 94 6. Statement of Directors’ responsibilities 135
G o ver n an c e 63Standard Life Aberdeen 2017
2. Board of Directors Our business is managed by our Board of Directors. Biographical details (and shareholdings) of the Directors as at 23 February 2018 are listed below.
Martin was appointed Director and Co-Chief Executive on 14 August 2017. He is co-founder (and former chief executive) of Aberdeen Asset Management PLC and has been a director since 1983. He is deputy chairman of Sky plc, a non-executive director of Glencore plc, chairman of the Prudential Regulation Authority’s Practitioner Panel and a board member of the Institute of International Finance, as well as a member of the International Advisory Panel of the Monetary Authority of Singapore and the International Advisory Board of British American Business. He is British, aged 62 and holds 139,185 shares.
6 Rod Paris Chief Investment Officer Appointed Director on 14 August 2017, Rod joined Standard Life Investments in 2002 as Head of Global Fixed Income and was appointed as Head of Investments in 2007 and latterly as Chief Investment Officer in 2013. Previously, he was a managing director at Merrill Lynch Investment Managers, and before that a director at Mercury Asset Management which he joined in 1984. He is British, aged 58 and holds 602,303 shares.
Appointed Director in July 2016, John is also a non-executive director of Credit Suisse International, Credit Suisse Securities (Europe) Limited, Citco Custody Limited and Citco Custody (UK) Limited. From 2008-2010, John was chief operating officer of Threadneedle Asset Management Limited. Prior to joining Threadneedle, John held a number of senior positions at Merrill Lynch in London and New York. He is British, aged 59 and holds 1,321 shares.
Gerhard was appointed Director on 14 August 2017, having been a non-executive director of Aberdeen Asset Management PLC since April 2016. Gerhard is also director of Credit Suisse Insurance Linked Strategies Limited. Over the last 25 years he has held a number of senior management roles in asset management at Credit Suisse Group AG and UBS AG. He is German and Swiss, aged 54 and holds 26,495 shares.
Richard was appointed Director on 14 August 2017, having been a non-executive director of Aberdeen Asset Management PLC since April 2012. Richard is also deputy chairman of alstria office REIT-AG, senior independent director of St Modwen Properties PLC, a nonexecutive director of Great Portland Estates plc and senior adviser to TPG Real Estate (Europe). Previously, Richard spent much of his career in financial services as an investment banker and was the cofounder and managing partner of Grove International Partners LLP. He is British, aged 56 and holds 52,990 shares.
Appointed Director in April 2012, Lynne is also Chairman of Standard Life Assurance Limited. She is senior independent director of Nationwide Building Society and a non-executive director of Serco Group plc. She joined National Australia Bank Limited in 2003 and, from 2004 to 2011, she was chief executive officer, UK (Clydesdale Bank plc and Yorkshire Bank). Prior to that, Lynne was with Woolwich plc from 1983 to 2003, finishing her career there as chief executive officer. She is British, aged 64 and holds 12,554 shares.
Jutta was appointed Director on 14 August 2017, having been a nonexecutive director of Aberdeen Asset Management PLC since January 2013. She is also chairman of Det Danske Klasselotteri A/S and a non-executive director of JPMorgan European Investment Trust plc, NKT A/S and Nilfisk Holding A/S. Previously, she was the executive vice president, CFO of ALK-Abellό A/S. She is Danish and aged 59. Nil shareholding.
16 Akira Suzuki Non-executive Director Akira was appointed Director on 14 August 2017, having been a nonexecutive director of Aberdeen Asset Management PLC since August 2013 through their business and capital alliance with Mitsubishi UFJ Trust and Banking Corporation. Akira has undertaken a wide variety of roles, primarily in asset management, in Mitsubishi UFJ Trust and Banking Corporation and is currently a managing executive officer. He is Japanese and aged 58. Nil shareholding.
The Directors present their annual report on the affairs of the Standard Life Aberdeen group of companies (the Group), together with the audited International Financial Reporting Standards (IFRS) consolidated financial statements for the Group, financial information for the Group and financial statements for Standard Life Aberdeen plc (the Company) for the year ended 31 December 2017.
Reporting for the year ended 31 December 2017 The Company is the holding company of the Group. You can find out about the relevant activities of the Company’s principal subsidiary undertakings and their overseas branches in the Strategic report. During 2017, the Company’s principal undertakings operated branches in Europe, together with Hong Kong and India.
The total payment is estimated at £421m for the final dividend and together with the interim dividend of 7.00p per share totalling £206m paid on 18 October 2017, the total dividend for 2017 will be 21.30p per share (2016: 19.82p) totalling £627m (2016: £389m).
Share capital You can find full details of the Company’s share capital, including movements in the Company’s issued ordinary share capital during the year, in Note 26 to the Group financial statements. You can also find an analysis of registered shareholdings by size, as at 31 December 2017, in the Shareholder information section.
Standard Life plc and Aberdeen Asset Management PLC made an announcement on 6 March 2017 relating to the recommended allshare acquisition by Standard Life plc of Aberdeen Asset Management PLC. This was implemented by way of a court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 (the Scheme). The Scheme became effective in accordance with its terms, following the sanction of the Scheme by the Court of Session in Scotland on 11 August 2017 and the delivery of the court order to the Registrar of Companies. Standard Life plc was renamed Standard Life Aberdeen plc immediately following the Scheme becoming effective.
The entire issued ordinary share capital of Aberdeen Asset Management PLC is now owned by Standard Life Aberdeen plc.
During the year, and until the date this report was signed, the Company received the following notifications in respect of major shareholdings and major proportions of voting rights in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA). The companies detailed below notified their positions following the merger.
The Company did not make any market purchases of its ordinary shares during the year ended 31 December 2017, and has not done so since then and up to the date of this report.
Aberdeen Asset Management PLC has two £60m revolving credit facilities, one with HSBC Bank plc and one with Abbey National Treasury Services plc,( each the Lender). Both are dated 27 July 2016 and run to 27 July 2019. In the event of a change of control of Aberdeen Asset Management PLC the Lender may by not less than 15 business days’ notice to Aberdeen Asset Management PLC cancel the commitment and require immediate repayment of all loans together with accrued interest and all other amounts accrued under the finance documents whereupon the commitment shall be cancelled
G o ver n an c e 67Standard Life Aberdeen 2017
India – under a shareholders' agreement dated 10 June 2003 (as amended) between Standard Life Investments Limited and Housing Development Finance Corporation Limited (HDFC), pursuant to which the relevant Group company holds its interest in HDFC Asset Management Company Limited (HDFC AMC), upon a change in the ownership structure of Standard Life Investments Limited that results in the acquisition by a third party, either directly or indirectly, of more than 20% of the issued, subscribed and paid-up capital of Standard Life Investments Limited, HDFC will have 90 days from the date upon which Standard Life Investments Limited notifies it in writing of the occurrence of such a change to purchase the relevant Group company’s shares in HDFC AMC for a price determined in accordance with an agreed pricing formula.
Asset Management – under various agreements dated 31 March 2014 (as amended) between members of the Group (Managers) and subsidiaries of Lloyds Banking Group plc (Customers), pursuant to which the Managers provide investment management and services to the Customers, upon a change of control of the relevant Manager where the new controller’s group either is in material competition in the UK with the Lloyds Banking Group or does not have investment capabilities comparable to the group it was in on 31 March 2014, then the relevant Customer has the right to terminate the relevant agreement. A description of events since the balance sheet date relevant to this agreement can be found on page 71 and for further information, please see Note 14 of the Group financial statements.
The UK Corporate Governance Code recommends that directors of FTSE 350 companies should stand for election every year. During the year, Paul Matthews resigned as Director on 1 March 2017 and Colin Clark, Pierre Danon, Noel Harwerth, Barry O’Dwyer and Luke Savage resigned as Directors on 14 August 2017.
Following the Merger, Martin Gilbert, Bill Rattray, Rod Paris, Simon Troughton, Julie Chakraverty, Gerhard Fusenig, Richard Mully, Jutta af Rosenborg and Akira Suzuki were appointed to the Board on 14
Directors and their interests The Directors who served during the year were: Sir Gerry Grimstone (Chairman) Lynne Peacock Keith Skeoch Martin Pike Martin Gilbert3 Jutta af Rosenborg3 Bill Rattray3 Akira Suzuki3 Rod Paris3 Simon Troughton3 Kevin Parry Colin Clark4 Julie Chakraverty3 Pierre Danon4 John Devine Noel Harwerth4 Gerhard Fusenig 3 Paul Matthews2 Melanie Gee Barry O’Dwyer1,4 Richard Mully3 Luke Savage4 1 Appointed 1 March 2017 2 Resigned 1 March 2017 3 Appointed 14 August 2017 4 Resigned 14 August 2017
Biographies of the current Directors can be found on pages 64 to 65
Copies of the following documents can be viewed at the Company’s registered office (details of which can be found in the Contact us section) during normal business hours (9am to 5pm Monday to Friday) and will be available for inspection at the Company’s AGM:  The Directors’ service contracts or letters of appointment  The Directors’ deeds of indemnity, entered into in connection with the indemnification of Directors provisions in the Articles  The rules of the Standard Life plc Executive Long-Term Incentive
Directors’ liability insurance During 2017, the Company maintained directors’ and officers’ liability insurance on behalf of its directors and officers to provide cover should any legal action be brought against them. The Company also maintained pension trustee liability indemnity policies (which includes third party indemnity) for the boards of trustees of the UK and Irish staff pension schemes where required to do so.
Diversity and Inclusion At Standard Life Aberdeen our aim is that all our people are able to reach their potential and build long term-careers in a workplace which values everything they bring. We do this by building and sustaining a diverse pipeline of talent in an inclusive workplace. And we believe this provides our customers and clients with the diversity of thought and creativity necessary to build long-term value and develop products and services to best support their needs.
Engagement There are several separate employee representation arrangements across the organisation aimed at providing insights from our people to help the Company understand the employee perspective. In the UK, most employees are represented through partnership agreements with the Group's staff associations, Vivo and Bridge. In Ireland, there is an established agreement with Unite, and a works council was established in Germany in 2008.
Previous Heritage Business Survey Results:  Aberdeen Asset Management PLC – December 2016: 73%
In addition, we’ve recently launched a digital learning campaign for all employees, ‘The Leading Edge – Challenge Series.’ Focusing on the key themes identified in the employee engagement survey, this series showcases a variety of employees across Standard Life Aberdeen sharing their personal views on topics such as well-being and mentoring with related online learning materials. Within the first four weeks, more than 3,000 colleagues across the globe accessed the videos and resources provided through the campaign.
As at 31 December 2017, 4,814 of the Group's employees were shareholders through participation in the Standard Life (Employee) Share Plan (the Plan). This Plan, currently offered to most employees of Standard Life Group in the UK, Ireland, Germany and Austria, allows employees to buy ordinary shares in the Company directly from their earnings up to a market value of £150 per month, or an equivalent sum in the relevant currency. These are called partnership shares. For each partnership share that an employee buys under the Plan in the UK, the Company matches the purchase by allocating them ordinary shares up to a maximum total value of £50 per month. As at 31 December 2017, 63% of eligible employees in the UK were making a monthly average contribution of £59. A similar tax approved plan is used in Ireland, where the maximum monthly matched amount is €70, and has a 53% take-up. Even though the Plan cannot be structured on a tax favourable basis in Germany or Austria, at the end of the year, 102 employees were buying shares on a monthly basis.
Annual General Meeting Details of the meeting content can be found in our AGM guide 2018. AGMs are held in Edinburgh and London in alternate years. The AGM will be held in London in 2018. The AGM guide and other materials will be published online at www.standardlifeaberdeen.com in advance of this year’s AGM.
Post balance sheet events Following the year end, Lloyds Banking Group and Scottish Widows have informed the Company that Scottish Widows and Lloyds Banking Group’s Wealth business intend to review their long term asset management arrangements including those services that are currently undertaken by certain legacy Aberdeen Asset Management PLC entities under arrangements covering in aggregate c£109 billion of assets under management. For further information, please see Note 14 of the Group financial statements.
The Company announced on 23 February 2018 that it intended to sell the majority of its UK and Europe Pensions and Savings business to Phoenix Group Holdings (‘Phoenix’) (the ‘Sale’). The Sale involves the disposal of Standard Life Assurance Limited with the Company retaining its UK retail platforms and advice business. The businesses transferring to Phoenix as part of the Sale include the UK Mature Retail and Spread/risk books and the European, UK Retail and Workplace businesses. The Sale constitutes a Class 1 transaction for the purpose of the Listing Rules and is conditional upon the approval of shareholders at a General Meeting. Shareholders will receive further information in due course.
 Reviewing the governance content of the Prospectus and Circular  Reviewing the executive governance structures, including the individual roles and responsibilities of the Co-Chief Executives and the key management committees
Membership The members of the Committee are the Chairman and a number of the independent non-executive Directors. The table below reflects the composition of the Committee and the members’ attendance both pre and post the Merger: Member Attendance
Sir Gerry Grimstone, Chairman 8/8 Julie Chakraverty 3/3 Melanie Gee 3/3 Richard Mully 3/3 Kevin Parry 8/8 Lynne Peacock 2/3 Simon Troughton 3/3 Former member Pierre Danon 5/5 Noel Harwerth 4/5
Keith Skeoch and, post the Merger, Martin Gilbert, in their Co-Chief Executive roles, were invited to Committee meetings to discuss relevant topics, such as the role and members of key executive management committees, talent development and management succession.
 Reviewing Board diversity, skills and experience  Supporting the review of the Board’s effectiveness  Overseeing succession planning, leadership and talent development and diversity levels throughout the Group
 Reviewed the corporate governance statement  Reviewed the Board Charter  Committee Effectiveness review  Following the announcement of the potential Merger
 Appointment of subsidiary board members  Reviewed results of Board Effectiveness review  Recommended establishment of Innovation Panel and Investment Performance Committee  Consideration of Colleague Mood and Sentiment survey  Discussed talent development in early stage careers  Reviewed subsidiary committees’ terms of reference
The Committee’s work in 2017 An indicative breakdown as to how the Committee spent its time is shown below: Committee effectiveness The Committee reviews its remit and effectiveness each year. The 2017 review was carried out via an internal self-assessment questionnaire which took account of the Committee’s membership and role. The review concluded that the Committee remained effective and fulfilled its remit, and going forward, would focus on succession and contingency planning and engagement with talent.
 Significant corporate and other transactions during 2017 which, as well as the Merger, included the initial public offering (IPO) process for our Indian life insurance associate HDFC Standard Life Insurance Company Limited, approval to progress the IPO of our Indian asset management associate HDFC Asset Management Company Limited, and the proposed sale of our Hong Kong subsidiary, Standard Life (Asia) Limited to our Chinese Joint Venture business, Heng An Standard Life Insurance Company Limited
 Remuneration policy  Succession planning  The sustainability of the Group’s business and our own sustainability responsibilities  Significant external communications  Terms of reference of Board Committees  Appointments to the Board and to Board Committees  Matters escalated from subsidiary boards to the Board for approval  Oversight of culture, our standards and ethical behaviours
Secretary, sets agendas for meetings of the Board  Ensures Board members receive accurate, timely and clear information on the Group and its activities  Encourages open debate and constructive discussion and decision making  Leads the Board and individual Director performance assessments and training needs  Speaks on behalf of the Board and represents the Board to shareholders and other stakeholders The Co-Chief Executives: The Co-Chief Executives, within authorities delegated by the Board:  Develop strategic plans and structures for presentation to the Board  Make and implement operational decisions  Lead the other executive Directors and the executive team in the day-to-day running of the Group  Report to the Board with relevant and timely information  Develop appropriate capital, corporate, management and succession structures to support the Group’s objectives  Together with the Chairman, represent the Group to external stakeholders, including shareholders, customers, suppliers, regulatory and governmental authorities, and the local and wider communities
 Keith Skeoch has individual accountability for the day to day running of the fabric of the combined business including responsibility for Investments, Pensions and Savings, the Indian associates and the China Insurance Joint Venture, Operations, Finance, HR, Risk and Regulatory Culture, as well as the Legal and Secretariat functions
Throughout 2017, the Company complied with all of the provisions set out in the Code issued by the FRC in April 2016 other than the following: Provision B.3.3 states that ‘The board should not agree to a full time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company’. As of the Merger, Martin Gilbert has continued to hold non-executive directorships with Sky plc and Glencore plc. He has given a commitment to the Board that by the time of the Company’s AGM, he will hold only one non-executive director position.
Provision B.6.2 requires that ‘Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. The external facilitator should be identified in the annual report and a statement should be made available of whether they have any other connection with the company.’ This external evaluation was last carried out in 2014 and was anticipated for 2017. However, due to the activities related to the Merger and the consequential significant changes to the composition and activities of the Standard Life Aberdeen plc Board which took place in August 2017, the Board determined that it would be more appropriate to carry out an external Board evaluation in 2018. An external evaluation, performed by IBE is currently taking place (see the Board Effectiveness section below).
During 2018, the Committee will follow closely the development of the revised Code to ensure that the Group is well placed to implement and comply with its requirements for 2019.
The roles of the Chairman and the Co-Chief Executives are separate. Each has clearly defined responsibilities, which are described in the Board Charter.
Board composition, balance and diversity This was a particular focus for the Committee in 2017. The Board’s policy is to appoint and retain non-executive Directors who bring relevant expertise as well as a wide perspective to the Group and its decision-making framework. The Directors believe that at least half of the Board should be made up of independent non-executive Directors. As at 23 February 2018, the Board comprises the Chairman,10 independent non-executive Directors, 1 non-independent nonexecutive Director and 4 executive Directors. The membership of the Board has undergone significant change following the Merger with a breadth of new talent and experience joining an already strong Board. On completion of the Merger, the Board comprised of the Chairman, 11 non-executive Directors and four executive Directors. This size of Board was appropriate to support the merging of the two companies and to ensure there is sufficient knowledge of and challenge of the merged Group’s business and client activities, but will be reduced in size and its composition evolved going forward. The Board is made up of 12 men (75%) and 4 women (25%) (2016: men 75%, women 25%). The Board continues to support its Board Diversity statement which states that the Board:  Believes in equal opportunities and supports the principle that due regard should be had for the benefits of diversity, including gender, when undertaking a search for candidates, both executive and nonexecutive
 Recognises that diversity can bring insights and behaviours that may make a valuable contribution to its effectiveness
 Believes that it should have a blend of skills, experience, independence, knowledge and gender amongst its individual members that is appropriate to its needs
 Is committed to maintaining its diverse composition  Supports the Co-Chief Executives’ commitment to achieve and maintain a diverse workforce, both throughout the Group, and within the executive team
The Nomination and Governance Committee supports the Group’s commitment to diversity and inclusion in the broadest sense and receives updates on progress towards achieving and maintaining diversity targets throughout the Group. This includes reviewing statistics on gender representation and approving gender diversity targets, including our reset targets for the Group following the Merger and will formally oversee progress against these on a bi-annual basis. The Group also promotes initiatives and programmes to raise awareness of why diversity and inclusion matter. You can read more about our diversity activities and current targets in the People and Culture section of the Strategic report and in our stand alone Corporate Sustainability and Stewardship report. We are committed to working to make the Group as inclusive a place to work as possible. Our activities and targets are in achievement of ‘our vision for an inclusive future’ which was published following the Merger on our website www.standardlifeaberdeen.com. In 2017, the Gender Pay Gap Regulations were published and you can find our gender pay gap disclosure statement on page 31. The Committee continues to follow the development of and the Group’s participation in significant diversity reviews, including the Hampton Alexander review, and as reported last year, supported our move to be one of the initial signatories to the Women in Finance Charter. The Committee supports our commitments under this charter and continues to oversee our progress against these, which we report publically on an annual basis.
Board changes during the period Many of the changes during 2017 were related directly to the Merger. Appointments Barry O’Dwyer, Chief Executive of Standard Life Assurance Limited was appointed to the Board on 1 March 2017. He replaced Paul Matthews as executive Director and Chief Executive of the Pensions and Savings business. On completion of the Merger on 14 August 2017, Martin Gilbert, Co-Chief Executive; Bill Rattray, Chief Financial Officer and Rod Paris, Chief Investment Officer were appointed as executive Directors. Simon Troughton, Deputy Chairman; Julie Chakraverty; Gerhard Fusenig; Akira Suzuki; Jutta af Rosenborg and Richard Mully were appointed as non-executive Directors.
Retirements Paul Matthews stood down from the Board on 1 March 2017, prior to his retirement, having served as a Director for 16 months. On completion of the Merger on 14 August 2017, Colin Clark stepped down from the Board after 21 months along with Barry O’Dwyer who remains in post as Chief Executive of Standard Life Pensions and Savings. Luke Savage also stepped down from the Board on 14 August 2017 after serving for three years along with Pierre Danon and Noel Harwerth who each served for over five years.
Board appointment process, terms of service and role During 2017, all Board appointments were internal or in relation to the Merger. In order to assist with determining the right balance of skills, diversity, knowledge and expertise for the post Merger Board, IBE were engaged. The Board is not aware of any other connection between the Group and IBE.
When seeking to make appointments from outside the Group, and having already identified the capabilities needed for Board roles and the succession timeframe, the Committee considers the related role profile submitted to external search consultants along with the request to prepare a list of suitable candidates. The Committee then considers the potential suitable candidates and agrees a shortlist. Following interviews with potential candidates, the Committee then makes recommendations to the Board on any proposed appointment, subject always to the satisfactory completion of all background checks and regulatory approvals. The other Board members are also offered the opportunity to meet the recommended candidates. The Committee considers the external commitments of candidates to assess their ability to meet the necessary time commitment and whether there are any conflict of interest matters to address.
Director election and re-election One of the Committee’s duties is to make recommendations regarding the election or re-election by members of any Director. In making its recommendations, the Committee reviews, as applicable, the appropriateness of continued service beyond a term of six years. Recognising this timeframe and the need for the Board to continue to oversee a successful integration, the Committee agreed to recommend the continuing appointments of Simon Troughton and Richard Mully.
Therefore, at the 2018 AGM, all of the current Directors will retire. Martin Gilbert, Bill Rattray, Rod Paris, Simon Troughton, Gerhard Fusenig, Jutta af Rosenborg and Richard Mully, having been appointed since the previous AGM, will retire and stand for election. Julie Chakraverty, Lynne Peacock and Akira Suzuki will retire at the conclusion of the 2018 AGM and will not stand for election or reelection. All the others will stand for re-election.
You can read more background information about the Directors, including the reasons why the Chairman believes you should support their election or re-election, in our AGM guide 2018, which will be published online at www.standardlifeaberdeen.com in advance of this year’s AGM, and in Section 2.
Director independence, external activities and conflicts of interest The Board carries out a formal review of the independence of nonexecutive Directors annually. The review considers relevant issues including the number and nature of their other appointments, any other positions they hold within the Group, any potential conflicts of interest they have identified and their length of service. Their individual circumstances are also assessed against independence criteria, including those in the Code. Following this review, the Board has concluded that all the non-executive Directors other than Akira Suzuki, as the representative of a shareholder, are independent. Akira will be stepping down from the Board at this year’s AGM. The Board continues to comprise a majority of independent non-executive Directors.
Deloitte North West Europe and the UK Government’s Ministry of Defence where he is the lead non-executive. He is also an adviser to the board of the Abu Dhabi Commercial Bank.
Kevin Parry was appointed as Senior Independent Director (SID) on 17 May 2016. In this role, Kevin supports the Chairman, and often meets with him one-to-one. Since his appointment he has met with all the Directors on an individual basis. He is also available to talk with our shareholders about any concerns that they may not have been able to resolve through the channels of Chairman, the Co-Chief Executives or Chief Financial Officer, or where a shareholder considers these channels are inappropriate. Some shareholders have discussed the Company’s corporate governance procedures with him, including those that were being put in place in connection with the Merger. On his appointment institutional shareholders were offered the opportunity to meet with him, and one chose to do so. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) also have periodic meetings with the SID.
Board effectiveness Review process The Board has, with the help of the Nomination and Governance Committee, developed a formal review process to assess how well the Board, its Committees, the Chairman and the Directors are performing collectively and individually and how performance could be improved.
The 2017 review comprised an online self-assessment questionnaire, followed up by individual meetings between the Chairman and each Director. Directors completed questionnaires about the Board, each Committee they sit on, the Chairman’s performance and their own individual performance. They were encouraged to provide open and honest feedback, explain the ratings they gave and suggest how the Board or Committee could improve.
 Leadership: Continuing desire to interact with top leaders across the Company
 Succession Planning: Further work on the structure of the approach required
 Board Information: Continuing need for Board papers to be more concise
Chairman The review of the Chairman’s performance was led by the SID, Kevin Parry. It was based on feedback given in the confidential online questionnaires and followed up by individual interviews between the SID and each Director. The questions covered:  The Chairman’s role to lead the Board and encourage effective participation and consensus decision-making
Directors The Chairman led the performance review of the Directors. He holds one-to-one meetings to assess their individual performance and contribution against duties set out in the Board Charter and in their appointment letters.
Director induction and development The Chairman, supported by the Company Secretary, is responsible for arranging a comprehensive preparation and induction programme for all new Directors. The programme is tailored to their individual requirements and takes their background knowledge and experience into account. All Directors are required to complete the FCA’s approval process and, if relevant, the PRA’s SIMR notification or approval process before they are appointed and to self-certify annually that they remain competent to carry out this aspect of their role. These processes continue to adapt to meet evolving best practice in respect of SIMR.
 Focused technical meetings with internal and external experts on specific areas including investments, Solvency II, conduct risk, risk and capital management, and financial reporting
G o ver n an c e 77Standard Life Aberdeen 2017
 Meetings with the Company Secretary on the Group’s corporate governance framework and the role of the Board and its Committees, with the Chief Risk Officer on the risk management framework as well as meetings on their individual responsibilities both as Directors and as holders of a Controlled Function/SIMR role
Background information is also provided including:  Key Board materials and information, shareholder communications and financial reports
The induction programme provides the background knowledge new Directors need to perform to a high level as soon as possible after joining the Board and to support them as they build their knowledge and strengthen their performance further.
When Directors are appointed to the Board, they make a commitment to broaden their understanding of the Group’s business. Our corporate centre monitors relevant external governance and financial and regulatory developments and keeps the ongoing Board training and information programme up to date. During 2017, while the Board spent a significant amount of its time discussing the Merger and integration activities, specific Board awareness sessions took place on cyber risks and security, the UK withdrawal from the EU, the Group’s strategy regarding joint venture operations, staff interaction surveys and corporate culture. Similarly, the relevant Board Committees received updates on developments in financial reporting, remuneration and corporate governance. Non-executive Directors are actively invited to all parts of the Group’s business in order to familiarise themselves with how our business is conducted and to meet with our people.
As the composition of the Board changed significantly post the Merger, specific training and awareness sessions were held in August and September 2017 to introduce the Aberdeen Directors to Standard Life’s life and pensions business and to strengthen the knowledge of the Standard Life Group Directors of the culture, distribution strategy and risks of the Aberdeen business. The Board was also kept up-todate on integration activities.
Succession and talent management activities The Nomination and Governance Committee regularly reviews the results of succession planning activities, including key person and retention risk, and talent development programmes at all levels across the Group. This was particularly relevant during 2017 as the Group sought to bring together the best of the talent in both Standard Life Group and Aberdeen and to plan for the future needs of the Standard Life Aberdeen Group.
Chairman’s Succession As set out in his Statement, the Chairman has indicated his intention to step down from his role by the end of 2019. In February 2018, the Nomination and Governance Committee considered and agreed the appropriate arrangements to oversee the governance of the succession process. An Appointments Committee will be established, chaired jointly by Simon Troughton and Melanie Gee and comprising all of the non-executive Directors other than any who indicate they wish to be considered as internal candidates. The Appointments Committee will begin its work in Q2 2018. The Chairman will not be a member and the process is subject to his annual election by shareholders at the AGM and continued high performance.
In line with the relevant elements of the Code and the FRC guidance on Risk Management, Internal Control and Related Financial and Business Reporting, pre and post-Merger, ongoing monitoring, review and reporting of the SoG was conducted through the risk committees, Enterprise Risk Management Committees (ERMCs) and relevant boards. On behalf of the Board, the Risk function has also carried out an annual review of compliance with the SoG. The SoG was in place throughout 2017 and up to the date of approval of the Annual report and accounts 2017.
In carrying out the annual compliance review of the SoG, all Solvency II SoG requirements are allocated to senior business owners on a line by line basis to ensure clear ownership and accountability for compliance. The Solvency II SoG requirements only apply to the insurance entities and the business owners in these entities were required to:  Review the arrangements and self-certify compliance (or otherwise) with the rules throughout 2017 and clarify the reasons for any noncompliance
 Ensure action plans were in place to close any identified gaps and agree a timeline for implementation
In addition, the Risk function carried out ongoing assurance activity during 2017 to provide assurance on Standard Life Aberdeen’s ability to meet regulatory requirements. The Risk function has also produced summaries of the key risk items discussed at business unit ERMCs on an ongoing basis throughout the year. Steps have also been taken to identify any relevant audit information that the External auditors should be made aware of.
For Aberdeen Asset Management Life and Pensions, the compliance Key Function Holder (KFH) co-ordinated an exercise which required detailing all the Solvency II requirements in relation to the SoG and documenting how Aberdeen Asset Management Life and Pensions complies. In addition, a range of individuals holding Senior Insurance Management Functions (SIMFs) or KFHs were allocated ownership for each individual requirement. The governance map has a responsibility formalised for each relevant individual. The governance map was presented to the Aberdeen Asset Management Life and Pensions Limited board quarterly. The European Insurance and Occupational Pensions Authority gap analysis and governance map were sent to SIMFs and KFHs annually and individuals were requested to confirm compliance.
Due to the simple risk profile of Aberdeen Asset Management Life and Pensions, the compliance KFH and Aberdeen Asset Management Life and Pensions chief executive reviewed this gap analysis in detail prior to circulation to other individuals and the exercise concluded with the chief risk officer signing it off prior to it being presented to the Aberdeen Asset Management Life and Pensions Limited board for noting.
The Chairman’s statement and the Strategic report in the Annual report and accounts aim to provide a balanced overall assessment of the Group’s activities, performance and prospects. This information will be supported by a presentation at the 2018 AGM. Shareholders will be invited to ask questions during the meeting and have an opportunity to talk with the Directors after the formal part of the meeting. The voting results will be published on our website at www.standardlifeaberdeen.com after the meeting. These will include the number of votes withheld.
In addition, a General Meeting was held on 19 June 2017 at which shareholders were asked to consider the resolutions recommended by the Board, to approve the Merger, the issue and allotment of new shares and an amended remuneration policy. 42% of the shares in issue were voted and the resolutions were passed.
Other information You can find details of the following, as required by Disclosure and Transparency Rule 7.2.6, in the Directors’ report and in the Directors’ remuneration report: Share capital  Significant direct or indirect holdings of the Company’s securities  Confirmation that there are no securities carrying special rights with regard to control of the Company  Confirmation that there are no restrictions on voting rights in normal circumstances  How the Articles can be amended  The powers of the Directors, including when they can issue or buy back shares
Directors are required to attend all meetings of the Board and the Committees they serve on, and to devote enough time to the Company to perform their duties. Board and Committee papers are distributed before meetings other than, by exception, urgent papers which may need to be tabled at the meeting. The Board sometimes needs to call or rearrange meetings at short notice and it may be difficult for all Directors to attend these meetings. If Directors are not able to attend a meeting because of conflicts in their schedules, they receive all the relevant papers and have the opportunity to submit their comments in advance to the Chairman or to the Company Secretary. If necessary, they can follow up with the Chairman of the meeting. The Board has established the Standing Committee as a formal procedure for holding unscheduled meetings. The Standing Committee meets when, exceptionally, decisions on matters specifically reserved for the Board need to be taken urgently. During 2017, the Standing Committee met three times to consider matters relating to the Merger. All Directors are invited to attend Standing Committee meetings.
The Board has established Committees that oversee, consider and make recommendations to the Board on important issues of policy and governance. At each Board meeting, the Committee Chairmen provide reports of the key issues considered at recent Committee meetings, and minutes of Committee meetings are circulated to the appropriate Board members. The Committees operate within specific terms of reference approved by the Board and kept under review by the Nomination and Governance Committee.
Investment Performance Committee (formerly the Investment Committee) During 2017, the Board reviewed the activities of the Investment Committee. Following the Merger, the investment management arm of the wider business has expanded considerably. The Merger also brought a number of changes at the Board of Standard Life Aberdeen plc and the decision was taken to appoint all of the Directors of Standard Life Aberdeen plc to the boards of Standard Life Investment (Holdings) Limited and Aberdeen Asset Management PLC, the two holding companies of the various investment management firms within the Group. As a result of this, there is a large degree of nonexecutive Director oversight of the investment business and consequently the Investment Committee of Standard Life Group in its previous form was deemed to be no longer appropriate. It was disbanded on completion of the Merger. The Committee was chaired by Pierre Danon and met twice in 2017 prior to the completion of the Merger. At its meetings, it received market outlook updates and reviewed investment performance and governance and stewardship activities.
In October 2017, following further consideration of its oversight responsibilities, the Board established the Investment Performance Committee. This Committee provides insight into investment performance results by asset class, the market and economic environment influencing investment results, supports the review and oversight of performance issues and supports the ongoing innovation and evolution of the investment process and capabilities of the Group. Gerhard Fusenig is the Chairman of this committee and Melanie Gee, Richard Mully and Kevin Parry are currently members. The Committee will have its first meeting in Q1 2018.
Governance Membership All members of the Audit Committee are independent non-executive Directors. The table below reflects the composition of the Committee and the members’ attendance both pre and post the Merger: Member Attendance
John Devine, Chairman 2/2 Julie Chakraverty 2/2 Melanie Gee 2/2 Martin Pike 7/7 Jutta af Rosenborg 2/2
Invitations to attend Committee meetings are extended on a regular basis to the Chairman, the Co-Chief Executives, the Chief Financial Officer, the Chief Executive Standard Life Pensions and Savings, the Group Financial Controller, the Chief Internal Auditor and the Group Chief Risk Officer.
The Audit Committee meets privately for part of its meetings and also has regular private meetings separately with the External auditors, Chief Internal Auditor and Chief Financial Officer. These meetings address the level of co-operation and information exchange and provide an opportunity for participants to raise any concerns directly with the Committee.
In accordance with the Senior Insurance Manager’s Regime, the Audit Committee Chairman is responsible for the oversight of the independence, autonomy and effectiveness of our policies and procedures on whistleblowing including the procedures for the protection of staff that raise concerns from detrimental treatment. Throughout the year the Audit Committee Chairman met regularly with the Chief Internal Auditor and the Head of Financial Crime to discuss their work, findings and current developments.
Going forward, the review highlighted the Committee’s wish to consider further where the reporting of financial performance in the investment business could be strengthened.
As recurring business, at every meeting the Committee reviews and discusses:  Updates from the Group Finance function on significant financial accounting, reporting and disclosure matters
 Completion of the 2016 external audit for all audited entities
 Half year results 2017  External auditors’ review of half year results  Impact on reporting of the Merger  CASS update  Internal Control Environment assessment
The Committee reviewed the Group accounting policies and confirmed they were appropriate to be used for the 2017 Group financial statements. During the year the Committee considered the presentation and accounting policy for when funds are classified as associates. Following discussions with the External auditors it was decided to change the treatment as disclosed in Note 16 of the Group financial statements. This did not have an impact on our reported profits but did impact the balance sheet presentation and disclosures.
The Committee reviewed the Annual report and accounts 2016 and the half year results 2017. For the half year it received written and/or oral reports from the Chief Financial Officer, subsidiary audit committee chairmen or boards, the Company Secretary, the Chief Internal Auditor and the External auditors. In addition, for the year end it received a report from the Head of Group Actuarial. The Committee uses these reports to aid its understanding of the composition of the financial statements, to confirm verification and compliance with reporting standards and to justify accounting judgements and estimates. Following its reviews, the Committee was able to recommend the approval of each of the reports to the Board, being satisfied that the annual and half year financial statements complied with laws and regulations and had been appropriately compiled.
In compiling a set of Group financial statements, it is necessary to make judgements and estimates about outcomes that are typically dependent on future events. This is particularly relevant to annuity business where profitability is inherently dependent on how long people live and future economic outcomes. Further, we have a substantial defined benefit pension plan with liabilities that are also dependent on economic and health related outcomes. Estimates are not however limited to liabilities; our business and pension funds invest in some hard to value investments, such as over-the-counter derivatives, private equity, real estate and commercial mortgages.
The Merger is accounted for under IFRS as an acquisition by Standard Life plc of Aberdeen Asset Management PLC. This acquisition accounting requires significant judgement and was a major area of focus for the Committee in the second half of 2017 and early 2018. The key judgements related to the recognition and valuation of intangibles on the acquisition. The major intangibles recognised related to customer relationships and brand. The Committee reviewed and challenged the assumptions underlying the valuation of these intangibles, including useful lives, and reviewed reporting from third party valuation experts. The Committee also considered the appropriate amortisation method for each intangible and the allocation of the goodwill arising on the acquisition to groups of cash generating units. See Note 14 of the Group financial statements.
In relation to the Lloyds Banking Group customer relationship intangible asset, the Committee considered that an impairment of £40m was appropriate. The Committee also considered intangible assets relating to internally developed software and agreed with management that an impairment of £31m was appropriate in relation to a discontinuation of part of an IT transformation project.
We carried out a review of the processes and controls for valuing hard to value assets and were satisfied that we could rely on the 84 Standard Life Aberdeen 2017
procedures for determining valuations. See Note 41 of the Group financial statements.
 The key messages in the narrative in the 'front half' of the report reflect the financial reporting contained in the financial statements
Balanced “We are fully disclosing our successes, the challenges we have faced in the period, and the challenges and opportunities we anticipate in the future – all with equal importance and at a level of detail that’s appropriate for our stakeholders”
 The report presents the 'whole' story where both successes and challenges experienced during the year and expected in the future are covered
 We, as an Audit Committee, reviewed the messaging in the Annual report and accounts, taking into account material received and discussion taken place during the year
 Our Annual report and accounts goes through an extensive internal verification process of all content to verify accuracy
The Committee also reviewed the use and presentation of APMs which complement the statutory IFRS results in order to give a more complete view of the performance of the business. This review considered guidelines issued by the European Securities and Markets Authority in 2016 and the thematic review by the Financial Reporting Council (FRC) during 2017. A Supplementary information section is included in the Annual report and accounts to explain why we use these metrics and to provide reconciliations of these metrics to IFRS measures where relevant. This section also provides increased transparency over the calculation of reported financial ratios. The Committee noted that management continued to develop and enhance the detail in this Supplementary information section in 2017 in response to emerging practice.
Following the Merger, management reconsidered the appropriate KPIs for the Group, taking into account the shift towards asset management business. The Supplementary information section sets out the changes in financial KPIs and the reasons for these changes.
4. Corporate governance statement continued line with the defined accounting policies, were consistent with previous practice and were appropriately disclosed.
Prudential reporting During 2017 the Group published its first Solvency and Financial Condition Report (for the year ended 31 December 2016), and submitted full annual Solvency II reporting to the PRA for the first time. In general, the Committee continued to adopt a compliance approach to Solvency II reporting drawing on work undertaken by management, Group Risk, Internal audit and the External auditors. The procedures are designed to give the Audit Committee a high degree of comfort that returns have been properly prepared. The Committee also reviewed both a draft and a final version of the Solvency and financial condition report, and following due consideration agreed to recommend the Solvency and financial condition report to the Board for approval.
In relation to actuarial assumptions used for year end 2017 Solvency II reporting, including mortality, persistency and expenses assumptions, the Committee received a report from the Chair of the Standard Life Assurance Limited (SLAL) Audit Committee which noted the consideration of these assumptions by the SLAL Audit Committee and External auditors. After due consideration of this reporting the Committee were satisfied that these assumptions were appropriate for year end Solvency II reporting. The Committee also reviewed disclosures relating to Solvency II results included in the Strategic report section of this Annual report and accounts, and related assurance reports and was satisfied with the disclosures.
The Committee Chairman is the designated whistleblower’s champion and the Committee receives regular updates on the operation of the whistleblowing procedures from the Global Head of Conduct and Compliance. The anonymised reports include a summary of the incidents raised as whistleblowing, and information on developments of the arrangements in place, to ensure concerns can be raised in confidence, about possible malpractice, wrongdoing and other matters.
Internal audit The Group now has an Internal audit function comprising of approximately 70 people post-Merger. Internal audit is supported by a co-source provider which recently transitioned from legacy arrangements to PwC from 1 January 2018. The process involved the Chairman of the Committee and PwC’s appointment was approved by the Committee. The Chief Internal Auditor reports to the Committee Chairman.
The Committee receives regular reports from the Chief Internal Auditor on:  The implementation of the approved plan and proposed changes to it
Instruments Directive (MiFID II) and the General Data Protection Regulation (GDPR)
The Committee considers Internal audit’s effectiveness annually, monitoring its independence, objectivity and resourcing in the context of the Chartered Institute of Internal Auditors’ professional standards. During the year, Internal audit carried out its own internal effectiveness review as well as quality assurance processes and reported the satisfactory results back to the Committee.
Auditor independence Following the Merger, the Committee sought assurance that KPMG’s independence would not be compromised as a result of their previous position as External auditor of Aberdeen Asset Management PLC until 30 September 2015. A paper outlining the matters which had been considered was brought to the Committee and, following the review, the Committee was satisfied that there were no impacting issues.
The Board has an established policy setting out what non-audit services can be purchased from the firm appointed as External auditors. The Committee monitors the implementation of the Policy on behalf of the Board. The aim of the Policy, which is reviewed annually, is to support and safeguard the objectivity and independence of the External auditors and to comply with the FRC Ethical standards for auditors (Ethical Standards). It does this by prohibiting the auditors from carrying out certain types of non-audit services to ensure that the audit services provided are not impaired. It also ensures that where fees for approved non-audit services are significant, they are subject to the Committee’s prior approval.
 Additional work was again undertaken on Solvency II reporting and the Committee also reviewed separate papers from KPMG covering this specific work
A large part of the Committee’s work this year has been focused on the merger of Standard Life plc and Aberdeen Asset Management PLC. Key activities undertaken prior to completion of the Merger included reviewing and challenging:  The assessment of risks posed by the Merger and their mitigants  The appropriateness of risk related disclosures included in the
Membership All members of the Risk and Capital Committee are independent nonexecutive Directors. The table below reflects the composition of the Committee and the members’ attendance both pre and post the Merger: Member Attendance
Martin Pike, Chairman 9/9 Julie Chakraverty 2/2 John Devine 9/9 Gerhard Fusenig 2/2 Melanie Gee 9/9
Regular private meetings of the Committee’s members have been held during the year providing an opportunity to raise any issues or concerns with the Chairman of the Committee. The Committee’s members have also been given access to management and subject matter experts outside of the Committee meetings in order to support them in gaining an in-depth understanding of specific topics.
The Risk and Capital Committee is responsible for overseeing, challenging and advising the Board on:  The Group’s risk appetite, material risk exposures and the impact of these on the levels and allocation of capital
In carrying out its duties, the Committee is authorised by the Board to obtain any information it needs from any Director or employee of the Group. It is also authorised to seek, at the expense of the Group, appropriate external professional advice whenever it considers this necessary. The Committee did not need to take any independent advice during the year.
One of the recurring items that is reviewed and discussed at each meeting is the Views on Risk report which provides a holistic view of the Group Chief Risk Officer’s assessment of the key risks and uncertainties faced by the Group’s businesses and the actions being taken to manage these.
Other recurring items that are reviewed by the Committee include:  Matters arising at the Standard Life Aberdeen Enterprise Risk Management Committee
 Customer proposition developments  Ongoing developments relating to the management of conduct risk  The management of cyber risk across the Group  Items supporting the ongoing assessment of the Group’s own risk and solvency assessment (ORSA)
The Committee has also continued to receive periodic reports from the Business Risk Review team. The Business Risk Review team operates within the Risk and Compliance function and is tasked with reviewing specific business activities and issues of a strategic significance. The output from the Business Risk Review team comprises independent assessments and reports that assist management in anticipating, managing and mitigating risk. The items subject to Business Risk Reviews are proposed by members of the executive team with the Committee providing further input into this process.
During the year the Committee’s work covered a range of risks faced by the business and included consideration of:  Advice to be provided to the Remuneration Committee regarding the delivery of performance in 2016 relative to risk appetites
 Findings included in the Standard Life Investments Internal Controls Report
 The approach to be followed by the Standard Life plc Risk and Capital Committee in reviewing documentation relating to the proposed merger
 Data privacy and data management practices  The management of cyber risk including an update on cyber insurance cover in the UK market  Lessons learned from the acquisition of Elevate
 The views of the risk function on the state of preparedness for the first day of operation following the merger
 Due diligence on the proposed acquisition of certain assets related to the investment management business of Alpine Woods Capital Investors, LLC
 Risk oversight arrangements in respect of investment risk in Standard Life Wealth Limited
 Progress on preparations for the implementation of the second Markets in Financial Instruments Directive (MiFID II)
and global presence of the business was expected to lead to relative increases in risks relating to regulatory scrutiny, IT risks due to possible targeting by cyber criminals and change risk as a result of merger integration activity. The output of this exercise was noted as helpful in focusing the deployment of resources following the merger.
Prior to the merger both Standard Life plc and Aberdeen Asset Management PLC operated their own risk appetite frameworks. These frameworks supported the respective businesses in managing their risks and capital requirements by providing a mechanism for stakeholders to communicate, understand and control risks. A detailed review of these frameworks following the merger indicated a high degree of commonality between the respective frameworks and provided the Committee with comfort that risks and capital were being well-managed across both businesses.
Regular reporting on financial exposures, conduct and operational risks, and the capital position are reported to the Committee through the Views on Risk report which is presented at each meeting of the Committee. Through reviewing the relevant dashboards, commentaries and associated management information, the Committee has monitored risks relative to applicable quantitative and qualitative appetites and views on the resilience of the capital position under current and stressed conditions.
Specific items that the Committee discussed during the year in this context included:  Risks relating to the significant volume of regulatory projects that were progressing simultaneously throughout 2017
 The extent to which there was a systemic cause for losses incurred as a result of operational errors
Another example is the report from the Business Risk Review team on the fair treatment of longstanding customers which supported the Committee in its oversight of conduct risk. This highlighted planned changes in governance arrangements to ensure the fair treatment of long standing customers and recommended enhancing reviews of customer activity to minimise the risk of customer inertia adversely impacting on customer outcomes. The report also recommended enhancements to the reviews performed in respect of the direct retail offering within Aberdeen Standard Investments.
Stress and scenario testing performed across the Group has also supported the Committee in understanding, monitoring and managing the risk and capital profile of the business under stressed conditions. In addition to the stress and scenario testing performed across the Group in support of Internal Capital Adequacy Assessment Process (ICAAP) and Solvency II reporting, assurance has been taken from the results of the Standard Life plc stress and scenario testing performed in 2017 prior to the merger. This provided a forward-looking assessment of resilience to significant adverse events affecting key risk exposures and comprised:  Univariate stresses – looking at stresses to financial and demographic risks in isolation
Four scenarios were explored as part of the reverse stress testing exercise. The scenarios considered were: an effective cyber attack; a major financial shock which triggered high remediation costs in cases of customer detriment; pressure on fund charges, performance and flows; and the failure of key services performed by outsourced investment administration providers.
Based on the above analysis, the Committee concluded there was no requirement for the business to reduce its risk exposures and that the business was resilient to extreme events as a result of the robust controls, monitoring and triggers in place to identify events quickly and to help mitigate their escalation. Under some circumstances the Committee noted that contingency funding may need to be relied on to support cash outflows, and dividends from Standard Life Investments and Standard Life Assurance Limited may be reduced.
During the year, the Committee continued to monitor the structure and implementation of the Group’s ERM framework to ensure the framework remained suitable for identifying, assessing and managing current and new risk types and for reacting to forward-looking risk issues and the changing nature of risks.
The Committee continues to receive assurance regarding the operation of the ERM framework through its review of regular content within the Views on Risk report. In particular we have used our review of the various risk and capital dashboards, including the consolidated dashboard on key conduct risk indicators and conduct risk outcomes, to understand the Group’s risk profile and the effectiveness of the framework in supporting the management of these risks.
Strategic risk management within the context of the ERM framework refers to the process of optimising risk-adjusted returns and for evaluating and prioritising strategic options. This takes place as part of the business planning process whereby forecast profits are considered alongside a forward-looking assessment of the Group’s risk and capital position. The December meeting of the Committee reviewed an annual report on the Group’s ORSA which reported on these two elements.
As part of discussions on regulatory activity, the Committee noted that the business had been invited to join one of the FCA’s Cyber Coordination Groups. These groups are intended to promote increased sharing of information regarding learnings and cyber threats. The Committee acknowledged this development and the expectation that it would provide the business with the opportunity to share experiences, to learn from others in the industry and to identify best practice.
A cross-business client and asset retention Business Risk Review was performed prior to the merger looking at activity across the Standard Life Investments and Pensions and Savings distribution channels. The Committee noted the activity undertaken across the various channels to retain business and client assets and the recommendations from the review team about possible ways of strengthening this. The Committee also received a Business Risk Review report on the Fair Treatment of Longstanding Customers. This focused on considering the extent to which there was a clear and consistent approach within the Standard Life Pensions and Savings and Standard Life Investments UK businesses to ensure the fair treatment of longstanding customers and clients, and the processes in place to support this. Key considerations of the Committee in this context were ensuring:  The proposition management governance process was effective  There was adequate visibility of longstanding customer fairness risks  The robustness of the reviews performed in respect of the direct retail offering within Aberdeen Standard Investments
In addition to reviewing reporting relating to the merger, the Committee has reviewed and challenged due diligence risk assessments relating to proposed material strategic transactions. This included assessments relating to the proposed acquisition of certain assets related to the investment management business of Alpine Woods Capital Investors, LLC.
Governance changes As already highlighted in this report, risk and capital committees have been established within Standard Life Assurance Limited (SLAL), Standard Life Savings Limited and Elevate Portfolio Services Limited during 2017.
In 2018 a similar risk committee will be established for Standard Life Asia Limited. This will allow similar governance arrangements to be implemented to those introduced for Standard Life Assurance Limited in 2017.
Committee effectiveness The Committee reviews its remit and effectiveness annually. In August 2017 the members of the Standard Life plc Risk and Capital Committee completed this review via an internal self-assessment questionnaire.
The overall conclusion of the review was that the Committee had operated effectively. In particular, comments from the Committee recognised the additional time spent on conduct risk and cyber risk and, in respect of pre-merger considerations, the strength of oversight provided by the Committee.
For 2018, the review highlighted an expectation that to continue to operate effectively the Committee would need to remain focused on evolving in response to a range of external and internal factors including the changing risk profile of the Group, the continued regulatory focus on matters such as conduct risk and the evolving governance arrangements within subsidiary companies.
5. Directors’ remuneration report 5.1 Remuneration Committee Chairman’s statement This report sets out the new remuneration policy for the Directors of Standard Life Aberdeen plc, what we paid them in 2017 and how we will pay them in 2018, together with an explanation of what the Remuneration Committee considered in reaching its recommendations. Where tables and charts in this report have been audited by KPMG LLP we have marked them as ‘audited’ for clarity.
 The new Directors’ Remuneration Policy, set out on pages 106 to 114, and which is subject to a shareholder vote at the 2018 AGM
 The annual report on remuneration. This will be subject to an advisory vote at the 2018 AGM.
The Directors’ remuneration report was approved by the Board and signed on its behalf by
This is my first report as Chairman of the Remuneration Committee for Standard Life Aberdeen plc, having previously served as Chairman of the Remuneration Committee for Aberdeen Asset Management PLC and taken on the role for Standard Life Aberdeen plc in August 2017 following the merger. I would like to thank Melanie Gee, who served as the previous Committee Chairman for Standard Life plc, the Board and my fellow Committee members for their continued support.
A key principle underlying our remuneration approach is that reward should be aligned to performance outcomes of the Group and the shareholder experience. In this year of change, the Group has delivered total shareholder return of 23.7% in 2017 and a total 2017 dividend of 21.30p per share which is a 7.5% year-on-year increase from the total 2016 dividend. More details on Group performance are set out in the Strategic report.
Board changes This year has also seen a number of changes to our executive leadership in light of the merger, with the appointment of the Co-Chief Executive Officers (Co-CEOs) Keith Skeoch and Martin Gilbert, Chief Financial Officer (CFO) Bill Rattray and Chief Investment Officer (CIO) Rod Paris to the Board. The following executive Directors stepped down from the Board during 2017: Barry O’Dwyer (CEO, Pensions and Savings), Luke Savage (CFO), Colin Clark (Global Client Director), and Paul Matthews (UK and Europe Chief Executive Officer). Our performance, along with the principles of our remuneration policy, have shaped the remuneration decisions that we have made during 2017 both in relation to the current and former executive Directors. The remuneration arrangements for the executive Directors who stepped down from the Board are detailed on pages 126 to 127.
In this context we reviewed our remuneration arrangements to ensure that we have a remuneration structure which both incentivises our leadership team to deliver our strategy and is appropriate in the context of the business model going forward.
In light of these considerations, the Committee have designed a new remuneration structure that is based around:  A simplified annual package for executive Directors comprised of fixed pay and benefits (aligned to the wider workforce) plus a single variable pay award, of which 75% is deferred in shares with no release of value to participants until year 5. Our aim is to improve transparency between performance and reward outcomes for our executive Directors and our shareholders over the long term.
These changes align our remuneration structures more closely with the market for the asset management industry and consider the FTSE and MSCI reclassification of Standard Life Aberdeen in the asset management subsector following the merger.
G o ver n an c e 95Standard Life Aberdeen 2017
5. Directors’ remuneration report continued discussions helpful and constructive and the feedback we received shaped our final proposals.
 The increased alignment to shareholders through the five-year time horizon for all deferred awards alongside high shareholding requirements
The level of remuneration for executives remains under intense scrutiny from shareholders and their representatives, the government and the general public. As a result, with the introduction of the new remuneration structure and alignment of the remuneration for our Co-CEOs, we have reduced the maximum opportunity for both of the Co-CEOs and reduced the fixed pay level for Keith Skeoch as detailed above. The maximum opportunity has also been reduced for the CIO. The package for the CFO has been adjusted to reflect the increase in the scale and complexity of the role compared to his role as CFO for Aberdeen. Furthermore, as a Committee, we understand that critical to any discussion on the levels of executive remuneration is an understanding of our scorecard measures and the process for target setting to ensure this delivers the right alignment between performance and reward. The proposed scorecard for awards (set out on page 100) reflects the feedback that we received from our shareholders on the scorecard measures.
The Committee has determined, however, that it is appropriate to restate the financial performance targets for the 2016 and 2017 Standard Life Executive Long-Term Incentive Plan (Executive LTIP)
The underlying principle used in setting the revised targets is that they should be no more and no less difficult to achieve than the original targets.
Details of the restated 2016 and 2017 Executive LTIP and Standard Life Investments LTIP targets can be found on pages 122 to 125.
Business context and remuneration outcomes for 2017 In accordance with the Directors’ Remuneration Policy adopted at the 2017 general meeting, variable pay for Keith Skeoch and Rod Paris is based on performance measures and objectives consistent with the Standard Life Group and Standard Life Investments measures that were set at the start of the 2017 performance year and assessed against the results of these businesses for this period.
Variable pay for Martin Gilbert and Bill Rattray from the date of the merger to the end of this performance year is based on performance measures and objectives consistent with Aberdeen measures that applied up to the merger and assessed against Aberdeen results for the period from 14 August 2017 to 31 December 2017.
In reaching its decisions in terms of the annual bonus scorecard and 2017 LTIP vesting levels for Keith Skeoch and Rod Paris and the variable pay awards for Martin Gilbert and Bill Rattray, the Committee considered a range of factors in order to ensure that the awards are fair and appropriately reflect overall performance. As well as considering the achievement against the targets, the Committee reviewed the individual components which contributed to the delivery of the financial performance. Looking externally, the Committee also considered the alignment of its decisions on remuneration with the interests of shareholders. In particular, the Committee have sought to ensure that there are no unintended consequences of the merger on 2017 performance outcomes.
As detailed earlier in the Annual report and accounts as a result of the announcement on 15 February 2018 that Lloyds Banking Group and Scottish Widows are seeking to terminate arrangements for the assets we manage we have recognised an impairment charge of £40m relating to this intangible asset in our 2017 results. The impact of this will be reviewed during 2018 and any implications in respect of executive Director remuneration will be considered as part of the 2018 year end decision making in relation to remuneration as the impact together with mitigating actions becomes clearer.
In addition, as a result of today’s announcement regarding the sale of the Group’s capital heavy insurance business, during 2018 the Committee will review the impact of this on remuneration measures and targets set for the 2018 and in-flight incentive arrangements and consult with shareholders as appropriate.
Further details regarding the implementation of our policy in 2018 are provided in the ‘Approach to remuneration going forward’ section of this report on page 103.
I hope that you find this report a clear account of how the Committee has developed our policy proposals for 2018 and implemented the policy during 2017 and are able to support the decisions we have taken. I would again like to thank our shareholders for their time and sharing their views during our meetings. I welcome any comments from shareholders and will be available to answer any questions at the AGM.
 Our remuneration design aligns the interests of executives, shareholders and importantly our clients
The following chart illustrates the key elements of our remuneration structure for executive Directors going forward and the time-horizons for each element.
How does the remuneration structure support delivery of strategy? The remuneration structure for executive Directors has consciously been designed to support the delivery of the Group’s key strategic priorities as illustrated below: Our strategy What this means for us How our remuneration structure delivers our strategy
 A balance of non-financial measures will form part of our scorecard for reward
 Appropriate balance of package between fixed pay and performance related pay (delivered in cash variable pay and deferred variable pay)
G o ver n an c e 99Standard Life Aberdeen 2017
Building up to three years over duration of policy 20%  Excludes spread/risk margin which can be volatile due to impact of demographic assumption changes  Links executive reward to profit generation
Focuses management on risk accountability, advancing an effective risk management environment, the management of conduct risk and the embedding of a robust control environment.
Personal Annual 10% Rewards delivery of performance against key personal performance objectives.
 This metric compares actual net new business flows on a cumulative basis over a rolling three-year period, covering only the Company’s growth channels (but excluding cash and liquidity funds), against the targets set as detailed above
 Investment performance is measured by reference to the aggregation of performance data of mandates and funds against the relevant client-specific benchmarks and calculating the average, weighted by AUM. This metric used for remuneration purposes is a blend of three-year and five-year relative performance, in equal proportions.
 The target is set at 60% of AUM by value to be outperforming benchmark  In considering relative investment performance, the GARS strategy is measured by reference to a LIBOR +2.5%
G o ver n an c e 101Standard Life Aberdeen 2017
 Return on adjusted equity is defined as the annualised adjusted profit before tax (excluding spread/risk margin), expressed as a percentage of opening IFRS equity, adjusted for (i) time-apportioned dividends paid to equity holders, (ii) the defined benefit pension surplus and (iii) the incremental goodwill and intangible assets arising from the IFRS accounting for the merger or any similar transaction in the future
 This metric will compare the actual average cost/income ratio (excluding spread/risk margin), consistent with adjusted profit before tax (excluding spread/risk margin) against target achieved over the relevant three-year underpin period
 The outcome will be calculated at the end of each financial year in the three-year underpin period (20192021 ), with the average of the three years’ results to be at or above 55% of AUM by value to be outperforming benchmark
 Net flows underpin will be set by aggregating the growth channel net new business flows budgets from the 2019 approved budget/plan for the three-year period 2019-2021 102 Standard Life Aberdeen 2017
 Underpin target for net flows will be set at the midpoint between the three-year aggregated 2019 budget total and the related threshold measure calculated for the 2019 performance scorecard
With effect from 1 January 2018 base salaries are as follows:  Co-Chief Executive Officers (Co-CEOs): £600,000 (Keith Skeoch £600,000 (reduced from £700,000), Martin Gilbert
(£600,000 increased from £522,000))  Chief Investment Officer (CIO): £450,000  Chief Financial Officer (CFO): £450,000 (increased from £365,000)
The maximum opportunities under the EIP in respect of 2018 have been set as follows: – Co-CEOs: 600% of salary – CIO: 600% of salary – CFO: 350% of salary
Executive Directors are required to build up substantial interests in the Group as follows:  Co-CEOs: 500% of salary  CIO: 300% of salary  CFO: 300% of salary  Shares up to the value of the share ownership guidelines must be held for 12 months following departure from the
G o ver n an c e 103Standard Life Aberdeen 2017
Performance and remuneration for 2017 at a glance Key performance measures The tables below illustrate outcomes against key performance measures relevant to 2017 remuneration for Co-CEOs Keith Skeoch and Martin Gilbert. The annual bonus outcome for 2017 for Keith Skeoch is driven by assessment of performance against a scorecard, which includes financial and non-financial measures and personal performance. Keith also participates in the Standard Life Group long-term incentive plans, details of which are provided below. The variable pay outcome for Martin Gilbert for the period 14 August 2017 to 31 December 2017, which determines his full incentive opportunity, was based on achievement against a mixture of long-term and annual financial metrics, non-financial metrics and personal performance.
Total remuneration – Co-Chief Executive Officers These tables measure for each Co-Chief Executive Officer, for the period in 2017 in which they held that position, the remuneration reportable in the single figure table on page114 compared to the maximum remuneration permissible under the remuneration policy.
Pay Ratios The Committee is mindful of the relationship between Chief Executive Officer pay and the pay of other employees across the Standard Life Aberdeen Group. In line with emerging best practice, the Committee has again therefore voluntarily decided to include the pay ratio between the Co-Chief Executive Officers and the median pay of other employees within the Group. The Committee notes that the UK Government intends to require companies to report this figure annually but the proposed legislation has not been published at the time of this report.
Based on the averaged annualised Co-Chief Executive Officers’ single figures set out on page 114 the ratio of pay to the median of all other UK based employees is 60:1. Employee pay includes base salary, employer pension contributions, benefits and incentive payments.
5. Directors’ remuneration report continued 5.2 Future Policy Report This section sets out the remuneration policy for executive Directors and non-executive Directors, which is subject to a binding vote of shareholders and will, if approved, take effect from the date of the 2018 AGM.
To provide a core reward for undertaking the role, commensurate with the individual’s role, responsibilities and experience.
Salaries for executive Directors are set at an appropriate level to attract and retain individuals of the right calibre and with the experience required.
In line with other employees, executive Directors are eligible to participate in the Company’s voluntary benefits programme.
In the event of recruitment or relocation additional benefits may be provided as considered appropriate by the Remuneration Committee, including, but not limited to: housing rental costs; education allowance; travel and accommodation costs; and other relocation costs.
The level of contribution/ cash equivalent is reviewed periodically taking into account: (i) the pension opportunity offered to other employees within the Group; (ii) external market data; and (iii) pension legislation.
The Group would continue to honour legacy arrangements (e.g. defined benefit pension arrangements) in the event of an individual with a contractual entitlement to such a pension benefit being promoted to an executive Director role.
To the extent operated by the Company, participation in an HMRC approved Share Incentive Plan or Sharesave plan is permitted.
For 2018, the opportunity levels are: – Martin Gilbert – 600% salary – Keith Skeoch – 600% salary – Rod Paris – 600% salary – Bill Rattray – 350% salary
The Remuneration Committee will normally consult with the Company’s largest institutional shareholders in advance of increasing award levels above the current grant levels.
The performance measures, their respective weightings and targets are set annually by the Remuneration Committee.
Performance is assessed against a range of key financial, nonfinancial (including strategy, customer and client, risk, conduct and compliance and engaging our talent) and personal performance measures.
Performance is measured both on annual, and where appropriate, trailing performance. Trailing performance will be measured over a
Deferred awards will be subject to underpin performance conditions which will normally be measured based on performance over the three financial years from award.
Deferred awards are, where appropriate, subject to a holding period to the end of the fifth anniversary of the grant date.
The measures, their respective weightings and targets for the purpose of the underpin performance conditions are set annually by the Remuneration Committee.
Deferred awards will normally be delivered as share awards. Where required, for regulatory purposes, deferred awards can be made in a combination of share awards and fund awards (which are conditional rights to receive a cash sum based on the value of a notional investment in a range of Standard Life Aberdeen funds). The balance of each award is determined by the Remuneration Committee; however, the share element would not be less than 50% of the deferred award.
For threshold performance, the amount of deferred award that vests is zero with 100% of the award vesting if the underpin condition is met in full.
Malus and clawback provisions apply to awards under the Executive Incentive Plan.
Under the malus and clawback provisions, the Remuneration Committee can reduce awards that have not yet vested (malus) and can require repayment of an award (clawback) for a period of five years from the date of award.
The circumstances in which malus or clawback would apply, include but are not limited to: – A material misstatement of the Group’s audited financial statement
– Any failure of risk management, fraud or other material financial irregularity
Executive Directors are required to build up a substantial interest in Group shares.
The current requirements are as follows: 500% of salary for the Co-Chief Executive Officers and 300% of salary for other executive Directors
Executive Directors will normally be required to retain shares held in satisfaction of the requirements for a period of one year following their departure from the Group.
For these purposes, payments include the Remuneration Committee satisfying awards of variable remuneration in relation to awards over shares set out in the table below. This means making payment in line with the terms that were agreed at the time the award was granted.
 Adjustments have been made to update the profit measure to adjusted profit before tax in the 2016 and 2017 LTIP performance measures and to adjusted profit excluding spread /risk margin in the 2018 LTIP performance measures. In addition, the net flows target has been updated in the 2018 LTIP performance measures to Group growth net flows. Finally the cumulative targets which relate to the 2018 performance year onwards reflect the enlarged Company.
 The Remuneration Committee has the discretion to amend the final vesting level of these awards if it does not consider that it reflects the overall performance of the Group. Awards are also subject to review by the Risk and Capital Committee at the end of the performance period to confirm that vesting of the award is appropriate. These awards accrue dividend equivalents over the vesting period which will normally be paid in shares on a reinvested basis. Awards are subject to malus and clawback provisions on the same basis as EIP awards.
 The Remuneration Committee has the discretion to amend the final vesting level of these awards if it does not consider that it reflects the overall performance of Aberdeen Standard Investments. Awards are also subject to review by the Risk and Capital Committee at the end of the performance period to confirm that vesting of the award is appropriate. These awards accrue dividend equivalents over the performance period which will normally be paid in shares on a reinvested basis. For awards made prior to 2017, awards are subject to malus provisions if the award is found to be granted based on inaccurate information as a result of an individual’s conduct, and clawback provisions within two years of vesting if there is a material misstatement of results by a Group member. For awards made from 2017 onwards, awards are subject to malus and clawback provisions on the same basis as EIP awards.
 Pre-merger awards – Under the terms of the merger, existing awards granted to employees of Aberdeen under the Aberdeen Deferred Share Plan 2009 or the Aberdeen USA Deferred Share Award Plan prior to completion were exchanged for equivalent awards over shares in the Company.
 Awards granted post-merger – Awards (in the form of nil-cost options) that were granted to executive Directors under the Aberdeen Deferred Share Plan 2009. Awards will be released in equal tranches over five years from grant. Awards are eligible to receive dividend equivalents between the date of grant and the date of exercise, which may be paid only after the earliest vesting date has passed. Awards are subject to malus and clawback provisions under the same basis as EIP awards.
G o ver n an c e 109Standard Life Aberdeen 2017