Remuneration Committee discretion in relation to future operation of the remuneration policy The Committee will operate variable pay plans according to the respective rules of the plans. The Committee will retain flexibility in a number of areas regarding the operation and administration of these plans, including (but not limited to) the following:  How to deal with a change of control or restructuring of the Group, or a demerger or similar event (including allowing awards to vest/be released and disapplying any relevant time pro-rating)
 How and whether any award may be adjusted in certain circumstances (including in the event of a variation of share capital, demerger, special dividend, fund merger, or winding up or similar event)
The Committee may accelerate the vesting and/or the release of awards if an executive Director moves jurisdictions following grant and there would be greater tax or regulatory burdens on the award in the new jurisdiction.
Choice of performance measures - approach to target setting Performance targets for the Group’s incentive arrangements are set on an annual basis by the Committee. The Committee takes into account a range of factors including business forecasts, prior year performance, degree of stretch against the performance targets in the business plan, the economic environment, market conditions and expectations.
The following table sets out details on why the performance measures for the purpose of the Executive Incentive Plan (EIP) were chosen. Further details on the proposed measures for the 2018 EIP award are provided on pages 100 to 102.
 Focuses management on growing customer and client volumes through winning new customers and clients and growing revenue from our existing customers and clients which will ultimately lead, through growth in assets under management and quality revenue flows, to increasing profitability and increased shareholder value
People measures  Focuses management on developing organisational capability by building the resources for the future, supporting the diversity agenda and encouraging the desired behaviours
 Focuses management on risk accountability, advancing an effective risk management environment, the management of conduct risk and the embedding of a robust control environment
Changes to the remuneration policy As set out in the statement from the Remuneration Committee Chairman, a new remuneration policy has been designed to reflect the strategic priorities of the Group going forward. The key change that has been made, further details of which can be found in the statement from the Remuneration Committee Chairman, is the approach to incentives going forward.
– Remuneration arrangements for new appointments will typically align with the remuneration policy presented above
– In the case of internal promotions, the Committee will honour existing commitments entered into before promotion.
The maximum level of variable pay which may be awarded to a new executive Director at or shortly following recruitment shall be limited to 700% of salary. These limits exclude buyout awards and are in line with the policy table above.
In considering buyout levels and conditions, the Committee will take into account such factors as the type of award and performance measures and the likelihood of performance conditions being met. The buyout award will reflect the foregone award in amount and terms (including any deferral or retention period and performance conditions) as closely as possible.
Service Contracts and loss of office payment policy Executive Directors Within executive service contracts, the Committee aims to strike the right balance between the Company’s interests and those of the executive Directors, whilst ensuring that the contracts comply with best practice, legislation and the agreed remuneration principles. Contracts are not for a fixed term, but set out notice periods in line with the executive Director’s role.
G o ver n an c e 111Standard Life Aberdeen 2017
Legacy awards under the Standard Life Group bonus arrangements A good leaver is defined as someone whose office or employment comes to an end because of death, ill health, injury, disability, redundancy or retirement, sale of the employing company or business or any other reason at the discretion of the Remuneration Committee.
Typically, for good leavers, rights to awards will be pro-rated for the proportion of the performance period that has elapsed on cessation and will, subject to performance, be paid at the usual time (which in the case of the Executive LTIP will normally include the holding period).
Typically, for other leavers, rights to outstanding awards will be forfeit.
Legacy awards under the Aberdeen Deferred Share Plans A good leaver is defined as someone whose employment comes to an end because of death, ill health, injury, disability, redundancy or retirement, sale of the employing company or business or any other reason at the discretion of the Remuneration Committee. Unvested awards granted to good leavers will typically vest in full at the normal vesting date, unless the Remuneration Committee decides it will vest on the date of termination.
 Fees for the Chairman and non-executive Directors are set at an appropriate level to reflect the time commitment, responsibility and duties of the position and the contribution that is expected from non-executive Directors
 The Board annually sets the fees for the non-executive Directors, other than the fee for the Chairman of the Company which is set by the Committee
 The Chairman receives an aggregate fee, which includes the chairmanship of any appropriate Board committee  The remuneration policy for non-executive Directors is to pay: (i) Board membership fees; and (ii) Further fees for additional Board duties such as chairmanship or membership of a committee, the Senior Independent Director, and the chairman of subsidiary boards, in each case to take into account the additional responsibilities and time commitments of the roles. Additional fees may be paid in the exceptional event that non-executive Directors are required to commit substantial additional time above that normally expected for the role.
 Time commitment: Two to three days a week for the Chairman. 30 to 35 days per year for non-executive Directors.  Notice periods: Six months for the Chairman. No notice period for other non-executive Directors.  Termination payment: There is no provision for compensation payments for loss of office for non-executive Directors
If a new Chairman or non-executive Director is appointed, the remuneration arrangements will normally be in line with those detailed in the remuneration policy detailed for non-executive Directors above.
The Group engages with its employee associations from an early stage in the annual remuneration cycle. The areas discussed include: external market data, economic factors, employee expectations and congruence of executive pay with that of the wider workforce in terms of overall pay budgets and approach. The Group operates a Compensation Committee constituted of the Chief People Officer (Chairman), Chief Financial Officer and Chief Risk Officer. The role of the Compensation Committee is to consider the implementation of the remuneration policy across the Group. The Compensation Committee refers its terms of reference to the Remuneration Committee for approval and the Chairman of the Compensation Committee formally reports to the Remuneration Committee on all matters which fall within the Compensation Committee’s remit.
1 This includes the taxable value of all benefits paid in respect of the year ended 31 December 2017. This includes car allowances of £9,827 for Luke Savage, £2,303 for Paul
2 The values reported for 2017 are the market values of the Executive LTIP awards and the Standard Life Investments LTIP awards granted in 2015 that will vest based on the three-year performance measurement period ending on 31 December 2017. As the share price at the date of vesting is not known at the date of publication of this report the number of Standard Life Aberdeen plc shares that will vest (including additional Standard Life Aberdeen plc shares received in respect of accrued dividends from grant through to 31 December 2017) has been multiplied by the average share price over the quarter ending 31 December 2017 (426.70 pence).
3 The values reported for 2016 have been restated to reflect the value of the shares vesting in respect of the three-year performance measurement period ending on 31 December 2016. Where the awards vested in 2017 the price has been restated using the share price on the vesting date. For the Executive LTIP awards which do not vest until 2019 the restatement is based on share price on the first trading day following the third anniversary of grant.
Pension (audited) Executive Directors received a cash allowance in lieu of pension as follows: Paid in 2017
In addition to the cash allowance shown above Paul Matthews was a member of the Standard Life Staff Pension Scheme at the date he ceased to be a Director. Under the pension scheme rules his normal retirement date is at age 60. At 1 March 2017 he was aged 56 and his accrued defined benefit pension was £61,897 per annum. There is no additional value paid on early retirement.
Standard Life Group annual bonus opportunity The target and maximum bonus award opportunities expressed as a percentage of base salary at 31 December 2017 (or at the date of cessation of employment if earlier) that could be earned in respect of 2017 Standard Life Group performance (pro-rated for time in role as appropriate) were: Target Maximum opportunity
Keith Skeoch 75% 175% Rod Paris 30% 60% Colin Clark 75% 175% Paul Matthews 65% 150% Barry O’Dwyer 65% 150% Luke Savage 65% 150%
G o ver n an c e 115Standard Life Aberdeen 2017
The bonus award is based on Group performance and personal performance. The relative weightings are 90% based on Group performance and 10% on personal performance for Keith Skeoch and Rod Paris and 80% based on Group performance and 20% on personal performance in respect of the other executive Directors.
Operating return on equity (RoE) Threshold: 13.3% Target: 14.1% Maximum: 14.9% Outcome: 15.0%
Develop our organisational capability by building the environment, the resources, capabilities and developing the behaviours we will need.This will include: – Developing powerful and consistent leadership identifying and growing tomorrow’s leaders – Developing and actively managing robust and future facing plans to ensure sustainable succession for critical roles – Embedding our remuneration and performance management strategy to encourage high performance and the delivery of our business objectives – Demonstrating commitment and action to progress the Group’s diversity and inclusion strategy – Ensuring the environment we work in reflects our values and creates a culture of appropriate risk taking and continuous improvement Improvement in the employee effectiveness scores for enablement and engagement as measured by the Interaction survey and other supplementary indicators
In a survey carried out after the merger completed, 60% of colleagues shared their views and whilst it was encouraging that 87% considered the merger to present an ‘opportunity’, it is equally important to address areas of concern which the executive team have been working on post completion. The Group continued its focus on developing organisational and leadership capability with the launch of a digital learning campaign and piloting of a more inclusive approach to leadership development. The Group was also named by Business in the Community as one of the UK’s Best Employers for Race and published our gender action plan for the combined organisation. Succession plans are in place for the combined organisation for key executive and regulatory roles across the organisation, for contingency and at a short/medium and long-term level.
 Leading role in ensuring the merger was delivered and was well received by our shareholders  Good pace of delivery in the integration of the merged companies to deliver the synergies targets  Return of gross flows performance and development of an investment philosophy which reflects a multi-strategy approach  Delivering growth in the Pensions and Savings business  Strong focus on the people agenda prior to and after the merger to engage and retain key talent and development of the shared culture across the company  Strong leadership of the planning and budgeting process for the combined company
 Launch of our first investment trust as a combined business  Provided very strong leadership on the integration of the investment teams and capabilities with a focus on stabilising the combined investment teams to maximise collaboration  Led the focus on building a forward looking investment platform to meet the needs of our clients  Progress towards the integration of stewardship and environmental, social and governance activities across the company Paul Matthews
 Launch of new funds across a range of different asset classes including equities, multi-asset, fixed income and private markets
 Effective management of our strong capital position to support strategic investments to grow our business and maintain our progressive dividend policy
Total bonus payable as a % of bonus maximum Total bonus payable as a % of salary Total payable1 1 Where a Director has been appointed or stepped down during the year shown the bonus shown is that payable for the period for which they were an executive Director.
Standard Life Investments annual bonus plan annual bonus targets The bonus pool is determined by reference to Standard Life Investments’ financial performance. Personal bonus awards are based on personal performance against agreed Standard Life Investments’ business scorecard objectives and awarded from the bonus pool. Company bonus awards are made from the bonus pool after deduction of personal bonus payments and the size of the award reflects the value of total reward positioned against the market. The actual targets are not disclosed as Standard Life Investments is a subsidiary business of Standard Life Aberdeen plc and the Board deems that this is commercially sensitive information which, if disclosed, could seriously prejudice the Group’s business.
G o ver n an c e 119Standard Life Aberdeen 2017
December 2017 Total payable1 1 Where a Director has been appointed or stepped down during the year shown the bonus shown is that payable for the period for which they were an executive Director.
Aberdeen Variable Pay plan (cash and deferred shares) In line with the legacy remuneration arrangements in place at Aberdeen, Martin Gilbert and Bill Rattray participated in this plan which was incorporated into the Standard Life Aberdeen plc Remuneration Policy with effect from 14 August 2017 for the period to 31 December 2017 only.
Aberdeen Variable Pay plan outcome for the period 14 August 2017 to 31 December 2017
Annual quantitative Underlying profit before tax 15.0% £98.9m £123.6m £148.4m £139.4m 12.3%
Non-financial strategic performance The performance measures for the non-financial elements of the bonus scorecard are reviewed by the Remuneration Committee. The scorecard is based on a scale of 0 to 10 with 0-4 below expectation, 5-6 meets expectation, 7-8 exceeds expectation and 9-10 significantly exceeds expectation.
Key performance indicators Key points in period from 14 August 2017 to 31 December 2017 Distribution Senior management held in excess of 60 meetings with strategic clients between 14 August and 31 December 2017. Distribution teams participated in many more, with approximately 20,000 engagements held across all regions with clients between 14 August and 31 December 2017 covering all aspects of client activities. Continued inflows across all asset classes emphasised strength of existing relationships maintained in the period since 14 August 2017 as well as being evidenced by annual results.These included crossbusiness wins as well as new mandates across asset classes. Significant marketing events, sponsorship, and sales related activities were carried out pre and post-merger to support the above, which included our Annual Conferences as well as other events across the globe.Commenced work on our newly combined pipeline of nearly £100bn GBP opportunities across the globe. Talent management Talent retention: our retention of key talent is strong following the implementation of our aligned retention plan. Succession: plans are in place for key role succession, focused on contingency, medium and long term requirements. Further development planning is also in progress for talent pools. Culture: following a robust gap analysis, detailed work is now underway in each functional stream to build a positive culture for the new business aligned to our corporate values. Diversity: there is a strong focus on diversity, with the heritage networks merging and focusing on a unified approach to the wide range of diversity and inclusion topics. In addition, an action plan is in place to address, and discuss with colleagues, the issues raised by recent Gender Pay Gap legislation. Integration: good progress has been made on restructuring both management and team structures of the newly merged business. Risk management and conduct Ongoing focus on promotion of good conduct and development of a positive conduct culture. Appropriate and effective structures in place for the management of risk and compliance. Total 6.75%
Personal Performance Martin Gilbert  Leading role in ensuring the merger was delivered and was well received by our shareholders  Good pace of delivery in the integration of the merged companies to deliver the synergies targets  Strong representation with external organisations and government bodies to build the profile and reputation of the merged company  Solid progress against the objectives in relation to geographic and asset class diversification  Effective delivery on the distribution and marketing agenda, including the new visual identity, and improved organisational design for distribution to support our clients and customers
Maximum Actual Maximum Actual Total actual £’000 Total actual (% of max)
2017 Annual bonus and variable pay outcomes (audited) The following table shows the total bonus awards made in respect of 2017 and the cash and deferred elements. Annual bonus payments are not pensionable.
G o ver n an c e 121Standard Life Aberdeen 2017
In line with the above results, the Remuneration Committee determined a vesting factor of 70% reflects the overall performance of the Standard Life Group. These awards will be delivered to Keith Skeoch, Luke Savage and Paul Matthews at the end of the holding period in 2020. In line with the terms of his award at the time of grant, Barry O’Dwyer’s award will be delivered in 2018.
2015 Standard Life Investments LTIP awards vesting in respect of performance ending in 2017 (audited) Under the Standard Life Investments LTIP, awards will only be capable of vesting if Standard Life Investments’ investment performance (threeyear money-weighted average) is above the lower quartile of the money-weighted average of all assets under management (both captive and third party assets) compared to other asset managers.
In line with the above, Keith Skeoch received an award under this plan in March 2015 equivalent to 200% of salary (at maximum vesting). Awards were also granted to Colin Clark and Rod Paris who were not Directors at the time of grant in March 2015.
The following table sets out performance against targets for the 2015 award: Performance level Below threshold Threshold Target Maximum
Consolidated cumulative three-year third party EBITDA <60% of target 60% of target 100% of target 140% of target Actual performance 93.84% of target
Executive LTIP Awards were made in March 2017 to Keith Skeoch, Luke Savage, Barry O’Dwyer and Colin Clark under the Executive LTIP.
As set out in the Committee Chairman’s statement, the performance targets for the 2017 award under the Executive Plan have been adjusted in light of the merger.
The table below shows the original performance targets for the 2017 LTIP award: Threshold and % of award vesting at threshold
Vesting: 100% Cumulative Group operating profit before tax Maximum: £2,725m Cumulative Group net flows Maximum: £45.9bn
Vesting: 0% Cumulative Group adjusted profit before tax Threshold: £3,000m Cumulative Group net flows Threshold: £27.7bn
The level of vesting in the Standard Life Investments LTIP is currently subject to consolidated cumulative three-year third party EBITDA performance and this measure has been used to capture vesting outcomes at the end of 2017.
As a consequence of the merger the awards will become subject to an adjusted profit before tax target for Aberdeen Standard Investments for performance years 2018 onwards (the remainder of the performance period).
The same principles were applied to the adjustments made to awards made to Rod Paris under the Standard Life Investments LTIP in 2016.
G o ver n an c e 123Standard Life Aberdeen 2017
Keith Skeoch £406,438 112,059 Colin Clark2 £346,500 95,533 Barry O’Dwyer £58,602 16,157 Paul Matthews2 £294,683 81,247 Luke Savage2 £287,667 79,312 1 Based on the average share price for the month of December 2016 as per plan rules (362.7 pence). 2 If for any technical, legal, or regulatory reason the deferred award cannot be made over Standard Life Aberdeen plc shares a cash equivalent payment will be paid on the date that the deferred share award would otherwise have vested.
Vesting: 0% Cumulative Group adjusted profit excluding spread/risk margin: Threshold: £2,675m Cumulative Group growth net flows Threshold: £45.1bn
Long-term incentive awards granted in 2016 As set out in the Committee Chairman’s statement, the performance targets for the 2016 Executive LTIP awards were also adjusted in light of the merger.
 No change to original net flows target 124 Standard Life Aberdeen 2017
Shares acquired/ (sold) during the period 1 January 2017or appointment if later to earlier of 31 December 2017or date ceased to be a
Total value2 of shares and unrestricted awards at 31 December 2017 as a
David Nish, our former Chief Executive, was required to hold 703,651 shares until 31 March 2017 and met this requirement. Paul Matthews is required to hold 157,934 shares until 1 March 2018. Colin Clark will be required to hold 100,921 shares until 31 December 2018. Luke Savage will be required to hold 15,940 shares until 28 February 2019.
This table shows, in relation to each executive Director, the total number of share options with and without performance conditions held at 31 December 2017: Unvested options with performance measures1
Restricted Stock Plan that were exercised during the year. It includes shares awarded in lieu of dividend equivalents.
The closing market price of Standard Life Aberdeen plc shares at 31 December 2017 was 436.6 pence and the range for the year was 345p to 447.1p.
Executive Directors’ external appointments Subject to the Board’s approval, executive Directors are able to accept a limited number of external appointments to the boards of other organisations and can retain any fees paid for these services. Significant executive Director appointments held during the year are shown below: Executive Director Role and Organisation 2017 Fees
Non-executive Director Sky plc £115,408 Chairman of the Practioner Panel – Prudential Regulation Authority £nil
Luke Savage After stepping down from the Board with effect from 14 August 2017 Luke Savage remains employed to provide support to Bill Rattray through to the publication of the 2017 full-year results and will leave the Company on 28 February 2018. He will continue to be eligible for his salary and benefits until his last working day of 28 February 2018 and will accrue a short-term bonus until this date including any deferred element as per the plan rules. Details of Luke Savage’s bonus for 2017, for the period in which he served as an executive Director, are set out on page 114.
In respect of outstanding incentive awards Luke Savage will be treated as a good leaver. The following treatment of outstanding options therefore applies:  2016 Deferred share award (deferred element of the 2015 short-term bonus) will vest on termination of employment. The number of shares that will vest is 88,010.
 2017 Deferred award (deferred element of the 2016 short-term bonus) will vest on 31 March 2020. The number of shares that will vest (excluding future dividend-equivalents) is 83,574.
 2014 Executive LTIP award: this award is not pro-rated as employment continued throughout the performance period  2015 Executive LTIP award: this award is not pro-rated as employment continued throughout the performance period. The number of shares that will vest on 27 March 2020 (adjusted for the performance outcome but excluding future dividend equivalents) is 125,871.  2016 Executive LTIP award: pro-rated to cessation of employment. The maximum number of shares that will vest on 24 March 2021 subject to performance (excluding future dividend equivalents) is 168,582.  2017 Executive LTIP award: pro-rated to cessation of employment. The maximum number of shares that will vest on 27 March 2022, subject to performance (excluding future dividend equivalents) is 87,073.
Paul Matthews After stepping down from the Board with effect from 1 March 2017 Paul Matthews continued to be eligible for his salary and benefits from 1 March 2017 until his retirement on 31 August 2017 and accrued bonus until this date in respect of services he continued to provide to the Group. Details of Paul Matthews’s bonus for 2017, for the period in which he served as an executive Director, are set out on page 114.
In respect of outstanding incentive awards Paul Matthews was treated as a good leaver. The following treatment of outstanding options therefore applies:  2016 Deferred share award (the deferred element of the 2015 short-term bonus) vested on 31 August 2017. The number of shares vested was 61,695.
 2017 Deferred award (the deferred element of the 2016 short-term bonus) will vest on 31 March 2020. The number of shares that will vest (excluding future dividend-equivalents) is 85,613.
 2014 Executive LTIP award: this award is not pro-rated as employment continued throughout the performance period  2015 Executive LTIP award: pro-rated to cessation of employment. The number of shares that will vest on 24 March 2020, (excluding additional dividend-equivalents) is 107,384.  2016 Executive LTIP award: pro-rated to cessation of employment. The maximum number of shares that will vest on 24 March 2021, subject to performance (but excluding additional dividend-equivalents) is 127,799.
G o ver n an c e 127Standard Life Aberdeen 2017
The following table shows the single figure of total remuneration for the Directors in the role of Chief Executive Officer for the same nine financial years as shown in the graph above. Also shown are the annual bonus awards and LTIP awards which vested based on performance in those years.
1 The annual bonus award rates against maximum opportunity are in respect of the Group annual bonus plan in respect of Keith Skeoch and the Aberdeen Asset Management award in respect of the period 14 August 2017 to 31 December 2017 for Martin Gilbert.
Relative importance of spend on pay The following table compares what the Group spent on employee remuneration to what is paid in the form of dividends to the Company’s shareholders. Also shown is the Group’s adjusted profit before tax which is provided for context as it is one of our key performance measures: Remuneration payable to all Group employees (£m)1 596 781 31.0% Dividends paid in respect of financial year (£m) 390 627 60.8% Adjusted profit before tax (£m)1 718 854 18.9% 1 Shown on a reported basis therefore remuneration includes remuneration paid to Aberdeen employees from 14 August 2017 and adjusted profit includes Aberdeen from 14
UK-based employees of Standard Life Group1 4.8% 2.38% 0% 1 In providing a comparator to the year ended 31 December 2016 the employees considered as the appropriate consistent comparator group are those in Standard Life Group.
Total remuneration for the year ended 31 December £000s 2016 – – –
The non-executive Directors, including the Chairman, have letters of appointment that set out their duties and responsibilities. The key terms are set out on page 113.
Gerhard Fusenig 14 August 2017 Melanie Gee 1 November 2015 AGM 2016
Akira Suzuki 14 August 2017 1 All Directors were appointed to the Board of Standard Life Aberdeen plc on 14 August 2017 for election by shareholders at the 2018 AGM and all non-executive Directors including the Chairman received new appointment letters at that time. These confimed that continuation of the appointment is subject to proposal for election of the individual at the 2018 AGM and is contingent thereafter on re-election at subsequent AGMs.
Non-executive Directors’ interests in shares (audited) The following table shows the total number of Standard Life Aberdeen plc shares held by each of the non-executive Directors and their connected persons: Total number of shares owned at 1 January 2017 or date of appointment if later
Total number of shares owned at 31 December 2017 or date of cessation if earlier
Sir Gerry Grimstone 206,626 – 206,626 – Simon Troughton 52,990 – 52,990 – Julie Chakraverty 2,302 – 2,302 – John Devine 1,321 – 1,321 – Gerhard Fusenig 26,495 – 26,495 Melanie Gee 20,000 – 20,000 –
Lynne Peacock 12,554 – 12,554 – Martin Pike 32,727 – 32,727 – Jutta af Rosenborg – – – – Akira Suzuki – – – –
Implementation of policy for non-executive Directors in 2018 The following table sets out non-executive Director fees to be paid in 2018. No changes have been made to fee levels, except for the Senior Independent Director.
2 The Chairman’s and Deputy Chairman’s fees are inclusive of the non-executive Directors’ core fee and no additional fees are paid to the Chairman or Deputy Chairman where they chair, or are members of, other committees/boards. In 2018 the Chairman will also receive £20,000 (2017: £15,000) as an allowance towards his business related accommodation costs in Edinburgh.
3 For non-executive Directors, individual fees are constructed by taking a base fee and adding extra fees for being the senior independent Director or, the chairman of, or member of, committees and subsidiaries’ boards where a greater responsibility and time commitment is required.
5.5 The Remuneration Committee Membership During 2017 the Remuneration Committee was made up of independent non-executive Directors: Melanie Gee (Chairman from 17 May 2016 until 13 August 2017), Richard Mully (Chairman from 14 August 2017), Martin Pike (until 13 August 2017), John Devine and from 14 August 2017 Kevin Parry, Gerhard Fusenig, and Jutta af Rosenberg.
Richard Mully (Chairman) 3/3 John Devine 13/13 Gerhard Fusenig 3/3 Kevin Parry 3/3 Jutta af Rosenborg 3/3
The role of the Committee To consider and make recommendations to the Board in respect of the total remuneration policy across the Group, including:  Rewards for the executive Directors, senior employees and the Chairman  The design and targets for any employee share plan  The design and targets for annual cash bonus plans throughout the Group  Changes to employee benefit structures (including pensions) throughout the Group
Committee effectiveness The Committee reviews its remit and effectiveness annually. The 2017 review was carried out via an internal self-assessment questionnaire. The review concluded that the Committee remained effective and fulfilled its remit.
During the year, the Committee also took advice from Deloitte LLP (a member of the Remuneration Consultants Group).
The Committee approached a number of remuneration consultants in September 2017 to tender for appointment. Following the review Deloitte LLP were re-appointed as external advisers to the Committee from 19 September 2017.
Fees paid to Deloitte LLP during 2017 for professional advice to the Committee were £244,450. Additional fees of £179,100 were paid to Deloitte LLP in respect of professional advice in relation to adjustments to the 2016 Standard Life Group annual bonus scorecard rating and the 2014 Executive LTIP vesting level, in consideration of the outcome of the Financial Conduct Authority’s thematic review into the sale of non-advised annuities, and remuneration related advice in relation to the merger.
The Committee’s work in 2017 An indicative breakdown as to how the Committee spent its time is shown below:  2016 Directors’ Remuneration Report  2016 bonus payments and 2014 LTIP outcomes  2017 annual bonus and LTIP targets  Paul Matthews’ retirement and Barry O’Dwyer’s appointment  Review of remuneration awards and proposals for senior management and material risk takers  Review of implications of the merger on remuneration  Employee retention plans in relation to the merger (see Section 5.6)
 Directors’ remuneration policy – design for 2018, including investor engagement  Regulatory update  2017 Directors' remuneration report
The remuneration policy was subject to a vote at the 2017 General Meeting held on 19 June 2017 and the following table sets out the outcome of the vote.
(% of total votes) 94.55% 5.45% (No. of votes cast) 715,476,157 41,212,837 123,003,556
The Directors’ remuneration report was subject to a vote at the 2017 AGM on Tuesday 16 May 2017 and the following table sets out the outcome.
Promoting all-employee share ownership We believe that share ownership by our employees helps them to understand the interests of the Company’s shareholders. We promote employee share ownership with a range of initiatives:  The Standard Life (Employee) Share Plan which allows eligible employees to buy Standard Life Aberdeen plc shares directly from their earnings. A similar tax-approved plan is used in Ireland. At 31 December 2017, 3,912 employees in the UK were making a monthly average contribution of £59 and 189 employees in Ireland were making an average contribution of €55. Even though the plan cannot be structured on a tax-favourable basis in Germany and Austria, 102 employees in these countries participated in December 2017 with an average contribution of €42. On 31 December 2017, 4,814 of our employees were Standard Life Aberdeen plc shareholders through participation in the Standard Life (Employee) Share Plan.
 The Sharesave Plan in Ireland launched in August 2012, with invitations made annually thereafter. As at 31 December 2017, 146 employees were saving towards one or more of the Sharesave Ireland offers.
Variable pay awards for the year under review were based on the following key performance indicators, weightings and targets.
The performance outcomes and bonus result for each KPI (as a percentage of maximum bonus) are also shown.
Retention Awards As previously disclosed in the merger prospectus retention awards were awarded to certain employees (excluding executive Directors). In total, 249 participants were granted awards in the form of nil-cost options over shares, phantom options or cash conditional awards over notional shares, or deferred cash awards. Awards are subject to a combination of personal and company performance conditions. Awards will normally only vest and awards will normally only be released on the earlier of (i) announcement of the successful completion of the integration of Standard Life Group and Aberdeen following the merger and (ii) the second anniversary of the date of the merger. For some participants, awards will vest on a later date due to regulatory requirements. The value of awards at the time of grant was £37.8m.
6. Statement of Directors’ responsibilities in respect of the Annual report and the financial statements
The Directors are responsible for preparing the Annual report and accounts and the Group and parent Company financial statements in accordance with applicable law and regulations.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge:  The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole
G o ver n an c e 135Standard Life Aberdeen 2017
Group’s and of the parent Company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended;  The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU);  The parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
 The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We were appointed as auditor by the shareholders on 16 May 2017. The period of total uninterrupted engagement is for the one financial year ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Materiality: group financial statements as a whole £38m 4.5% of normalised profit before tax
The risk Our response Acquisition of Aberdeen Asset Management – Goodwill and Intangible assets: (Goodwill £3,209 million) (Intangible assets £865 million)
Refer to page 84 (Audit Committee Report), page 156 (accounting policy) and page 159 (financial disclosures).
Subjective estimate: On acquisition, separate intangible assets must be identified and valued. Both the identification of each category of intangible asset and the valuation of these assets are highly sensitive to underlying assumptions of the duration and level of future cash flows and discount rates. The Directors have exercised judgement in identifying and estimating the fair value of the separately identifiable intangibles comprising customer relationships, brand and technology as part of the acquisition.
The fair value of these intangible assets recognised in the business combination accounting is £865 million. There would be a corresponding impact on the amount of goodwill recognised of £3,209 million if alternative assumptions had been adopted; in future periods goodwill will not be amortised, but intangible assets will be.
Our procedures included:  Our sector experience: We considered the rationale for the acquisition to challenge the identification of intangible assets. We inspected publically available documents including the prospectus, inspected board minutes and discussed with Directors.
 Our business combination expertise: Using our own valuation specialists we challenged the Group’s identification and valuation analysis prepared by management and third party valuations experts who assisted management, which was the basis for the determination of the fair value of the intangible assets used in the business combination accounting;  Assessing Transparency: We assessed the Group’s disclosures regarding the acquisition and estimation assumptions and whether they have been disclosed appropriately.
Refer to page 84 (Audit Committee Report), page 196 (accounting policy) and page 199 (financial disclosures).
Subjective estimate: The Group has significant non-participating insurance contract liabilities representing 12 per cent of the Group’s total liabilities. The liabilities are required to be measured at the discounted value of uncertain future settlement amounts, which involves significant judgment as to key operating and economic assumptions.
The key operating assumptions are mortality (base) and longevity (mortality improvement). The key economic assumption in setting the discount rate is the allowance for credit risk.
The risk is that inappropriate assumptions are utilised in determining the valuation of the insurance contract liabilities.
 Control design and operation: We tested the design, implementation and operating effectiveness of key controls over operating and economic assumption setting.
 Tests of details and our sector experience: We assessed the mortality assumption by reference to company and industry data on historical mortality experience. We assessed the longevity assumptions by reference to evaluation of the Group’s internal cause-ofdeath model and industry based expectations of future longevity. We assessed the credit risk assumption by reference to the Group’s investment portfolio and industry practice.
We found the valuation of insurance contract liabilities to be acceptable.
Refer to page 84 (Audit Committee Report), page 212 (accounting policy) and page 212 (financial disclosures).
The Group is required to use judgment in the selection of key assumptions which are used to calculate the provision. The key assumptions are the number of customers entitled to redress and the average annual amount of redress payable to those customers.
(Customer relationships and investment management contracts £774 million; 2016: £154 million)
Internally generated software assets not yet available for use comprise £53m of the intangible asset balance. The risk is that the recoverable amount associated with the assets not yet available for use is less than the capitalised amount.
 Sensitivity analysis: We performed our own sensitivity analysis which included assessing the effect of reasonably possible reductions in growth rates and forecast cash flows to evaluate the impact on current headroom.
Subjective valuation: Within the Group’s investment portfolio, the valuation of certain assets requires significant judgement as a result of quoted prices being unavailable and limited liquidity in these markets. The asset categories where significant audit effort and judgement was focussed were investment property, commercial mortgages, private equity and debt securities. These holdings together represented 7 per cent of the total investment assets.
The valuation of commercial mortgages require judgement in determining the discount rate over future cash flows particularly in relation to the credit risk of borrowers.
 Our valuation expertise: We used our own property valuation specialists to assess the key inputs and assumptions used by external valuers by reference to our own market and industry benchmarks. Key assumptions were forecast rent, yield and vacant periods for property.
 Methodology choice: We assessed the pricing model methodologies used with reference to the International Private Equity and Venture Capital Valuation guidelines for funds and matrix pricing and discounted cash flow methodologies for unlisted debt.
The key operating assumptions are base mortality and mortality improvement. The key economic assumptions are the discount rate and inflation. The risk is that inappropriate assumptions are used in determining the present value of the funded obligation.
 Our actuarial experience: We used our own actuarial specialists to perform procedures in this area;  Test of detail and our sector experience: We considered the appropriateness of the base mortality assumption by reference to scheme and industry data on historical mortality experience. We considered the appropriateness of the mortality improvement assumptions by reference to industry based expectations of future mortality improvements. We considered the appropriateness of the discount rate and inflation assumptions by reference to industry practice
 Assessing transparency: We considered whether the Group’s disclosures in relation to the assumptions used in the calculation of present value of the funded obligation appropriately represent the sensitivities of the obligation to the use of alternative assumptions.
We found the group’s assessment of the recoverability of the investment in subsidiaries to be acceptable.
7. Independent auditors’ report to the members of Standard Life Aberdeen plc continued 3. Our application of materiality and an overview of the scope of our audit Materiality for the group financial statements as a whole was set at £38m, determined with reference to a benchmark of group profit before tax, normalised to exclude the policyholder tax gross up (as explained in Note 10 to the financial statements), to exclude the impact of the increase in the provision for annuity sales practices, to exclude impairment, to exclude restructuring costs and to exclude the profit on disposal of associates as disclosed in note 38, note 14, note 9, and note 24 respectively. Materiality represents 4.5% of normalised profit before tax.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £2m, in addition to other identified misstatements that warranted reporting on qualitative grounds.
The Group team visited 18 of the component locations (excluding consolidated funds) to assess the audit risk and strategy. Video and telephone conference meetings were also held with these component auditors and certain others that were not physically visited. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the group team was then performed by the component auditor.
Strategic report and directors’ report Based solely on our work on the other information:  We have not identified material misstatements in the strategic report and the directors’ report;  In our opinion the information given in those reports for the financial year is consistent with the financial statements; and
Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:  The directors’ confirmation within the viability statement page 38 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;  The Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
 The directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect.
Corporate governance disclosures We are required to report to you if:  We have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion:  Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
 Certain disclosures of directors’ remuneration specified by law are not made; or
 We have not received all the information and explanations we require for our audit.
We have nothing to report in these respects 7. Respective responsibilities Directors’ responsibilities
7. Independent auditors’ report to the members of Standard Life Aberdeen plc continued or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The risk of not detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and regulation not just those directly affecting the financial statements
We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statements items.
Insurance and participating investment contract premium income 31 2,143 2,092 Profit on disposal of interests in associates 1 319 – Other income 58 75 Total revenue 16,980 18,729
Restructuring and corporate transaction expenses 9 176 62 Other administrative expenses 6 1,982 1,494
Total administrative expenses 2,158 1,556 Provision for annuity sales practices 38 100 175 Change in liability for third party interest in consolidated funds 42 1,124 296 Finance costs 88 82 Total expenses 16,061 18,003
Attributable to: Equity holders of Standard Life Aberdeen plc 699 368 Non-controlling interests
Earnings per share Basic (pence per share) 11 29.8 18.7 Diluted (pence per share) 11 29.6 18.6 1 The presentation of the consolidated income statement has changed from the prior year. Detail on breakdown of insurance related income and expenses which was previously shown on the face of the income statement is now included in Note 31.
Items that may be reclassified subsequently to profit or loss: Fair value losses on cash flow hedges 29 (33) – Fair value gains on available-for-sale financial assets 29 – 17 Exchange differences on translating foreign operations 29 (32) 173 Change in unallocated divisible surplus 29 12 (62) Share of other comprehensive income/(expense) of associates and joint ventures 28 4 (10) Items transferred to the consolidated income statement
Realised losses on cash flow hedges 21 13 – Realised foreign exchange gains 1 (2) –
Equity holder tax effect of items that may be reclassified subsequently to profit or loss 10 3 (3) Total items that may be reclassified subsequently to profit or loss (35) 115 Other comprehensive income for the year (62) 279 Total comprehensive income for the year 670 698
The Notes on pages 154 to 264 are an integral part of these consolidated financial statements 148 Standard Life Aberdeen 2017
Adjusted profit/(loss) before tax Aberdeen Standard Investments2 492 386 Pensions and Savings 381 362 India and China life 59 36
Adjusted profit before tax 2 854 718 Adjusted for the following items
2 Previously Standard Life Investments. Refer Note 2 for further details. 3 On 18 December 2017, perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details. 4 Other adjusting items for the year ended 31 December 2017 includes £24m (2016: £nil) in relation to the impairment of a disposal group classified as held for sale. Refer Note 24 for further details. 5 Profit before tax expense attributable to equity holders consists of profit before tax of £964m (2016: £789m) less tax expense attributable to policyholders’ returns of £166m
The Group’s key alternative performance measure is adjusted profit before tax. Refer Note 12 for further details.
Assets Intangible assets 14 4,514 572 Deferred acquisition costs 15 612 651 Investments in associates and joint ventures accounted for using the equity method1 16 503 572
Property, plant and equipment 18 146 89 Pension and other post-retirement benefit assets 35 1,099 1,093 Deferred tax assets 10 65 42
Assets held for sale 24 1,038 263 Cash and cash equivalents 19 10,226 7,938 Total assets 198,111 190,495 Equity Share capital 26 364 242 Shares held by trusts 27 (61) (2) Share premium reserve 26 639 634
Deferred tax liabilities 10 367 259 Current tax liabilities 10 166 113 Derivative financial liabilities 21 813 965 Other financial liabilities 33 3,896 3,916
Dividends paid on ordinary shares 13 – – – (469) – (469) – – (469) Coupons paid on perpetual notes – – – – – – – (13) (13) Non-controlling interests acquired through business combination 1 – – – – – – – 501 501 Reclassification of perpetual notes to liability 30 – – – 19 – 19 – (399) (380) Other movements in non-controlling interests in the year – – – – – – (33) – (33) Reserves credit for employee share-based payments 29 – – – – 96 96 – – 96 Transfer to retained earnings for vested employee share-based payments 28, 29 – – – 86 (54) 32 – – 32 Shares acquired by employee trusts – (61) – – – (61) – – (61) Shares distributed by employee and other trusts and related dividend equivalents 28 – 5 – (8) – (3) – – (3) Sale of shares held by trusts – – – 4 – 4 – – 4 Aggregate tax effect of items recognised directly in equity 10 – – – – 1 1 – 2 3
Profit for the year – – – 368 – 368 51 419 Other comprehensive income for the year – – – 154 125 279 – 279 Total comprehensive income for the year 28, 29 – – – 522 125 647 51 698
Dividends paid on ordinary shares 13 – – – (370) – (370) – (370) Reserves credit for employee share-based payments 29 – – – – 30 30 – 30 Transfer to retained earnings for vested employee share-based payments 28, 29 – – – 23 (23) – – – Shares acquired by employee trusts – (3) – – – (3) – (3) Shares distributed by employee and other trusts 28 – 7 – (7) – – – – Expiry of unclaimed asset trust claim period 28 – – – 41 – 41 – 41 Cancellation of capital redemption reserve 29 – – – 488 (488) – – – Other movements in non-controlling interests in the period – – – – – – (101) (101) Aggregate tax effect of items recognised directly in equity 10 – – – (4) (3) (7) – (7)
Cash flows from operating activities Profit before tax 964 789 Change in operating assets 42 1,351 (12,995) Change in operating liabilities 42 (84) 12,926 Adjustment for non-cash movements in investment income 40 174 Change in unallocated divisible surplus 31 140 53 Other non-cash and non-operating items 42 3 122 Taxation paid (220) (333) Net cash flows from operating activities 2,194 736
Interpretation or amendment Effective Date Detail Amendments to IAS 7 Statement of Cash Flows : Disclosure Initiative 1 January 2017 The amendment requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash movements.
The Group’s revenue generated from the following contracts is exempt from this standard:  Lease contracts within the scope of IAS 17 Leases  Insurance contracts within scope of IFRS 4 Insurance Contracts  Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments, IFRS 10
IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019) IFRS 16 replaces IAS 17 Leases and introduces a new single accounting approach for lessees for all leases (with limited exceptions). As a result there is no longer a distinction between operating leases and finance leases, and lessees will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The accounting for leases by lessors remains largely unchanged.
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2021 for the Group) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows two measurement categories for financial assets in the statement of financial position: amortised cost and fair value. All equity instruments and derivative instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows represent principal and interest, otherwise it is classified at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL) depending on the business model it is held within or whether the option to adopt FVTPL has been applied. Changes in value of all equity instruments and derivative instruments are recognised in profit or loss unless an OCI presentation election is made at initial recognition for an equity instrument or a derivative instrument is designated as a hedging instrument in a cash flow hedge. IFRS 9 also introduces a new impairment model, an expected credit loss model which will replace the current incurred loss model in IAS 39. An impairment loss will now be recognised prior to a loss event occurring. Accounting for financial liabilities remains the same as under IAS 39 except that for financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability’s credit risk are recognised in OCI.
The impact of the implementation of IFRS 9 will be dependent on the implementation of IFRS 17.
IFRS 17 will impact the reporting of results arising from insurance contracts and contracts with discretionary participating features issued by entities within the Group’s Pensions and Savings, and India and China life segments. The Group has commenced a project which will cover both the implementation of IFRS 17 and IFRS 9. IFRS 17 has not yet been endorsed by the EU.
(a)(iii) Critical accounting estimates and judgements in applying accounting policies The preparation of financial statements requires management to exercise judgements in applying accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses arising during the year. Judgements and sources of estimation uncertainty are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The areas where judgements have the most significant effect on the amounts recognised in the consolidated financial statements are as follows: Financial statement area Critical judgements in applying accounting policies Related note Classification of insurance, reinsurance and investment contracts
Assessment of the significance of insurance risk transferred, and treatment of contracts which have insurance, non-participating investment and participating investment elements
Defined benefit pension plans Assessment of whether the Group has an unconditional right to a refund of the surplus Treatment of tax relating to the surplus
During the year to 31 December 2017 we have assessed the identification and valuation of intangible assets arising from business combinations and determination of amounts to be recognised as internally developed software as critical judgements in applying accounting policies. In the year to 31 December 2016 we disclosed these areas as critical accounting estimates however given that they do not result in a significant risk of material adjustment to the carrying value in the next financial year we have considered that they are more akin to an area of judgement. There are no other changes to critical judgements from the prior year.
Determination of the fair value of private equity investments and debt securities categorised as level 3 in the fair value hierarchy
In addition to the change to intangible assets discussed above the following changes have been made to critical accounting estimates and assumptions:  We have improved the disclosure of the estimate in relation to participating contract liabilities, non-participating insurance contract liabilities and reinsurance assets to inform users that the critical area of estimation uncertainty is in relation to annuity liabilities
The statements of financial position of Group entities that have a different functional currency than the Group’s presentation currency are translated into the presentation currency at the year end exchange rate and their income statements and cash flows are translated at average exchange rates for the year. All resulting exchange differences arising are recognised in other comprehensive income and the foreign currency translation reserve in equity.
Subsidiaries are all entities (including investment vehicles) over which the Group has control. Control arises when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. For operating entities this generally accompanies a shareholding of 50% or more in the entity. For investment vehicles, including structured entities, the control assessment also considers the removal rights of other investors and whether the Group acts as principal or agent in assessing the link between power and variable returns. In determining whether the Group acts as principal, and therefore controls the entity, the removal rights of other investors and the magnitude of the variability associated with the returns are also taken into account. As a result, the Group often is considered to control investment vehicles in which its shareholding is less than 50%.
Notes to the Group financial statements 1. Group structure (a) Composition The following diagram is an extract of the Group structure at 31 December 2017 and gives an overview of the composition of the Group.
(b) Acquisitions (b)(i) Subsidiaries On 6 March 2017, the boards of Standard Life plc and Aberdeen Asset Management PLC (Aberdeen) announced that they had reached agreement on the terms of a recommended merger of Standard Life plc and Aberdeen, through the acquisition by Standard Life plc of the entire issued ordinary share capital of Aberdeen, to be effected by means of a court-sanctioned scheme of arrangement between Aberdeen and Aberdeen shareholders under Part 26 of the Companies Act 2006. The merger completed on 14 August 2017, following receipt of all necessary approvals, and Standard Life plc was renamed Standard Life Aberdeen plc. The acquisition of Aberdeen accelerates the Group’s strategy to create a world-class investment company.
Under the terms of the merger, Aberdeen ordinary shareholders received 0.757 of a share in Standard Life Aberdeen plc on the completion date satisfied through newly issued shares. The merger is accounted for as an acquisition of Aberdeen by Standard Life plc. Aberdeen is reported in the Aberdeen Standard Investments operating segment.
Aberdeen Asset Management PLC is the parent company of the Aberdeen Asset Management Group which is a full-service asset management group focused on meeting the worldwide investment needs of its clients, including institutions, private investors and the advisors who serve them. Aberdeen manages investments across the full spectrum of asset classes and geographic markets, including equities, fixed income, property and alternative assets.
Life Aberdeen plc shares. The adjustment to consideration reflects the fair value of the pre-acquisition service element of the awards. Refer Note 45 for further details. 2 On 18 December 2017 perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details. 3 Non-participating investment contract liabilities includes £254m due to other Group entities which eliminates on consolidation.
The fair value of the equity consideration has been calculated by reference to the number of shares issued and the share price at the completion date. The number of shares issued has been adjusted to exclude the shares issued to the Aberdeen Asset Management Employee Benefit Trust 2003 which was included in the acquisition.
The fair value of perpetual cumulative capital notes is based on the listed price. The fair value of preference shares has been calculated using a discounted cash flow model, the significant input for which is comparable transactions used to estimate an appropriate discount rate.
The amount of revenue and profit contributed to the Group’s consolidated income statement for the year ended 31 December 2017 from the acquired business was £492m and £96m respectively. The profit of £96m is after restructuring costs of the acquired business since acquisition and excludes amortisation and impairment of intangible assets acquired through business combinations. If the acquisition had occurred on 1 January 2017 the Group’s total revenue and profit for the year would have increased by £1,360m and £248m to £18,340m and £980m respectively.
The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed. IFRS 8 Operating Segments requires that the information presented in the financial statements is based on information provided to the ‘Chief Operating Decision Maker’. The Chief Operating Decision Maker for the Group is the executive committee.
(a) Basis of segmentation The Group’s reportable segments are as follows: Aberdeen Standard Investments Following the merger with Aberdeen, Standard Life Investments and Aberdeen Asset Management combined under the Aberdeen Standard Investments brand. The combined business is managed and reported as one operating segment. Aberdeen Standard Investments provides a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. Investment management services are also provided by Aberdeen Standard Investments to the Group’s other reportable segments. This segment includes the Group’s share of the results of HDFC Asset Management Company Limited.
Pensions and Savings Pensions and Savings provide a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
Share of associates’ and joint ventures’ profit before tax3 41 – 58 – – 99 Adjusted profit/(loss) before tax 492 381 59 (78) – 854 Tax on adjusted profit (86) (29) – 7 – (108) Share of associates’ and joint ventures' tax expense 10 (29) – (12) – – (41) Adjusted profit/(loss) after tax 377 352 47 (71) – 705 Adjusted for the following items
Short-term fluctuations in investment return and economic assumption changes 12 – 67 – – – 67 Restructuring and corporate transaction expenses 9 (58) (38) – (77) – (173) Amortisation and impairment of intangible assets acquired in business combinations4 (117) (8) (13) – – (138) Provision for annuity sales practices 38 – (100) – – – (100) Coupons payable on perpetual notes classified as equity5 10 – – – – 10 Profit on disposal of interests in associates 1 14 – 305 – – 319
Tax on adjusting items 25 (2) – 19 – 42 Profit attributable to non-controlling interests (preference shares and perpetual notes) (8) – – – – (8) Profit/(loss) for the year attributable to equity holders of Standard Life Aberdeen plc 243 270 315 (129) – 699 Profit attributable to non-controlling interests
5 On 18 December 2017, perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument. Refer Note 30 for further details.
China life2 Other3 restated1 Eliminations Total restated1 31 December 2016 Notes £m £m £m £m £m £m
Tax on adjusting items 10 46 – 2 – 58 Profit/(loss) for the year attributable to equity holders of Standard Life Aberdeen plc 259 130 31 (52) – 368 Profit attributable to non-controlling interests
2 The India and China segment has been renamed as India and China life. 3 Other primarily includes the corporate centre and related activities. 4 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life
(b)(ii) Total income and expenses The following table provides a reconciliation of total adjusted operating income and total adjusted operating expenses, as presented in the analysis of Group adjusted profit by segment, to total revenue and total expenses respectively, as presented in the IFRS consolidated income statement: Income Expenses Income restated Expenses restated £m £m £m £m
Total adjusted operating income and adjusted operating expenses as presented in the analysis of Group adjusted profit by segment 2,276 (1,527) 1,785 (1,156) Insurance and participating investment contract claims and change in liabilities 3,628 (3,628) 7,126 (7,126) Change in non-participating investment contract liabilities 8,963 (8,963) 8,768 (8,768) Change in liability for third party interest in consolidated funds 1,124 (1,124) 296 (296)
(c) Total revenue by geographical location Total revenue as presented in the consolidated income statement split by geographical location is as follows: £m £m
The revenue of the operating businesses is allocated based on where the revenue is earned. The return on investment funds is allocated based on where funds are registered.
8. Group financial statements continued 3. Business written in the Group’s insurance entities (a) How the business is held in the Group’s insurance entities The Group’s insurance and investment contracts are held by the regulated entities within each reportable segment. Each regulated entity operates various funds and how the business is held within these funds is outlined below by reportable segment.
Standard Life Assurance Limited The main entity in the Pensions and Savings reportable segment that issues insurance and investment contracts is Standard Life Assurance Limited (SLAL). SLAL operates a fund structure which was established on the demutualisation of The Standard Life Assurance Company on 10 July 2006, under which its recognised assets and liabilities are allocated to one of the following funds:  Shareholder Fund (SHF)  Proprietary Business Fund (PBF) – includes UK, Germany and Ireland branches  Heritage With Profits Fund (HWPF) – includes UK, Germany and Ireland branches  German With Profits Fund (GWPF)  German Smoothed Managed With Profits Fund (GSMWPF)  UK Smoothed Managed With Profits Fund (UKSMWPF)
SLAL – Insurance and investment contracts issued before demutualisation The liabilities and associated supporting assets for contracts, both participating and non-participating, issued prior to demutualisation are mostly held in the HWPF except for (i) the assets and corresponding liabilities for unit linked investment elements of such contracts, and (ii) the supporting assets and associated liabilities for longevity risk and investment risk on certain annuity contracts. The assets and associated liabilities for these two contract components are held in the PBF. Asset management charges arising on unit linked investment elements are transferred from the PBF to the HWPF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit linked investment element or a with profits investment element are held in the HWPF. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element or a with profits investment element are also held in the HWPF.
Under the Scheme of Demutualisation (the Scheme) the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the board of SLAL is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. The Scheme provides that certain defined cash flows (recourse cash flows (RCF)) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the SHF, and thus accrue to the ultimate benefit of equity holders of the Company. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of Germany branch business. Under these mechanisms, profits, on an RCF basis, on non-participating business excluding investment spread profits on annuities and profits, on an RCF basis or German additional expenses basis, on unitised with profits contracts, are transferred to the SHF. All investment return on HWPF investments is retained in the HWPF for the ultimate benefit of participating policyholders. Under the Scheme, transfers to the SHF are subject to certain constraints in order to protect policyholders.
For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2017 is £458m (2016: £432m) and this represents approximately 10% (2016: 10%) of the total liability for UK annuity in payment contracts held in the PBF. If the market moves in line with the adverse market conditions as shown in the market risk sensitivity analysis, the impact on shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.
Germany unit linked deferred annuity contracts (fee business) This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds. These contracts provide a return of premiums guarantee on death and the option to take up an annuity on guaranteed terms. They are classified as non-participating insurance contracts. These contracts do not contain a with profits investment option.
UK and Ireland unitised with profits life contracts (fee business via RCF) Unitised with profits life business comprises single or regular premium endowment and whole life contracts held in the HWPF under which a percentage of the premium is allocated to units on a participating basis. The death benefit under regular premium contracts is the greater of the bid value of units allocated and sum assured under the contract. Some contracts also contain critical illness cover providing for payment of a critical illness sum assured on diagnosis of certain defined serious illnesses. These contracts, principally Homeplan, With Profits Bonds and Versatile Investment Plans, are classified as participating insurance contracts.
 For bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits
Germany unitised with profits contracts (fee business via German additional expenses basis) Unitised with profits Germany contracts held in the HWPF mainly consist of endowment assurances and deferred annuities, under which a percentage of the premium is allocated to units on a participating basis. The death benefit under endowment assurances is the greater of the sum assured on death or 105% of the current surrender value. The death benefit under deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the fund value and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.
UK and Ireland unit linked pension contracts (fee business via RCF) This class of business comprises single or regular premium contracts under which a percentage of the premium is allocated to units in one or more unit linked funds held in the PBF. Such contracts include hybrid contracts (see Note 31) resulting in the unit linked investment elements being classified as non-participating investment contracts. The major unit linked pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.
UK and Ireland annuity-in-payment contracts (spread/risk business in relation to longevity risk transferred to the PBF otherwise no impact on shareholder profits in absence of burnthrough) This class of business consists of the same type of contracts described in (b)(i) and also includes the With Profit Pension Annuity (WPPA), under which changes to the level of annuity are based on a declared rate of return but reductions in the level of the annuity are limited. These contracts are classified as non-participating insurance contracts, except for the WPPA which is classified as a participating insurance contract.
SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF. In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 39(c) on credit exposure and Note 31(c) for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer. The reinsurance asset recognised in relation to this arrangement is £4,645m (2016: £5,190m).
For those annuities in payment which increase at a predefined rate the total liability at 31 December 2017 is £2,755m (2016: £2,951m) and this represents approximately 33% (2016: 32%) of the total liability for UK annuity in payments contracts held within the HWPF.
UK other non-participating contracts (spread/risk business via RCF) This class of business consists primarily of deferred annuities that provide guaranteed annuity payments from the retirement age associated with the relevant pension plan. The payments depend on the survival of a life or lives with or without a guarantee period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in UK RPI. These contracts are classified as nonparticipating insurance contracts.
(b)(iii) India and China life – Insurance and investment contracts Unit linked life contracts (fee business) The main contract issued by SL Asia is the Harvest 101 product. This contract was closed to new business in 2015. It is a regular premium savings product with a term ranging from 5 to 25 years. The customer has the option to invest in unit linked funds offered by SL Asia and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the initial account value is paid subject to a USD10,000 cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
(b)(iv) Aberdeen Standard Investments – investment contracts Unit linked contracts and reinsurance contracts (fee business) This class of business consists of unit linked investment contracts to trustees of UK pension schemes and reinsurance contracts to insurance companies covering unit linked pension liabilities. There are no investment guarantees on the contracts. The benefits payable are linked solely to the performance of the internal linked funds. These contracts are classified as non-participating investment contracts.
Gains and losses resulting from changes in both market value and foreign exchange on investments classified at fair value through profit or loss are recognised in the consolidated income statement in the period in which they occur. The gains and losses include investment income received such as interest payments but exclude dividend income. Dividend income is separately recognised in the consolidated income statement when the right to receive payment is established.
Fee income from investment contracts, fund platforms and third party funds under management relates to the provision of investment management and administration services, and is recognised as services are provided and it is almost certain that the fee income will be received. Where fee income is received in advance (front-end fees), this income is deferred and recognised as a deferred income liability until the services have been provided (see Note 36).
8. Group financial statements continued 6. Other administrative expenses 2017 2016 Notes £m £m
Depreciation of property, plant and equipment 18 15 14 Impairment losses (reversed)/recognised on property, plant and equipment 18 (4) 1 Amortisation of intangible assets 14 124 64 Impairment losses on intangible assets 14 77 20 Impairment losses on disposal group classified as held for sale 24 24 –
In addition to interest expense of £6m (2016: £5m), interest expense of £88m (2016: £82m) was incurred in respect of subordinated liabilities and £21m (2016: £31m) in respect of deposits from reinsurers. For the year ended 31 December 2017, total interest expense is £115m (2016: £118m).
7. Staff costs and other employee-related costs 2017 2016 Notes £m £m
The aggregate remuneration payable in respect of employees: Wages and salaries 633 489 Social security costs 75 56 Pension costs 35
Total average number of staff employed 7,768 6,302 1 Previously Standard Life Investments. Refer Note 2 for further details. Includes staff employed by Aberdeen from the acquisition date to 31 December 2017. 2 India and China has been renamed as India and China life. 3 Includes staff in group corporate centre and group information technology.
Information in respect of Directors’ remuneration is provided in the Directors’ remuneration report on pages 94 to 134.
Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated financial statements 0.9 0.3 Fees payable to the Company’s auditors for other services
Total audit and audit related assurance fees 7.6 4.9 Other assurance services 0.3 0.5 Tax compliance services – 0.4 Tax advisory services – 0.2 Other non-audit fee services 0.1 0.3 Total non-audit fees 0.4 1.4 Total auditors’ remuneration 8.0 6.3
During the year ended 31 December 2017 no audit fees were payable in respect of defined benefit plans to the Group’s principal auditor (2016: £71,000 payable to PwC).
In December 2014, the Group announced that the UK staff defined benefit pension plan would be closed to future accrual. On 16 April 2016, all employees in the closing plan were transferred to the UK defined contribution plan for future service and employer contributions into the defined contribution plan were amended. Following this restructuring of the pension plans, adjusted profit before tax for the year ended 31 December 2016 was increased by £5m so that adjusted profit before tax reflected the expected long-term pension expense for the period and was therefore more indicative of the long-term operating performance of the Group. As a result for year ended 31 December 2016, £5m of pension costs that were included in staff costs in the consolidated income statement, were included in restructuring and corporate transaction expenses in determining adjusted profit before tax.
Adjustment to tax expense in respect of prior years 4 (3) Total current tax 243 333
Deferred tax: Deferred tax (credit)/expense arising from the current year (11) 37 Total deferred tax (11) 37 Total tax expense 232 370
Attributable to policyholders’ investment return 166 302 Attributable to equity holders’ profits 66 68 Total tax expense 232 370
In 2017 unrecognised tax losses from previous years were used to reduce the current tax expense by £3m (2016: £2m). Unrecognised tax losses and timing differences were used to reduce the deferred tax expense by £3m (2016: £7m).
Certain Group entities are party to claims and proceedings to recover tax suffered in respect of overseas income. These claims and proceedings predominantly relate to assets in policyholder funds, primarily SLAL’s HWPF. There is significant uncertainty on the outcome of these claims and they are not expected to materially impact profit for the year attributable to equity holders or total equity. No amounts have been recognised at 31 December 2017 or 31 December 2016 in respect of these claims and proceedings.
Policyholder tax (net of tax at UK standard rate) 134 241 Permanent differences (49) 2 Tax effect of accounting for non-controlling interests (5) (10) Tax effect of accounting for share of profit from associates and joint ventures (8) (13) Different tax rates (18) (5) Adjustment to current tax expense in respect of prior years 4 (3) Recognition of previously unrecognised tax credit (6) (9) Deferred tax not recognised 6 – Adjustment to deferred tax expense in respect of prior years (35) (2) Write down of deferred tax asset 25 11 Other (2) – Total tax expense for the year 232 370
The standard UK corporation tax rate for the accounting period is 19.25%. The UK corporation tax rate was reduced to 19% from 1 April 2017 and will reduce to 17% from 1 April 2020. These changes have been taken into account in the calculation of the UK deferred tax balance at 31 December 2017.
 Different tax rates will vary according to the level of profit subject to tax at rates different from UK standard rate (e.g. overseas profit and profit arising in consolidated investment funds)
(c) Tax relating to items taken directly to equity 2017 2016
Deferred tax assets comprise: Actuarial liabilities 5 – Losses carried forward 11 12 Depreciable assets 12 42 Deferred income 8 12 Employee benefits 37 26 Provisions and other temporary timing differences 2 14 Insurance related items 5 5 Other 4 – Gross deferred tax assets 84 111 Less: Offset against deferred tax liabilities (19) (69) Deferred tax assets 65 42 Deferred tax liabilities comprise: Insurance related items 4 5 Unrealised gains on investments 196 187 Deferred acquisition costs 53 104 Temporary timing differences – 1 Deferred tax on intangible assets acquired through business combinations 130 25
A deferred tax asset of £11m (2016: £12m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investments. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against the reversal of deferred tax liabilities and anticipated taxable profits and gains based on business plans. The losses do not have an expiry date.
Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the year excluding shares owned by the employee trusts that have not vested unconditionally to employees.
Basic earnings per share was 29.8p (2016: 18.7p) and diluted earnings per share was 29.6p (2016: 18.6p) for the year ended 31 December 2017. The following table shows details of basic, diluted and adjusted earnings per share.
Weighted average number of ordinary shares outstanding 2,343 1,972 Dilutive effect of share options and awards 17 6 Weighted average number of diluted ordinary shares outstanding 2,360 1,978
8. Group financial statements continued 12. Adjusted profit and adjusting items
Adjusted profit before tax (previously named operating profit before tax) is the Group’s key alternative performance measure. Adjusted profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes in the Group’s insurance entities. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from adjusted profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from adjusted profit and is presented within profit before tax.
Coupons payable on perpetual notes classified as non-controlling interests are included in adjusted profit before tax. For IFRS purposes, these are recognised directly in equity. Prior to these instruments being reclassified as a subordinated liability on 18 December 2017, this gave rise to an adjusting item relating to ‘coupons payable on perpetual notes classified as equity’. Dividends payable on preference shares classified as non-controlling interests are excluded from adjusted profit in line with the treatment of ordinary dividends.
There have been no actual defaults or impairments of assets backing subordinated liabilities during the year ended 31 December 2017 or 31 December 2016. If these were to arise they would be excluded from adjusted profit.
(b) Other In the reconciliation of consolidated adjusted profit before tax to profit for the year the Other adjusting item sub-total includes £24m (2016: £nil) in relation to the impairment of a disposal group classified as held for sale and £nil (2016: £5m) net fair value movements in contingent consideration.
Accumulated amortisation and impairment At 1 January 2016 – – (75) (26) (144) (31) (276) Amortisation charge for the year – – (16) (3) (37) (8) (64)
Goodwill The additions to goodwill and intangible assets acquired through business combinations during the year to 31 December 2017 relate solely to the acquisition of Aberdeen discussed in Note 1. Of the Group’s goodwill of £3,427m (2016: £223m) at 31 December 2017, £3,354m (2016: £145m) is attributed to the Aberdeen Standard Investments group of cash-generating units. The remaining goodwill of £73m (2016: £78m) is attributable to a number of smaller cash-generating units in the Pensions and Savings segment.
In attributing the goodwill relating to the acquisition of Aberdeen to a group of cash-generating units we considered the existing cash-generating units which are expected to benefit from the synergies from the combination. As the benefit is expected to arise across Aberdeen Standard Investments (a combination of Aberdeen and Standard Life Investments now managed and reported together as one operating segment) we judged it was appropriate to allocate goodwill to this group of cash-generating units. This is the lowest level at which goodwill is monitored for internal management purposes.
Lloyds Banking Group Customer relationship with Lloyds Banking Group, including Scottish Widows Group. 4 years 78 26
Customer relationships and investment management contracts intangible assets also include £101m (2016: £114m) acquired through the acquisition of Ignis, comprising life company customer relationships/contracts, institutional client investment management contracts and retail client investment management contracts.
The impairment of internally generated software recognised during the year includes £31m (2016: £nil) relating to discontinuation of part of an IT transformation project in the Pensions and Savings segment.
In relation to customer relationships acquired in business combinations, the most significant judgements relate to assumptions for the openended and, segregated and similar intangible assets acquired through the acquisition of Aberdeen. The following table shows the consequence of downside sensitivities of key assumptions to the carrying amounts at 31 December 2017: Open ended Segregated and similar £m £m 20% increase in net attrition (28) (51) 10% one-off decrease in AUM at 1 January 2018 (20) (36) Operating margin percentage decreased by 2.5 (21) (37) Discount rate percentage increased by 2 (12) (24)
The carrying value of the life company customer relationships/contracts acquired through Ignis at 31 December 2017 is £50m (2016: £58m). Increasing the discount rate by 2% or decreasing the operating margin by 5% would not result in an impairment loss and therefore would have no impact on carrying value. The remaining amortisation period of the life contracts is 7 years.
Non-participating investment contracts and asset management contracts Incremental costs directly attributable to securing rights to receive fees for asset management services either sold with unit linked investment contracts or in other asset management services contracts, are deferred. Where such costs are borne by a with profits fund that was subject to the PRA’s realistic capital regime, deferral is limited to the level of any related deferred income.
8. Group financial statements continued investment as associates. The reason for the change in accounting policy is to make the financial statements more relevant to users as it is more consistent with peers. Following the presentational change discussed in part (c) of this note, this change in accounting policy only impacts the breakdown of ‘Equities and investments in pooled investment vehicles’, between amounts relating to investments in associates at FVTPL and other interests in pooled investment vehicles. This breakdown is disclosed in Note 40 with comparatives restated.
Country of incorporation and registration India India 2017 2016 2017 2016 £m £m £m £m
In July 2017, HDFC Standard Life Insurance Company Limited (HDFC Life) announced that its board of directors had approved proceeding with an initial public offering (IPO), with the Group offering up to 5.43% of the paid-up equity share capital of HDFC Life. Refer Note 1 for further details. Following the IPO, the Group’s interest in HDFC Life has decreased to 29.3% (2016: 35.0%). A gain on sale of £302m has been recognised in the consolidated income statement.
The difference between the carrying value of this associate and the Group’s current share of net assets is due primarily to goodwill and intangible assets of £157m (2016: £210m) arising from additional investments being made at fair value rather than book value. The fair value of the Group’s investment in HDFC Life at 31 December 2017 is £2,636m.
HDFC AMC is unlisted and manages a range of mutual funds and provides portfolio management and advisory services. The Group’s share of post-acquisition movements in reserves of HDFC AMC which have been recognised directly in equity, have not been reflected in the carrying value of the associate. As a result there is a difference between the carrying value of the associate and the Group’s share of net assets.
(b) Investments in joint ventures The following are particulars of the Group’s principal joint venture which is unlisted: Heng An Standard Life Insurance Company
(c) Investments in associates measured at FVTPL The aggregate fair value of associates accounted for at FVTPL at 31 December 2017 is £5,936m (2016: £4,797m restated) none of which are considered individually material to the Group as the investments are primarily held by unit linked funds. These associates have no significant contingent liabilities to which the Group is exposed and there are no restrictions that would prevent the transfer of funds to the Group (2016: none).
Additions – acquisitions2 270 1,624 Additions – subsequent expenditure 143 131 Net fair value gains/(losses) 4 485 (302)
The rental income arising from investment property during the year amounted to £508m (2016: £555m). Direct operating expenses (included within other administrative expenses) arising in respect of such rented property during the year amounted to £70m (2016: £75m).
Estimates and assumptions Determination of the fair value of investment property is a key estimate. The methods and assumptions used to determine fair value of investment property are discussed in Note 41.
Impairment losses recognised 6 (1) – (1) Foreign exchange adjustment – 1 1
Depreciation charge for the year 6 – (15) (15) Disposals and adjustments1 – 5 5 1 For the year ended 31 December 2017 £1m (2016: £4m) of disposals and adjustments relates to equipment with net book value of £nil which is no longer in use.
Derivative financial assets 21 – 3,053 – – 3,053 Equity securities and interests in pooled investment funds 39 99,020 – – – 99,020
Loans and receivables Total 2016 Notes £m £m £m £m £m Investments in associates and joint ventures 16 – – – 3 3
Receivables and other financial assets 22 10 – – 1,245 1,255 Cash and cash equivalents 25 – – – 7,938 7,938
Loans secured by mortgages 41(e) 57 73 Loans and advances to banks with greater than three months to maturity from acquisition date 32 220 Loans secured on policies 2 2
In addition foreign exchange contracts with an aggregate notional principal amount of £8m (2016: £9m) and a net fair value liability position of less than £1m (2016: less than £1m) were designated as hedges of future cash flows arising from revenue receivable in foreign currency. The
(b) Net investment hedges Forward foreign exchange contracts with a notional principal amount of £6m (2016: £6m) and a net fair value asset position of less than £1m (2016: liability of less than £1m) were designated as net investment hedges and gave rise to gains for the year of less than £1m (2016: losses of less than £1m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2017, the losses recognised in the consolidated income statement were less than £1m (2016: less than £1m).
Net cash flow hedge cash inflows/(outflows) 6 21 27 (12) – – 42
Amounts receivable on direct insurance business 71 82 Amounts receivable on reinsurance contracts 2 1 Outstanding sales of investment securities 125 196 Accrued income 388 223 Cancellations of units awaiting settlement 219 317 Collateral pledged in respect of derivative contracts 39 46 30 Property related assets 154 156 Contingent consideration asset 41 6 10
The amount of other assets expected to be recovered after more than 12 months is £7m (2016: £4m).
Assets of operations held for sale Standard Life (Asia) Limited 703 – Investment vehicles 91 27
At 31 December 2017, this disposal group was measured at fair value less cost to sell and comprised the following assets and liabilities: £m
(b) HDFC Asset Management Company Limited (HDFC AMC) On 30 November 2017, HDFC Asset Management Company Limited (HDFC AMC), which is reported within the Aberdeen Standard Investments segment, announced that its board of directors had approved initiation of the process of an initial public offering (IPO) subject to receipt of necessary approvals. As a result a portion of the paid-up equity share capital of HDFC AMC is classified as held for sale at 31 December 2017.
Total cash and cash equivalents for consolidated statement of cash flows 9,715 7,900
Included in cash and cash equivalents and bank overdrafts are £661m (2016: £nil) and £533m (2016: £nil) relating to cash and overdrafts held by Aberdeen, which are held within a cash pooling facility in support of which cross guarantees are provided by certain subsidiary undertakings and interest is paid or received on the net balance. Included in cash and cash equivalents is an offsetting overdraft of £118m (2016: £nil) where the Group has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis.
All ordinary shares in issue in the Company rank pari passu and carry the same voting rights to receive dividends and other distributions declared or paid by the Company.
The number of shares held in trust at 31 December 2017 was as follows: Number of shares held in trust Employee Share Trust 16,031,679 1,287,431 Aberdeen Asset Management Employee Benefit Trust 2003 23,704,305 – Unclaimed Asset Trust 180,766 12,999,801
28. Retained earnings The following table shows movements in retained earnings during the year.
Recognised in comprehensive income Recognised in profit for the year attributable to equity holders 699 368 Recognised in other comprehensive income
Remeasurement (losses)/gains on defined benefit pension plans 35 (18) 162 Share of other comprehensive income/(expense) of associates and joint ventures 4 (10) Aggregate tax items recognised in other comprehensive income (10) 2
The following tables show the movements in other reserves during the year.
Recognised in other comprehensive income Fair value losses on cash flow hedges – (33) – – – – – – (33) Revaluation of owner occupied property 18 1 – – – – – – – 1 Exchange differences on translating foreign operations – – (32) – – – – – (32) With profits funds: Associated UDS movement recognised in other comprehensive income 31 – – 12 – – – – – 12 Items transferred to the consolidated income statement 21 – 13 (2) – – – – – 11 Aggregate tax effect of items recognised in other comprehensive income – 3 – – – – – – 3 Total items recognised in other comprehensive income 1 (17) (22) – – – – – (38) Recognised directly in equity Shares issued in respect of business combinations – – – – 3,877 – – – 3,877 Reserves credit for employee sharebased payments – – – – – 96 – – 96 Transfer to retained earnings for vested employee share-based payments – – – – – (54) – – (54) Aggregate tax effect of items recognised directly in equity – – – – – 1 – – 1 Total items recognised directly within equity – – – – 3,877 43 – – 3,920
A reconciliation of movements in non-controlling interests – ordinary shares during the year is provided in Note 42.
Summarised financial information for SLPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2017 and 2016 which is SLPET’s financial reporting date and is considered indicative of the interest that non-controlling interests of SLPET have in the Group’s activities and cash flows. The financial statements of SLPET for the years ended 30 September 2017 and 2016 have been adjusted for market movements and any other significant events or transactions for the three months to 31 December for the purposes of consolidation into the Group’s consolidated financial statements for the years ended 31 December 2017 and 2016 respectively.
(b)(ii) Perpetual notes The perpetual capital notes bear interest on their principal amount at 7.0% per annum, the discretionary coupons are payable quarterly in arrears on 1 March, 1 June, 1 September and 1 December in each year. Interest accrues on any deferred payments. On 18 December 2017 Aberdeen Asset Management PLC notified the trustees of the perpetual capital notes of its irrevocable intention to redeem the notes on the first call date, 1 March 2018. Following notification to the trustees the perpetual capital notes were reclassified as subordinated liabilities as an obligation to deliver cash was created. The liabilities were recognised at fair value of £380m with fair value movements since acquisition of £17m being transferred to retained earnings. On reclassification £2m in relation to tax allocated to non-controlling interests was also transferred to retained earnings.
8. Group financial statements continued 31. Insurance contracts, investment contracts and reinsurance contracts
(i) Classification of insurance and investment contracts The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts.
Pensions and Savings Germany unitised with profits deferred annuity contracts UK & Ireland unitised with profits life contracts
UK & Ireland annuity-in-payment contracts Certain UK & Ireland unit linked investment bonds UK deferred annuity contracts Germany unit linked deferred annuity contracts
UK & Ireland unit linked pension contracts Certain UK & Ireland unit linked investment bonds
When a policyholder exercises an option within an investment contract to utilise withdrawal proceeds from the investment contract to secure 196 Standard Life Aberdeen 2017
8. Group financial statements continued included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
Unallocated divisible surplus (UDS) The UDS comprises the difference between the assets and all other recognised liabilities in the Group’s with profits funds. This amount is recognised as a liability as it is not considered to be allocated to shareholders due to uncertainty regarding transfers from these funds to equity holders.
(v) Measurement – non-participating insurance contract liabilities Pensions and Savings The liability for annuity in payment contracts is measured by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from yields on the underlying assets.
A presentational change has been made to the face of the consolidated income statement from prior year. Details of the breakdown of insurance related income and expenses which were previously shown on the face of the consolidated income statement are now included in the sections that follow. Our judgement is that this more concise presentation is more relevant to the users of the financial statements.
Gross earned premium 2,190 2,139 Premium ceded to reinsurers (47) (47) Insurance and participating investment contract premium income 2,143 2,092
Interest payable on deposits from reinsurers 21 31 Premium Adjustments 181 478 Expenses under arrangements with reinsurers 202 509
The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within its Heritage With Profits Fund. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. Interest is payable on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring fenced assets. This has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer. The investment return on the ring fenced assets included in investment return in the consolidated income statement is equal to these expenses under arrangements with reinsurers.
Non-participating insurance contract liabilities 22,740 23,422 Participating contract liabilities: Participating insurance contract liabilities 14,659 15,151 Participating investment contract liabilities 15,313 15,537 Unallocated divisible surplus 675 585 Participating contract liabilities 30,647 31,273
Non-participating insurance contract liabilities includes UK immediate annuities of £12,667m (2016: £13,532m) and UK deferred annuities of £1,289m (2016: £1,415m).
(e) Change in liabilities and reinsurance contracts The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during the year was as follows: Participating insurance contract liabilities
1 Total change in contract liabilities recognised in the consolidated income statement in the table above excludes (£100m) (2016 £nil) and £7m (2016: £nil) of insurance and participating contract liabilities and reinsurance contracts respectively relating to assets and liabilities held for sale.
Total change in contract liabilities (587) 1,985 717 2,115 140 2,255 200 Standard Life Aberdeen 2017
(f) Movement in components of unallocated divisible surplus (UDS) The movement in UDS was as follows: £m £m
Change in UDS recognised in the consolidated income statement 140 53 Change in UDS recognised in other comprehensive income (12) 67 Foreign exchange adjustment (38) (190)
(g) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 39. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
Estimates and assumptions The determination of the valuation interest rates and longevity assumptions are key accounting estimates for UK immediate and UK deferred annuity non-participating insurance contracts.
For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation. The basis is considered prudent in each aspect. In particular, options and guarantees have been provided for on prudent bases.
The principal assumptions for the main UK non-participating insurance contracts are as follows: Valuation interest rates The valuation interest rates used are determined in accordance with the Prudential Regulation Authority’s Integrated Prudential Sourcebook that existed at 31 December 2015. The process used to determine the valuation interest rates used in the calculation of the liabilities comprises three stages: determining the current yield on the assets held after allowing for risk and tax, hypothecating the assets to various types of policy and determining the discount rates from the hypothecated assets.
For corporate bonds, a deduction is made for the risk of default which varies by the quality of asset and the credit spread at the valuation date. The yield for each category of asset is taken as the average adjusted yield weighted by the market value of each asset in that category except for UK and Ireland annuity business and Germany non-participating insurance business within the PBF where the internal rate of return of the assets backing the liabilities is used.
Annuities Individual and group in deferment Males: 62.6% AMC00 Males: 64.7% AMC00 Females: 64.2% AFC00 Females: 65.7% AFC00 Individual after vesting (business written after 10 July 2006) Males: 95.3% RMC00 Males: 91.2% RMC00 Females: 99.3% RFC00 Females: 99.9% RFC00 Individual after vesting (business written prior to 10 July 2006) Males: 100.1% RMC00 Males: 95.7% RMC00 Females: 105.5% RFC00 Females: 104.7% RFC00 Group after vesting (business written after 10 July 2006) Males: 113.0% RMV00 Males: 109.8% RMV00 Females: 117.5% WA00 Females: 118.3% WA00 Group after vesting (business written prior to 10 July 2006) Males: 112.5% RMV00 Males: 109.3% RMV00 Females: 120.1% WA00 Females: 120.1% WA00
In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. For 2017, this is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2015 model with long-term improvement rates of 2.0% for males and 1.7% for females. The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2015 is a model that was published towards the end of 2015.
At 2016, this was based on the SLAL parameterisation of the CMI_2014 model with long-term improvement rates of 1.8% for males and 1.5% for females. CMI_2014 is a model that was published towards the end of 2014.
 Assumes that cohort improvements dissipate over a 30-year period, or by age 90 if earlier (compared with a 40-year period, or by age 100 if earlier, in the core CMI model)
Other assumptions Expenses The assumptions for future policy expense levels are determined from the Group’s recent expense analyses. No allowance has been made for potential expense improvement and the costs of projects to improve expense efficiency have been ignored. The assumed future expense levels incorporate an annual inflation rate allowance of 3.65% (2016: 3.79%) for UK business derived from the expected RPI implied by current investment yields and an additional allowance for earnings inflation.
Unit linked non-participating investment contracts are separated into two components being an investment management services component and a financial liability. All fees and related administrative expenses are deemed to be associated with the investment management services component (refer Note 5, Note 15 and Note 36). The financial liability component is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets.
Management determines the classification of financial liabilities at initial recognition. The majority of the Group’s financial liabilities are designated as fair value through profit or loss (FVTPL). The methods and assumptions used to determine fair value of financial liabilities designated at FVTPL are discussed in Note 41. Financial liabilities which are not derivatives and not FVTPL are financial liabilities measured at amortised cost.
Capital notes 7.0% US Dollar fixed rate perpetual $500m £377m – –
Subordinated notes 4.25% US Dollar fixed rate due 30 June 2048 $750m £556m – – 5.5% Sterling fixed rate due 4 December 2042 £500m £500m £500m £499m
Subordinated guaranteed bonds 6.75% Sterling fixed rate perpetual £500m £502m £500m £502m
Mutual Assurance Capital Securities 6.546% Sterling fixed rate perpetual £300m £318m £300m £318m Total subordinated liabilities 39 £2,253m £1,319m
On 18 October 2017, the Company issued US Dollar subordinated notes with a principal amount of $750m. Further details are included in the table below.
The US$500m capital notes will be redeemed on 1 March 2018. The principal amount of all other subordinated liabilities is expected to be settled after more than 12 months and accrued interest of £44m (2016: £37m) is expected to be settled within 12 months.
(semi-annually) thereafter 12 July 2027 and on every fifth anniversary thereafter 6 January 2020 and on every anniversary thereafter
These plans are governed by trustee boards, which comprise employer and employee nominated trustees and an independent trustee. The plans are subject to the statutory funding objective requirements of the Pensions Act 2004, which require that plans be funded to at least the level of their technical provisions (an actuarial estimate of the assets needed to provide for benefits already built-up under the plan). The trustees perform regular valuations to check that the plans meet the statutory funding objective.
The trustees set the plan investment strategy to protect the ratio of plan assets to the trustees’ measure of technical provisions. This investment strategy does not aim to protect the IAS 19 surplus or the ratio of plan assets to the IAS 19 measure of liabilities.
The Group also operates two UK defined benefit plans as a result of the merger with Aberdeen. These plans are final salary based, with benefits depending on members’ length of service and salary prior to retirement. These plans are currently in deficit and the Group has agreed funding plans, which aim to eliminate the current deficits, with the plans’ trustees.
Other The Group operates smaller funded and unfunded defined benefit plans in other countries.
Current service cost (60) (49) Net interest income 28 33 Administrative expenses (3) (3) Expense recognised in the consolidated income statement 7 (35) (19)
Present value of funded obligation (2,839) (345) (3,184) (3,207) (117) (3,324) Present value of unfunded obligation – (9) (9) – (10) (10) Fair value of plan assets 4,530 276 4,806 4,927 72 4,999 Effect of limit on plan surplus (592) – (592) (627) – (627)
Return on plan assets, excluding amounts included in interest income – 69 69 – 69 Loss from change in demographic assumptions (111) – (111) – (111) Loss from change in financial assumptions (37) – (37) – (37)
Change in effect of limit on plan surplus – – – (95) (95)
Assets measured at fair value based on level 1 inputs Derivatives 33 16 1 – 34 16 Equity securities – 112 – – – 112 Interests in pooled investment funds
Total assets measured at fair value based on level 1 inputs 3,711 4,355 184 54 3,895 4,409 Assets measured at fair value based on level 2 or 3 inputs Derivatives 334 324 – – 334 324
Total assets measured at fair value based on level 2 or 3 inputs 712 682 75 – 787 682
Liability in respect of collateral held (339) (292) – – (339) (292)
(e) Estimates and assumptions Determination of the valuation of principal plan liabilities is a key estimate as a result of the assumptions made relating to both economic and non-economic factors. The key economic assumptions for the principal plan which are based in part on current market conditions are shown below: Discount rate 2.60 2.70 Rates of inflation
Expectation of life from NRA Male age today Female age today 2016 Table Improvements NRA 40 NRA 40
Life expectancy Decrease by 1 year 79 – 101 – Increase by 1 year (78) – (101) –
Creation of units awaiting settlement 205 251 Cash collateral held in respect of derivative contracts 39 1,501 2,016
The amount of other financial liabilities expected to be settled after more than 12 months is £141m (2016: £211m).
(a) Provisions The movement in provisions during the year is as follows: Provision for annuity sales practices Legal provisions Other provisions Total provisions 2017 £m £m £m £m
Used during the year (27) (16) (21) (64) Foreign exchange adjustment – – – –
Other provisions comprise obligations in respect of compensation, staff entitlements, vacant property and reorganisations.
The amount of provisions expected to be settled after more than 12 months is £102m (2016: £106m).
Annuity sales practices relating to enhanced annuities The provision for annuity sales practices includes £229m (2016: £175m) in relation to enhanced annuities.
On 14 October 2016, the Financial Conduct Authority (FCA) published the findings of its thematic review of non-advised annuity sales practices. Standard Life Aberdeen has been a participant in that review. The FCA looked at whether firms provided sufficient information to their customers about their potential eligibility for enhanced annuities.
At the request of the FCA, Standard Life Aberdeen are conducting a review of non-advised annuity sales (with a purchase price above a minimum threshold) to customers eligible to receive an enhanced annuity from 1 July 2008 until 31 May 2016. The purpose of this review is to identify whether these customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and, where appropriate, provide redress to customers who have suffered loss as a result of not having received sufficient information. Standard Life Aberdeen has been working with the FCA regarding the process for conducting this past business review.
The Group expects the majority of the outflows associated with this provision, including outflows relating to establishing any reserves for future annuity payments, to have occurred by mid 2019.
Estimates and assumptions The key assumptions underlying the provision for annuity sales practices relating to enhanced annuities are:  The number of customers entitled to redress  The amount of redress payable per customer  The costs of conducting the review
The number of customers entitled to redress has been estimated based on:  The number of customers in the review population  The estimated percentage of these customers eligible for an enhanced annuity  The estimated percentage of these eligible customers that did not receive sufficient information from Standard Life Aberdeen about enhanced annuities
At this stage there is significant uncertainty relating to the amount of redress payable and the expenses of the review. Sensitivities are provided in the table below.
Assumption Change in assumption Consequential change in provision Percentage of customers eligible for an enhanced annuity
Percentage of eligible customers that did not receive sufficient information from Standard Life Aberdeen about enhanced annuities Percentage changed by +/-5 +/- £12m Lost income per annum for an average annuity purchase of £25,000 +/- £60 +/- £37m Costs per case of conducting the review +/- 20% of the cost per case +/- £6m
For the purposes of managing risks to the Group’s financial assets and financial liabilities, the Group considers the following categories: Risk Definition Market The risk that arises from the Group’s exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. Credit The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. Demographic The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic experience differing from that expected. This class of risk includes risks that meet the definition of insurance risk under IFRS 4 Insurance Contracts and other financial risks.
Conduct The risk that through our behaviours, strategies, decisions and actions the Group delivers unfair outcomes to our customer/client and/or poor market conduct.
The risk that arises from violation, or non-conformance with laws, rules, regulations, prescribed practices or ethical standards which may result in fines, payments of damages, the voiding of contracts and damaged reputation.
Risk segments The assets and liabilities on the Group’s consolidated statement of financial position can be split into four categories (risk segments) which give the shareholder different exposures to the risks listed previously. These categories are: Shareholder business Shareholder business refers to the assets and liabilities to which the shareholder is directly exposed. For the purposes of this note, the shareholder refers to the equity holders of the Company and the preference shareholders.
Pensions and Savings SLAL – SHF SLAL – PBF (excluding unit linked funds) SLS
India and China life SL Asia (excluding unit linked funds) Interests in Indian and Chinese associates and joint ventures n/a SL Asia unit linked funds
AAMLP = Aberdeen Asset Management Life and Pensions Limited 1 As discussed in Note 3 and above, unit linked funds does not include cash flows arising from unit linked fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked fund contracts. Such cash flows and liabilities are included in shareholder or participating business.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are expected to be borne by the policyholder. The shareholder’s exposure is limited to changes in the value of future fee based revenue earned on unit linked funds due to market movements.
Investments in associates and joint ventures accounted for using the equity method 503 572 – – – – – – 503 572
At available-for-sale 856 621 – – – – – – 856 621
Third party interest in consolidated funds – – – – – – 16,457 16,835 16,457 16,835
Net inter-segment assets/(liabilities) 275 336 (274) (316) 5 (14) (6) (6) – –
The specific controls and techniques used to manage the market risks in the shareholder and participating businesses are discussed below: Shareholder business Assets in the shareholder business are managed against benchmarks that ensure they are diversified across a range of asset classes, instruments and geographies. A combination of limits by name of issuer, sector and credit rating are used where relevant to reduce concentration risk among the assets held.
The shareholder business holds interests in newly established investment vehicles which the Group has seeded but is actively seeking to divest from. Seed capital is classified as held for sale when it is the intention to dispose of the vehicle in a single transaction and within one year. The shareholder balance sheet includes the following amounts in respect of seed capital.
Seed capital is typically invested in quoted funds. The Group sets the limits for investing in seed capital and regularly monitors the exposure. The Group will consider hedging its exposure to market and currency risk in respect of seed capital investments where it is appropriate and efficient to do so.
The key considerations in the asset and liability management of the participating business are:  The economic liability and how this varies with market conditions  The need to invest the assets in a manner consistent with participating policyholders' reasonable expectations and, where appropriate, the
In practice, an element of market risk arises as a consequence of the need to balance these considerations, for example, in certain instances participating policyholders may expect that equity market risk will be taken on their behalf and derivative instruments may be used to manage these risks.
Information on the methods used to determine fair values for each major category of financial instrument and investment property measured at fair value is presented in Note 41 and Note 17.
(b)(i)(ii) Group exposure to property risk The Group is exposed to the risk of adverse property market movements which could result in losses. This applies to changes in the value and return on holdings in investment property. This risk arises from:  Burnthrough from the with profits funds where adverse movements in the market values and returns on investment property in these funds mean the assets of the with profits funds are not sufficient to meet their obligations
Exposures to property holdings are primarily controlled through the use of portfolio limits which specify the proportion of the value of the total property portfolio represented by:  Any one property or group of properties  Geographic area  Property type  Development property under construction
Office Industrial Retail Other Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 £m £m £m £m £m £m £m £m £m £m
Spain – – – – – – – – – –
There is no direct exposure to residential property in the shareholder and participating businesses.
(b)(i)(iii) Group exposure to interest rate risk Interest rate risk is the risk that arises from exposures to changes in the shape and level of yield curves which could result in losses due to the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by different amounts.
The sensitivity of profit after tax to changes in interest rates for both the shareholder business and the participating business is included in the profit after tax sensitivity to market risk table, shown in Section (b)(ii).
The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries, joint ventures and associates accounted for using the equity method. On 18 October 2017, the Group issued US dollar subordinated notes with a principal amount of US $750m. The related cash flows expose the Group to foreign currency risk on the principal and coupons payable. The Group manages the foreign exchange risk with a cross-currency swap which is designated as a cash flow hedge.
During 2017 the Group reaffirmed its strategy for hedging foreign currency risks in the shareholder business. This strategy provides a consistent approach to managing these foreign exchange risks. This includes, within certain parameters, minimising currency volatility within the regulatory capital surplus, aside from the Solvency II volatility created by holding a cross currency swap to hedge the economic foreign exchange risk arising from issuing US Dollar denominated notes. The Group does not separately hedge translation of reported earnings from overseas operations in the consolidated financial statements.
There are no net investment hedges or cash flow hedges in the participating business. Other currencies include assets of £8m (2016: £49m) and liabilities of £3m (2016: £11m) in relation to the fair value of derivatives used to manage currency risk exposures.
The foreign currency exposures shown above largely reflect the impact of financial assets being denominated in currencies other than the local currency of the operational geographic location. These exposures arise as a result of asset allocation decisions that are intended to meet the expectations of particular groups of policyholders or to improve the risk profile through diversification. The investment mandates used to manage the participating business contain limits to restrict the extent of foreign currency risk that can be taken and currency derivatives are held to provide economic hedges of some of the above exposures. These are typically short dated forward foreign exchange contracts, however the investment mandates do not normally require these contracts to be replaced on maturity providing the foreign currency risk is within limits.
(b)(ii) Sensitivity to market risk analysis The Group’s profit after tax and equity are sensitive to variations in respect of the Group’s market risk exposures and a sensitivity analysis is presented on the following pages. The analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date applied to assets and liabilities other than those classified as held for sale.
Participating business For the participating business, in particular the HWPF and the GWPF, the risk to shareholders is that the assets of the fund are insufficient to meet the obligations to policyholders. Given the nature of the Group’s participating business, changes in equity security and property prices and/or fluctuations in interest rates will generally affect participating liabilities and the associated assets by the same amount. Therefore the change in participating contract liabilities and the corresponding asset movement has not been presented. However under certain economic scenarios guarantees in participating contracts could require the shareholder to provide support to the participating business. This is presented as follows: HWPF For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The recourse cash flows have been determined in accordance with the Scheme and consider the extent to which shareholders participate in the investment return and surplus of the HWPF. The Scheme, and in particular the Capital Support Mechanism, requires the financial state of the HWPF to be considered before recourse cash flows are transferred to the Shareholder Fund and, under certain circumstances, the payment of recourse cash flows can be withheld to support the financial strength of the HWPF. Therefore, the HWPF has been treated as a whole for the purpose of this sensitivity analysis and only the impact on the recourse cash flows of the sensitivity tests is presented. When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant Principles and Practices of Financial Management. The sensitivities presented are not sufficiently severe to have restricted recourse cash flows in 2017 and 2016.
Increase/(decrease) in profit after tax £m £m £m £m £m £m Shareholder business Pensions and Savings: Deferred acquisition costs – – – – – – Assets backing non-participating liabilities – – – – (662) 778 Non-participating insurance contract liabilities – – – – 642 (756) Non-participating investment contract liabilities – – – – – – Other assets and liabilities – – – – (6) 8 Total Pensions and Savings – – – – (26) 30
India and China life: Deferred acquisition costs – – – – – – Assets backing non-participating insurance contract liabilities – – – – – – Assets backing non-participating investment contract liabilities – – – – – – Non-participating insurance contract liabilities – – – – – – Non-participating investment contract liabilities – – – – – – Other assets and liabilities – – – – – – Total India and China life – – – – – –
The Company within other shareholder business classifies certain debt securities as available-for-sale (AFS). The Group’s sensitivity of profit after tax to changes in interest rates does not include the impact of changes in interest rates for these AFS assets. There is no impact in 2017 or 2016 on profit after tax to changes in property prices.
Equity sensitivity to market risk on assets and liabilities other than those classified as held for sale The shareholder business in the corporate centre and related activities classified as Other includes certain debt securities as AFS. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the consolidated income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Group's equity to variations in interest rate risk exposures differs from the sensitivity of the Group's profit after tax to variations in interest rate risk exposures.
(c) Credit risk As described in the table on page 216, the shareholder is exposed to credit risk from the shareholder and participating businesses and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.
Debt securities The Group’s policy is to set exposure limits by name of issuer, sector and credit rating. Loans Portfolio limits are set by individual business units. These limits specify the proportion of the value of the total portfolio of mortgage loans and mortgage bonds that are represented by a single, or group of related counterparties, geographic area, employment status or economic sector, risk rating and loan to value percentage.
The objective evidence that is taken into account in determining whether any impairment of debt securities has occurred includes:  A default against the terms of the instrument has occurred  The issuer is subject to bankruptcy proceedings or is seeking protection from creditors through bankruptcy, individual voluntary arrangements or similar process
Neither past due nor impaired: AAA – – – – – – – – 475 481 – – 612 92 1,087 573
Finland – – – – – – – – – – – –
Participating business An analysis of financial and reinsurance assets by credit rating is as follows: Reinsurance assets Loans Derivative financial assets Debt securities
Neither past due nor impaired: AAA – – – – – – 4,396 4,523 – – 124 30 4,520 4,553
Impaired – – – – – – – – – – – – – –
At 31 December 2017, receivables and other financial assets of £5m (2016: £6m) were past due by less than three months.
The shareholders’ exposure to credit risk arising from investments held in the HWPF and other with profits funds is similar in principle to that described for market risk exposures in Section (b). As at 31 December 2017, the financial assets of the HWPF include £4,621m (2016: £5,093m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been
8. Group financial statements continued structured in this manner specifically to mitigate credit risks associated with default of the reinsurer. Any credit losses and defaults within the portfolio of assets are borne by the external reinsurer.
An analysis of debt securities by country based on the ultimate parent country of risk is as follows: Government, provincial and municipal1 Banks Other financial institutions Other corporate Other2 Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 £m £m £m £m £m £m £m £m £m £m £m £m
Gross amounts of financial instruments as presented on the consolidated statement of financial position Financial instruments Financial collateral pledged/(received) Net position
As described in Section (b), the Group’s ERM framework defines market risk as the risk that arises from the Group’s exposure to market movements, which could result in the income, or value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. The movement in the fair value of loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions.
Demographic and expense risk is managed by analysing experience and using statistical data to make certain assumptions on the risks associated with the policy during the period that it is in-force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing demographic and expense risk exposures, the Group considers:  Historic experience of relevant demographic and expense risks  The potential for future experience to differ from that expected or observed historically  The financial impact of variances in expectations  Other factors relevant to their specific markets, for example obligations to treat customers fairly
Morbidity The Group defines morbidity risk as the risk that claims dependent on the state of health of a policyholder are incurred at a higher than expected rate or, in the case of income benefits, continue for a longer duration or start earlier than those assumed and could either arise over time or as a result of a single catastrophic event such as a pandemic. This risk will be present on disability income, healthcare and critical illness contracts.
Income protection contracts have the risk that claim duration may be longer than anticipated.
Mortality The Group defines mortality risk as the risk that death claims are at a higher rate than assumed and could either arise over time or as a result of a single catastrophic event such as a pandemic. This risk will exist on any contracts where the payment on death is greater than the reserve held.
(d)(i)(ii) Other financial risks Persistency – withdrawals and lapse rates The Group defines persistency risk as the risk that clients or policyholders redeem their investments or surrender, lapse or pay-up their policies at different rates than assumed resulting in reduced revenue and/or financial losses. This risk may arise if persistency rates are greater or less than assumed or if policyholders selectively lapse when it is beneficial for them. If the benefits payable on lapse or being paid-up are greater than the reserve held then the risk will be of a worsening of persistency and if benefits are paid out that are lower than the reserve then the risk will be that fewer policyholders will lapse or become paid-up.
Persistency risk also reflects the risk of a reduction in expected future profits arising from early retirements, surrenders – either partial or in full – and similar policyholder options.
Variances in persistency will affect equity holder profit to the extent that charges levied against policies are dependent upon the number of policies in-force and/or the average size of those policies. The policies primarily relate to unit linked and unitised with profits business. Profit may also be at risk if it is considered necessary, or prudent, to increase liabilities on certain lines of business.
The tables that follow illustrate the sensitivity of profit after tax and equity to variations in the key assumptions made in relation to the Group’s most significant demographic and expense risk exposures, including exposure to persistency risk. The values have, in all cases, been determined by varying the relevant assumption as at the reporting date and considering the consequential impacts assuming other assumptions remain unchanged.
2017 £m £m £m £m £m £m £m £m Shareholder business Pensions and Savings: Reinsurance assets – – – – – – 1 (1) Non-participating insurance contract liabilities (142) 133 (8) 8 1 (1) (1) 1 India and China life Deferred acquisition costs – – – – – – – – Non-participating insurance contract liabilities – – – – – – – – Non-participating investment contract liabilities – – – – – – – –
Participating business Pensions and Savings: Recourse cash flows (19) 18 (2) 2 – – (2) 2
Participating business Pensions and Savings: Recourse cash flows (16) 15 (1) 1 – – (2) 2
All business units are required to monitor, assess, manage and control liquidity risk in accordance with the relevant principles within the Group’s policy framework. Oversight is provided both at a Group level and within the business unit. In addition, all business units benefit from membership of a larger Group to the extent that, centrally, the Group:  Coordinates strategic planning and funding requirements  Monitors, assesses and oversees the investment of assets within the Group  Monitors and manages risk, capital requirements and available capital on a group-wide basis  Maintains a portfolio of committed bank facilities
Greater than 20 years No defined maturity Total 2017 £m £m £m £m £m £m £m £m Shareholder business Non-participating insurance contract liabilities 318 1,216 1,375 1,143 864 1,152 – 6,068 Non-participating investment contract liabilities – 1 1 1 1 – – 4 Reinsurance liabilities – – – – – – – –
No defined maturity Total 2016 £m £m £m £m £m £m £m £m Shareholder business Non-participating insurance contract liabilities 330 1,194 1,351 1,139 881 1,297 – 6,192 Non-participating investment contract liabilities 1 1 1 1 – – – 4 Reinsurance liabilities – – – – – – – –
Participating business Other financial liabilities 1,631 2,179 3 27 3 6 2 6 2 5 70 85 1,711 2,308
Unit linked funds Non-participating investment contract liabilities 105,765 102,059 – – – – – – – – – – 105,765 102,059
Deposits received from reinsurers reflect the liability to repay the deposit received from an external reinsurer under the reinsurance transaction referred to in Section (c). The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty, under which there is no defined contractual maturity date to repay the deposit as at 31 December 2017 or 31 December 2016.
Risk Control Self Assessment (CSA) is a monitoring activity where business managers assess the operation of the controls for which they are responsible and the adequacy of these controls to manage key operational risks and associated business processes. The assessment completed by business managers is validated and challenged on a risk-basis by the risk function in its role of ‘second line of defence’.
The Group has a single conduct and operational risk framework that utilises the tools, such as Risk CSAs, outlined under operational risk (f) to ensure the appropriate identification and management of conduct risk. Business units adopt the relevant minimum standards contained within the conduct risk policy and are required to manage risk in accordance with this and other policies that have an impact on the overall conduct risk, taking mitigating action as appropriate to operate within appetites.
The following conduct risk policy standards have defined outcomes against which conduct risk is assessed within the Group:  Culture  Proposition design  Communication and information  Advice and distribution  Service  Barriers  Proposition performance  Market integrity
The Group consolidates structured entities which it controls. Where the Group has an investment in, but not control over these types of entities, the investment is classified as an investment in associate when the Group has significant influence.
(a) Consolidated structured entities As at 31 December 2017 and 31 December 2016, the Group has not provided any non-contractual financial or other support to any consolidated structured entity and there are no current intentions to do so.
(b) Unconsolidated structured entities As at 31 December 2017 and 31 December 2016, the Group has not provided any non-contractual financial or other support to any unconsolidated structured entities and there are no current intentions to do so.
Equity securities and interests in pooled investment funds includes £11,146m (2016: £7,376m) of unconsolidated structured entities which are managed by the Group and in which the Group has a direct investment of which £5,936m (2016: £4,797m restated; previously reported as £7,376m) relates to investments in associates measured at FVTPL. The asset value of these unconsolidated structured entities is £62,741m (2016: £41,379m) of which £19,219m (2016: £18,198m restated; previously reported as £41,379m) relates to investments in associates measured at FVTPL. The total fees recognised in respect of these assets under management during the year to 31 December 2017 were £254m (2016: £265m) of which £31m (2016: £17m restated; previously reported as £265m) relates to structured entities where the Group’s holding is classified as an investment in an associate measured at FVTPL. For details of the background of the restatement to 2016 comparatives refer Note 16.
The total issuance balance relating to unconsolidated structured debt securitisation vehicles in which the Group has an investment is £59,169m (2016: £57,877m).
Additional information on how the Group manages its exposure to risk can be found in Note 39.
The Group uses fair value to measure the majority of its assets and liabilities. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction.
(a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used:  Level 1 – Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Investments in associates at FVTPL, equity securities and interests in pooled investment funds, and amounts seeded into funds classified as held for sale Investments in associates at FVTPL are valued in the same manner as the Group’s equity securities and interests in pooled investment funds.
 Commercial mortgages These instruments are valued using models. The models use a discount rate adjustment technique which is an income approach. The key inputs for the valuation models are contractual future cash flows, which are discounted using a discount rate that is determined by adding a spread to the current base rate. The spread is derived from a pricing matrix which incorporates data on current spreads for similar assets and which may include an internal underwriting rating. These inputs are generally observable with the exception of the spread adjustment arising from the internal underwriting rating. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending on whether the spread is adjusted by an internal underwriting rating
 Income strips Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30 – 45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1).
The valuation technique used by the Group to value these instruments is an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. Unlike investment properties which typically are leased on shorter lease terms, the estimated rental value is not a significant unobservable input. This is due to the length of the lease together with the nature of the rent reviews where the annual rental increases over the term of the lease in line with inflation or fixed increases. As the income capitalisation valuations generally include significant unobservable inputs including unobservable adjustments to the yield observed in other income strip transactions, these assets are categorised as level 3 in the fair value hierarchy.
Contingent consideration asset and contingent consideration liabilities A contingent consideration asset was recognised during 2014 in respect of a purchase price adjustment mechanism relating to the acquisition of Ignis. The fair value of the asset is calculated using a binomial tree option pricing model. The main inputs are management fee income and expected probabilities of payouts. These are considered unobservable and as a result the asset is classified as level 3 in the fair value hierarchy.
Equity securities and interests in pooled investment vehicles 331 88 122 27 453 115 335 88 36 2 82 25
Unit linked funds Investment property 5,721 5,727 4 12 5,725 5,739 – – – – 5,725 5,739
Equity securities and interests in pooled investment vehicles 8,263 8,213 2 – 8,265 8,213 8,003 7,944 – – 262 269 1 Third party interest in consolidated funds and non-controlling interests.
Participating business Derivative financial liabilities 64 39 – – 64 39 44 20 20 19 – –
Unit linked funds Non-participating investment contract liabilities 105,765 102,059 62 – 105,827 102,059 – – 105,827 102,059 – –
TPICF and NCI1 Liabilities in respect of third party interest in consolidated funds 16,457 16,835 28 – 16,485 16,835 – – 15,187 15,607 1,298 1,228 1 Third party interest in consolidated funds and non-controlling interests.
Reclassified to held for sale (225) (191) (4) (8) – – – – – – Reclassification between investment property and debt securities1 (319) – – – – – 319 – – – Acquired through business combinations – – 2 – 100 – – – – – Total gains/(losses) recognised in the consolidated income statement 485 (302) 4 (1) 72 90 35 34 (57) 19
Transfers between investment property and owner occupied property (17) (28) 17 28 – – – – – –
Total gains recognised on revaluation of owner occupied property within other comprehensive income – – 1 5 – – – – – –
As at 31 December 2017, £425m of total gains (2016: £119m losses) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £478m gains (2016: £137m losses) were recognised in investment return, £4m gains (2016: £1m losses) were recognised in other administrative expenses and £57m losses (2016: £19m gains) were recognised in change in liability for third party interest in consolidated funds.
(d)(iv) Significant unobservable inputs in level 3 instrument valuations The table below identifies the significant unobservable inputs used in determining the fair value of level 3 instruments and quantifies the range of these inputs used in the valuation at the reporting date: Fair value 2017 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 9,571 Income capitalisation Equivalent yield Estimated rental value per square metre per annum
Equity securities and interests in pooled investment funds 997 Adjusted net asset value Adjustment to net asset value1
Investment property and owner occupied property 60 Market comparison Estimated value per square metre
Equity securities and interests in pooled investment funds 958 Adjusted net asset value Adjustment to net asset value1
(d)(v) Sensitivity of the fair value of level 3 instruments to changes in key assumptions The shareholder is directly exposed to movements in the value of level 3 instruments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 instruments held by the participating business and unit linked funds risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders. Movements in level 3 instruments held in the TPICF and NCI risk segment are offset by opposite movements in the liabilities in respect of third party interest in consolidated funds and in equity attributable to non-controlling interest and therefore the shareholder is not directly exposed to such movements.
Assets Loans secured by mortgages 20 57 73 64 86 – – 64 86 – – Liabilities Non-participating investment contract liabilities 33 4 4 4 4 – – – – 4 4
Assets held for sale 62 25 Change in operating assets 1,351 (12,995) 1 Presentation changed and comparative restated. Refer Note 16(c).
Profit on disposal of associates (319) – Loss on disposal of property, plant and equipment 1 1 Depreciation of property, plant and equipment 15 14 Amortisation of intangible assets 124 64 Impairment losses on intangible assets 77 20 Impairment losses (reversed)/recognised on property, plant and equipment (4) 1 Impairment losses on disposal group held for sale 24 – Equity settled share-based payments 39 – Other interest cost 3 3 Finance costs 88 82 Share of profit from associates and joint ventures accounted for using the equity method (45) (63) Other non-cash and non-operating items 3 122 244 Standard Life Aberdeen 2017
Cash flows from financing activities (12) (1,108) (1,120) (11) (1,943) (1,954) Non-cash items
(b) Legal proceedings, complaints and regulations The Group is subject to regulation in all of the territories in which it operates insurance and investment businesses. In the UK, where the Group primarily operates, the FCA has broad powers, including powers to investigate marketing and sales practices.
(a) Capital commitments As at 31 December 2017, capital expenditure that was authorised and contracted for, but not provided and incurred, was £167m (2016: £286m) in respect of investment property and income strips (discussed in Note 41). Of this amount, £147m (2016: £220m) and £20m (2016: £66m) relates to the contractual obligations to purchase, construct, or develop property and repair, maintain or enhance property respectively.
(c) Operating lease commitments The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights.
(d) Asset acquisitions At 31 December 2017 the Group has contractual commitments in place to acquire assets under management for £74m (2016: £nil). These acquisitions remain subject to certain approvals and other conditions to closing.
The Group operates share incentive plans for its employees. These generally take the form of an award of options or shares in Standard Life Aberdeen plc (equity-settled share based payments) but can also take the form of a cash award based on the share price of Standard Life Aberdeen plc (cash-settled share based payments). Aberdeen Asset Management PLC and its subsidiaries also incentivise certain employees through the award of units in Group managed funds (deferred fund awards) which are cash-settled. All the Group’s incentive plans have conditions attached before the employee becomes entitled to the award. These can be performance and/or service conditions (vesting conditions) or the requirement of employees to save in the save-as-you-earn scheme (non-vesting condition). The period over which all vesting conditions are satisfied is the vesting period and the awards vest at the end of this period.
revised and original estimate in the consolidated income statement with a corresponding adjustment to the equity compensation reserve.
(ii) Short-term incentive plan (annual bonus deferred share options) The Group operates the following short-term incentive plans which award share options.
Plan Recipients Conditions which must be met prior to vesting Short-term incentive plan (Standard Life Group STIP)
(iii) Sharesave (Save-as-you-earn) The Group operates Save-as-you-earn (SAYE) plans, which allow eligible employees in the UK and Ireland the opportunity to save a monthly amount from their salaries, over either a three or five year period, which can be used to purchase shares in the Company. The shares can be purchased at the end of the savings period at a predetermined price. Employees are granted a predetermined number of options based on the monthly savings amount and duration of their contract. The conditions attached to the options are that the employee remains in employment for three years after the grant date of the options and that the employee satisfies the monthly savings requirement. Settlement is made in the form of shares.
Other share plans (i) Short-term incentive plan (annual bonus deferred share awards) The Group operates the following short-term incentive plan which awards conditional shares.
Employees may forfeit some or all of share options or awards made under any of the above share-based payment schemes if they leave the Group prior to the end of the awards’ vesting periods.
Replacement awards On the acquisition of Aberdeen on 14 August 2017, the outstanding options and awards for Aberdeen Asset Management PLC shares under the Aberdeen Asset Management DSP 2009 and Aberdeen Asset Management USA DSAP were replaced with equivalent options and awards for Standard Life Aberdeen plc shares. Aberdeen also operated a long-term incentive plan which was fully vested prior to acquisition and replaced awards were also issued for the remaining unexercised options. At the same date, options and awards for Standard Life Aberdeen plc shares were made to relevant Aberdeen employees by the plan in respect of pre-acquisition bonus.
Weighted average remaining contractual life of options outstanding (years) 2.06 1.63 10.36 2.84 2.21 1.35 1.43 2.66
The exercise price for options granted under all long-term and short-term incentive schemes is nil. The fair value of options granted under the Group’s incentive schemes is determined using a relevant valuation technique, such as the Black Scholes option pricing model.
Options exercised during the year Share price at time of exercise 358p 364p 423p 419p 1 The fair value of options granted under the Aberdeen Asset Management DSP 2009 in respect of pre-acquisition bonus was calculated by reference to the share price on acquisition of Aberdeen adjusted for pre-combination service. The fair value of replaced awards was calculated in the same way.
The following table shows the range of exercise prices of options outstanding at 31 December 2017. All options are exercisable for a period of six months after the vesting date except for the options under the Aberdeen Asset Management DSP 2009 which are exercisable for a period of ten years after the vesting period.
During the year, the Group recognised management fees from Group managed non-consolidated investment vehicles. These fees are disclosed in Note 40. It also recognised management fees of £4m (2016: £5m) from the Group’s defined benefit pension plans. There were no sales to or purchases from associates accounted for under the equity method during the year ended 31 December 2017 or 31 December 2016.
There were no sales to or purchases from joint ventures during the year ended 31 December 2017 (2016: purchases of £1m). Details of the proposed sale of a subsidiary to our joint venture business are included in Note 24.
Salaries and other short-term employee benefits 9 6 Post-employment benefits – 1 Share-based payments 3 3 Termination benefits 1 – Total compensation of key management personnel 13 10
There are two primary objectives of capital management within the Group. The first objective is to ensure that capital is, and will continue to be, adequate to maintain the required level of financial stability of the Group and hence to provide an appropriate degree of security to our stakeholders – this aspect is measured by the Group’s regulatory solvency position. The second objective is to create equity holder value by driving profit attributable to equity holders.
The formal procedures for identifying and assessing risks that could affect the capital position of the Group are described in the risk management policies set out in Note 39.
(b) Regulatory capital (b)(i) Regulatory capital framework From 1 January 2016, both the consolidated Group and regulated insurance entities within the Group operating in the EU have been required to measure and monitor their capital resources under the Solvency II (SII) regulatory regime.
The Group’s capital position under SII is determined by aggregating the assets and liabilities of the Group recognised and measured on a SII basis (being own funds) and comparing this to the Group’s SII solvency capital requirement (SCR) to determine surplus capital.
The Group has complied with all externally imposed capital requirements during the year. The Group position can be analysed as follows: Own funds SCR Surplus 31 December 20171 £bn £bn £bn
Restriction on SLAL own funds recognised at Group (1.1) – (1.1)
1 2017 based on draft regulatory returns, 2016 based on final regulatory returns.
The Group’s own funds do not take into account capital in subsidiaries that is not deemed to be freely transferable around the Group.
liabilities. 4 Certain items that are recognised as assets and liabilities under IFRS are not recognised as assets and liabilities in Group own funds, being the Group’s DAC, DIR and other intangible assets. Intangible assets include goodwill acquired through business combinations. Other valuation differences are mainly due to differences in the measurement of technical provisions for insurance business.
5 2017 based on draft regulatory returns, 2016 based on final regulatory returns.
48. Events after the reporting date The impact of the review of long term asset management arrangements by Lloyds Banking Group and Scottish Widows is discussed in Note 14.
On 23 February 2018 the Group announced the sale of the majority of the business within the Pensions and Savings reportable segment to Phoenix Group Holdings (Phoenix) (the Sale), conditional on shareholder and relevant regulatory approvals. The Sale includes the disposal of Standard Life Assurance Limited (SLAL).
Under the transaction the following businesses will be retained by the Group:  UK retail platforms, including Wrap and Elevate  1825, our financial advice business In addition, the assets and liabilities of both the UK and Ireland Standard Life defined benefit pension plans will be retained by the Group.
The total consideration payable to the Group by Phoenix in respect of the Sale is £3.24bn. This comprises cash payable on closing of £2.0bn, a dividend to be paid by SLAL to the Company of £0.3bn in Q2 2018 and new shares issued at completion representing 20% of the then issued share capital of Phoenix following the completion of the rights issue undertaken to part finance the acquisition and worth £1.0bn based on Phoenix’s share price on 22 February 2018. The shareholding in Phoenix is subject to a lock-up of 12 months from completion.
The Group and Phoenix have also agreed to significantly expand their existing long-term strategic partnership whereby the Group continues as Phoenix’s long-term asset management partner for the business acquired by Phoenix and the existing arrangements between the parties under which the Group manages £48bn of assets for Phoenix have been extended.
The ability of subsidiaries to transfer cash or other assets within the Group for example through payment of cash dividends is generally restricted only by local laws and regulations, and solvency requirements. Included in equity attributable to equity holders of Standard Life Aberdeen plc at 31 December 2017 is £85m (2016: £3m) related to the Standard Life Foundation, a subsidiary undertaking of the Group. During the year to 31 December 2017 the Company made a donation to the Standard Life Foundation related to the unclaimed shares and unclaimed cash that were transferred to the Company on expiry of the Unclaimed Asset Trust claim period in 2016. These assets are now restricted to be used for charitable purposes. Additionally dividends and coupons payable on Aberdeen’s preference shares or perpetual notes rank ahead of any dividends paid on Aberdeen’s ordinary shares. These are not considered significant restrictions on the Group’s ability to access or use the assets and settle the liabilities of the Group.
The registered head office of all related undertakings is 1 George St, Edinburgh, EH2 2LL unless otherwise stated. (a) Direct subsidiaries Name of related undertaking Share class1 % interest held 30 STMA 1 Limited3 Ordinary Shares 100% 30 STMA 2 Limited3 Ordinary Shares 100% 30 STMA 3 Limited3 Ordinary Shares 100% 30 STMA 4 Limited3 Ordinary Shares 100% 30 STMA 5 Limited3 Ordinary Shares 100% Aberdeen Asset Management PLC4 Ordinary Shares 100% Focus Solutions Group Limited6 Ordinary Shares 100% Standard Life (Asia Pacific Holdings) Private Limited7 Ordinary Shares 100% Standard Life Assurance Limited2 Ordinary Shares
(b) Other subsidiaries, joint ventures, associates and other significant holdings Name of related undertaking Share class1 % interest held 1825 Financial Planning Limited3 Ordinary Shares 100% 28 Ribera del Loira SA10 Ordinary Shares 100% 30 SLH 1 Limited2 Ordinary shares 100% 330 Avenida de Aragon SL10 Ordinary Shares 100% 4th Contact Limited3 Ordinary Shares 100% Aberdeen ACP LLP4 Limited Liability Partnership 100% Aberdeen Alternatives (Holdings) Limited4 Ordinary shares 100% Aberdeen Asia IV (General Partner) S.a.r.l.11 Ordinary shares 100% Aberdeen Asset Investment Group Limited5 Ordinary shares 100% Aberdeen Asset Investments Limited5 Ordinary shares 100% Aberdeen Asset Management (Shanghai) Co. Ltd12 Limited Liability Company 100% Aberdeen Asset Management Asia Limited13 Ordinary shares 100% Aberdeen Asset Management Canada Limited14 Ordinary shares 100% Aberdeen Asset Management Cayman Limited15 Ordinary shares 100% Aberdeen Asset Management Company Limited16 Ordinary shares 100%
ESP General Partner Limited Partnership Limited Partnership 50% ESP II Conduit LP Limited Partnership 46% ESP II General Partner Limited Partnership Limited Partnership 46% European Strategic Partners Limited Partnership 73% European Strategic Partners II 'C' Limited Partnership 69% Extraverde Property BV60 Ordinary shares 59% Ezraya Sp Z.o.o.61 Ordinary Shares 59% FLAG Squadron Asia Pacific III GP LP15 Limited Partnership 100% Focus Business Solutions Limited6 Ordinary Shares 100% Focus Holdings Limited6 Ordinary Shares 100% Focus Software Limited6 Ordinary Shares 100% Focus Solutions EBT Trustee Limited6 Ordinary Shares 100% G Park Management Company Limited62 Preference shares 100% Gallions Reach Shopping Park (Nominee) Limited62 Ordinary Shares 100% Gallions Reach Shopping Park Limited Partnership62 Limited Partnership 100% Gallions Reach Shopping Park Unit Trust58 Unit Trust 100% Glasgow Investment Managers Limited27 Ordinary shares 100%
Name of related undertaking Share class1 % interest held GREF Almeda Park SL63 Ordinary Shares 59% GREF Jersey Esplanade Limited58 Ordinary Shares 59% GREF Jersey Holding Limited58 Ordinary Shares 59% GREF Jersey Ireland Holding Limited64 Ordinary Shares 59% GREF Jersey Ireland Property Limited64 Ordinary Shares 59% Griffin Nominees Limited5 Ordinary shares 100% HDFC Asset Management Company Limited65 Ordinary shares 38% HDFC International Life and Re Company Limited66 Ordinary shares 29% HDFC Pension Management Company Limited67 Equity shares 29% HDFC Standard Life Insurance Company Limited68 Equity shares 29% Heng An Standard Life Insurance Company Limited69 Equity shares 50% Hundred S.a r.l.52 Ordinary Shares 100% Iceni Nominees (No.2) Limited62 Ordinary shares 100% Iceni Nominees (No.2A) Limited62 Ordinary shares 100% Ignis Asset Management Limited Ordinary Shares 100% Ignis Carry Partner Limited15 Ordinary Shares 100% Ignis Cayman GP2 Limited15 Ordinary Shares 60% Ignis Cayman GP3 Limited15 Ordinary Shares 60% Ignis Fund Managers Limited Ordinary Shares 100% Ignis Investment Management Limited Ordinary Shares 100% Ignis Investment Services Limited Ordinary Shares 100% Inesia S.A. 52 Ordinary shares 100% Inhoco 3107 Limited62 Ordinary Shares 100% Invest Park 3 Sp. Z.o.o.70 Ordinary Shares 59% Jones Sheridan Financial Consulting Limited71 Ordinary shares 100% Jones Sheridan Holdings Limited71 Ordinary shares 100% Lake Meadows Management Company Limited62 Ordinary Shares 100% Living In Retirement Limited54 Ordinary shares 25% Lothian Development III (Nederland) BV60 Ordinary Shares 100% M J Founders Limited22 Ordinary shares 100% Mallard Investments LLP Limited Liability Partnership 26% Murray Johnstone Asset Management Limited27 Ordinary shares 100% Murray Johnstone Holdings Limited4 Ordinary shares 100% Murray Johnstone Limited4 Ordinary shares 100% NASP 2006 General Partner Limited Partnership Limited Partnership 62% Nordic Hydro AS72 Ordinary shares 26% Nordic Hydro Holding AS72 Ordinary shares 26% Nordic Power AS72 Ordinary shares 26% Nordic Power Torsnes AS72 Ordinary shares 26% North American Strategic Partners (Feeder) 2006 Limited Partnership 70% North American Strategic Partners (Feeder) 2008 Limited Partnership Limited Partnership 100% North American Strategic Partners 2006 L.P.21 Limited Partnership 100% North American Strategic Partners 2008 L.P.21 Limited Partnership 100% North American Strategic Partners GP, LP21 Limited Partnership 80% North American Strategic Partners, LP21 Limited Partnership 40% North East Trustees Limited73 Ordinary A Shares
Name of related undertaking Share class1 % interest held Parnell Fisher Child Holdings Limited3 Ordinary A Shares
PLC Poland 20 Sp Z.o.o.61 Ordinary Shares 59% PLC Poland 25 Sp Z.o.o.61 Ordinary Shares 59% PLC Poland 34 Sp Z.o.o.61 Ordinary Shares 59% PT Aberdeen Asset Management41 Limited Liability Company 80% PURetail Luxembourg Management Company S.a r.l.30 Ordinary shares 50% Regent Property Partners (Retail Parks) Limited5 Ordinary shares 100% Reksa Dana Syariah Aberdeen Syariah Asia Pacific Equity USD Fund41 Unit trust 25% Residential Zoning Club General Partner Oy19 Ordinary shares 100% Retail Park HANÁ a.s.75 Ordinary shares 59% Retail Park Ostrava a.s.75 Ordinary Shares 59% Rock Rail East Anglia (Holdings) 1 Limited76 Ordinary shares 26% Rock Rail East Anglia (Holdings) 2 Limited76 Ordinary shares 26% Rock Rail East Anglia plc76 Public Limited Company 26% Rock Rail Moorgate (Holdings) Limited76 Ordinary shares 26% Rock Rail Moorgate plc76 Public Limited Company 26% Scottish Mutual Investment Managers Limited Ordinary Shares 100% Scottish Mutual PEP and ISA Managers Limited5 Ordinary Shares 100% Seabury Assets Fund plc
SLMT American Equity Unconstrained Fund Unit Trust 100% SLMT Standard Life Japan Fund Unit Trust 100%
SLTM Limited Ordinary Shares 100% Sorbin Systems Limited53 Ordinary shares 100% Squadron Capital Asia Pacific GP, LP15 Limited Partnership 100% Squadron Capital Asia Pacific II GP LP15 Limited Partnership 100% Squadron Capital Management Limited15 Limited Liability Company 100% Squadron Capital Partners Limited15 Limited Liability Company 100% Standard Aberdeen Asset Management Limited2 Ordinary shares 100% Standard Aberdeen Group Limited2 Ordinary shares 100% Standard Aberdeen Investment Management Limited2 Ordinary shares 100% Standard Aberdeen Investments Limited2 Ordinary shares 100% Standard Aberdeen Limited2 Ordinary shares 100% Standard Life (Asia) Limited82 Ordinary Shares 100% Standard Life Aberdeen Asset Management Limited2 Ordinary shares 100% Standard Life Aberdeen Group Limited2 Ordinary shares 100% Standard Life Active Plus Bond Trust Unit Trust 100% Standard Life Agency Services Limited2 Ordinary Shares 100% Standard Life Assurance Company of Europe BV60 Ordinary shares 100% Standard Life Assurance (HWPF) Luxembourg S.a r.l.52 Ordinary Shares 100% Standard Life Charity Fund2 N/A 100% Standard Life Client Management Limited2 Ordinary Shares 100% Standard Life European Trust Unit Trust 98% Standard Life European Trust II Unit Trust 100% Standard Life Global Equity Trust II Unit Trust 100% Standard Life International Designated Activity Company83 Ordinary shares 100%
Name of related undertaking Share class1 % interest held MyFolio Multi-Manager IV Fund OEIC 55% MyFolio Multi-Manager V Fund OEIC 52%
Name of related undertaking Share class1 % interest held Standard Life Investments Global SICAV Global Bond Fund88 SICAV 73% Standard Life Investments Global SICAV Global Corporate Bond Fund88 SICAV 63% Standard Life Investments Global SICAV Global Emerging Markets Equity Unconstrained Fund88
Standard Life Investments Global SICAV Global Equities Fund88 SICAV 90% Standard Life Investments Global SICAV Global Focused Strategies Fund88 SICAV 64% Standard Life Investments Global SICAV Global High Yield Bond Fund88 SICAV 81% Standard Life Investments Global SICAV Global Inflation-Linked Bond Fund88 SICAV 36% Standard Life Investments Global SICAV Global REIT Focus Fund88 SICAV 89%
Liability Aware Absolute Return II Nominal Profile Fund77 ICAV 54% Liability Aware Absolute Return II Real Profile Fund77 ICAV 48%
Euro Liquidity Fund89 OEIC 31% Standard Life Investments Multi Asset Class Company15 Ordinary Shares 100% Standard Life Investments Securities LLC21 Ordinary Shares 100% Standard Life Investments Strategic Bond Fund Unit Trust 66% Standard Life Investments UK Real Estate Funds ICVC
Standard Life Investments UK Real Estate Accumulation Feeder Fund Unit Trust 56% Standard Life Investments UK Retail Park Trust90 Unit Trust 57% Standard Life Investments UK Shopping Centre Feeder Fund Company Limited58 Ordinary Shares 100% Standard Life Investments UK Shopping Centre Trust90 Unit Trust 41% Standard Life Japan Trust Unit Trust 78% Standard Life Lifetime Mortgages Limited2 Ordinary Shares 100% Standard Life Master Trust Co. Ltd3 Ordinary Shares 100% Standard Life Multi-Asset Trust Unit Trust 100% Standard Life North American Trust Unit Trust 100% Standard Life Pacific Basin Trust Unit Trust 98% Standard Life Pan-European Trust Unit Trust 100% Standard Life Pension Funds Limited N/A 100% Standard Life Portfolio Investments Limited Ordinary Shares 100% Standard Life Premises Services Limited Ordinary Shares 100% Standard Life Private Equity Trust plc Ordinary Shares 56% Standard Life Property Company Limited Ordinary Shares 100% Standard Life Savings Limited Ordinary Shares 100% Standard Life Savings Nominees Limited Ordinary Shares 100% Standard Life Short Dated UK Government Bond Trust Unit Trust 100% Standard Life Trustee Company Limited Ordinary Shares 100% Standard Life UK Corporate Bond Trust Unit Trust 100% Standard Life UK Equity General Trust Unit Trust 100% Standard Life UK Government Bond Trust Unit Trust 100%
Name of related undertaking Share class1 % interest held Standard Life Wealth (CI) Limited91 Ordinary Shares 100% Standard Life Wealth International Limited91 Ordinary Shares 100% Standard Life Wealth Limited Ordinary Shares 100% Suomen Kaasuenergia Oy92 Ordinary shares 26% Suomi Gas Distribution Holdings Oy55 Ordinary Shares 26% Suomi Gas Distribution Oy55 Ordinary Shares 26% Telles Holding S.a r.l. 52 Ordinary Shares 59% Tenet Business Solutions Limited54 Ordinary shares 25% Tenet Client Services Limited54 Ordinary shares 25% Tenet Group Limited54 Ordinary B Shares 25% Tenet Limited54 Ordinary shares 25% Tenet Valuation Services Limited54 Ordinary shares 25% TenetConnect Limited54 Ordinary shares 25% TenetConnect Services Limited54 Ordinary shares 25% TenetFinancial Solutions Limited54 Ordinary shares 25% TenetLime Limited54 Ordinary shares 25% TenetSelect Limited54 Ordinary shares 25% Tenon Nominees Limited4 Ordinary shares 100% The Coaching Platform Limited6 Ordinary Shares 100% The Employee Benefits Corporation Limited54 Ordinary shares 20% The Heritable Securities and Mortgage Investment Association Limited2 Ordinary Shares 100% The Munro Partnership Ltd.93 Ordinary Shares 100% The Standard Life Assurance Company 20062 N/A 100% Threesixty Partnerships Limited9 Ordinary Shares 100% Threesixty Services LLP9 Limited Liability Partnership 100% Touchstone Insurance Company Limited94 Ordinary Shares 100% Two Rivers One Limited47 Ordinary shares 100% Two Rivers Two Limited47 Ordinary shares 100% UK PRS Opportunities General Partner Limited5 Ordinary shares 100% Vebnet Limited2 Ordinary Shares 100% VPC Greater China Value Fund43 Investment Trust 71% Waverley General Private Equity Limited27 Ordinary shares 100% Waverley Healthcare Private Equity Limited4 Ordinary shares 100% Wealth Horizon Ltd53 Ordinary shares 100% Welbrent Property Investment Company Limited62 Ordinary Shares 100% Whiteleys of Bayswater Limited Ordinary Shares 100% Wise Trustee Limited53 Ordinary shares 100% 1 OEIC = Open-ended investment company
Canada 15 PO Box 309GT, Ugland House, South Church Street, George Town, KY11104, Cayman Islands 16 Bangkok City Tower, 28th Floor, 179 South Sathorn Road, Thungmahamek,
PO Box 5100737, Abu Dhabi, United Arab Emirates 33 1266 East Main Street, 5th Floor, Stamford, CT 06902, USA 34 c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, DE 19801 Wilmington, USA 35 Rua Joaquim Floriano, 913 – 7th floor – Cj. 71 São Paulo SP 04534-013, Brazil 36 1735 Market St, 32nd FL, Philadelphia, PA 19103, USA 37 29 Rue De Berri, Paris, 75008, France 38 40 Upper Mount Street, Dublin 2, Republic of Ireland 39 35a Avenue John F. Kennedy, L-1855 Luxembourg, Luxembourg 40 State Street (Guernsey) Limited, First Floor Dorey Court, Admiral Park, St Peter
Port, Guernsey, GY1 6HJ 41 16th Floor, Menara Dea Tower 2, Kawasan Mega Kuningan, Jl Mega Kuningan
Jersey 45 Suite 26.3, Level 26, Menara IMC, Letter Box No.66, No. 8, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia 46 13th Fl., B Tower (Seocho-dong, Kyobo Tower Building), 465, Gangnam-daero,
Japan 52 6B, rue Gabriel Lippmann, Parc d’Activité Syrdall 2, L-5365 Münsbach,
Luxembourg 53 2 College Square, Anchor Road, Bristol , BS1 5UE 54 5 Lister Hill, Horsforth, Leeds, LS18 5AZ 55 c/o Dittmar & Indrenius, Pohjoiseplanadi 25 A, 00100, Helsinki, Finland 56 Kings Place, 90 York Way, London, N1 9AG, 57 11th Floor, Two Snowhill, Birmingham, West Midlands, B4 6WR 58 44 Esplanade, St Helier, Jersey, JE4 9WG 59 7th Floor, 40 Princes Street, Edinburgh, EH2 2BY 60 Naritaweg 165, 1043 BW Amsterdam, The Netherlands 61 ul. Skaryszewska 7, 03-802 Warsaw, Poland 62 100 Barbirolli Square, Manchester, M2 3AB 63 Calle Nanclares de Oca, 1B, 28022 Madrid, Spain 64 47 Esplanade, St Helier, Jersey , JE1 0BD 65 HDFC House, 2nd floor, H.T. Parekh Marg, 165-166, Backbay Reclamation,
Churchgate, Mumbai- 400 020, India 66 Unit OT 17-30, Level 17, Central Park, Dubai International Financial Centre,
Mahalaxmi, Mumbai - 400011, Maharashtra, India 69 18F, Tower II, The Exchange, 189 Nanjing Road, Heping District, Tianjin,
Zammit Street, St Julian’s, STJ 3155, Malta 79 c/o Citco (Mauritius) Limited, 4th Floor, Tower A, 1 CyberCity, Ebene, Mauritius 80 Springpark House, Basing View, Basingstoke, RG21 4HG 81 Avenue Louise 326, bte 33, 1050 Brussels, Belgium 82 40th Floor, Tower One, Times Square, 1 Matheson Street, Causeway Bay,
Brought forward retained earnings 1,351 837 Profit for the year 624 351 Other movements in retained earnings (411) 163
The Notes on pages 269 to 279 are an integral part of these financial statements 266 Standard Life Aberdeen 2017
Cash flows from operating activities Profit before tax 597 334 Impairment of subsidiary undertakings A 20 49 Impairment of associate undertaking – 3 Gains on financial instruments (2) (4) Dividend income from subsidiaries (794) (458) Interest income on loans to subsidiaries (20) (20) Interest income on available-for-sale debt securities (10) (12) Distributions from equity instruments (34) (34) Interest payable on subordinated liabilities 86 82 Movements in operating assets and liabilities 10 5 Taxation paid – – Net cash flows used in operating activities (147) (55)
Company accounting policies (a) Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of availablefor -sale financial assets (AFS) and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss (FVTPL).
The principal accounting policies adopted are the same as those set out in the Group financial statements, together with the Company specific policies set out below, and have been consistently applied to all financial reporting periods presented in these financial statements.
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. The Company has no employees.
IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. Details of the Group’s assessment of IFRS 9 are given in the basis of preparation of the Group financial statements. Management have assessed the impact of the standard in relation to the Company financial statements. The main impact is that the Company’s debt securities currently classified as available-for-sale and therefore measured at fair value will be measured at amortised cost under IFRS 9. IFRS 9 also introduces a new impairment model, an expected credit loss model, which will replace the current incurred loss model in IAS 39. An impairment loss will now be recognised prior to a loss event occurring. At 31 December 2017 the fair value of available-for-sale securities is £857m with a corresponding available-for-sale financial assets reserve balance of £15m. Of the £857m, £839m is investment grade and £566m is expected to be recovered within one year.
Investments in subsidiaries measured at cost 9,092 4,493 Investments in subsidiaries measured at FVTPL C 333 276 Investments in subsidiaries 9,425 4,769 £m £m
Investment into existing subsidiaries measured at cost 413 220 Acquisition of subsidiaries at cost 4,243 – Disposal of subsidiaries measured at cost (37) (12) Impairment of subsidiaries measured at cost (20) (49) Acquisition of subsidiaries at FVTPL 55 19 Gains on subsidiaries at FVTPL 2 –
Included within the impairment charge of £20m in 2017 (2016: £49m) is an impairment of £7m (2016: £31m) of the Company’s investment in its subsidiary Focus Solutions Group Limited. The recoverable amount is £11m which is its value in use and has been determined using a discount rate of 12% (2016: 12%). Additionally during 2017, an impairment of £13m (2016: £nil) was recognised in relation to the Company’s investment in its subsidiary Standard Life Employee Services Limited. The recoverable amount is £30m which is its value in use and has been determined using a discount rate of 9%. The impairments are as a result of a decrease in projected future revenues of the entities.
During 2016, an impairment charge of £18m was recognised in the Company’s investment in its subsidiary Standard Life Oversea Holdings Limited. This was primarily in relation to an impairment of Standard Life Oversea Holdings Limited’s investment in Standard Life (Asia) Limited.
B. Investments in associates and joint ventures 2017 2016 £m £m
Investments in subsidiaries at FVTPL 333 – – 333 Loans to subsidiaries – – 324 324 Debt securities – 857 – 857 Receivables and other financial assets E – – 76 76 Cash and cash equivalents G – – 7 7
Investments in subsidiaries at FVTPL 276 – – 276 Loans to subsidiaries – – 323 323 Debt securities – 605 – 605 Receivables and other financial assets E – – 54 54 Cash and cash equivalents G – – 55 55
The amount of debt securities expected to be recovered or settled after more than 12 months is £291m (2016: £297m).
Due from related parties 43 52 Collateral pledged in respect of derivatives contracts 28 – Other financial assets 5 2 Total receivables and other financial assets 76 54
Money at call and term deposits with original maturity of less than three months 7 55 Total cash and cash equivalents 7 55
H. Share capital and share premium Details of the Company’s share capital and share premium are given in Note 26 of the Group financial statements including the shares issued during the year in relation to the acquisition of Aberdeen discussed in Note A.
Details of the dividends paid on ordinary shares by the Company are provided in Note 13 of the Group financial statements. Note 13 also includes information regarding the final dividend proposed by the Directors for the year ended 31 December 2017.
I. Shares held by trusts Shares held by trusts relates to shares in Standard Life Aberdeen plc that are held by the Employee Share Trust (EST) and the Unclaimed Asset Trust (UAT). Further details of these trusts are provided in Note 27 of the Group financial statements.
In July 2006 Standard Life demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members were yet to claim their shares and the UAT held these on their behalf. On expiry of the claim period on 9 July 2016, the entitlement to the unclaimed shares remaining in the UAT transferred to the Company and they became classified as shares held by trusts. During the year ended 31 December 2017 11,719,073 shares were transferred from the UAT to the EST for £nil consideration. An amount equivalent to the fair value of shares as at the date of transfer was donated by the Company to the Standard Life Foundation.
Included in retained earnings in 2016 is an amount related to the expiry of the UAT claim period. In addition to unclaimed shares, which are referred to in Note I, the UAT held cash in relation to unclaimed cash entitlements arising from both cash entitlements which were allocated to eligible members of the mutual company at the date of demutualisation and dividends received on shares held in the UAT. On expiry of the UAT claim period on 9 July 2016, the entitlement to the unclaimed cash remaining in the UAT transferred partly to the Company and partly to the Standard Life Foundation. The transfer of the cash entitlement to the Company resulted in the recognition of a cash asset of £36m, the impact of which was recognised directly in retained earnings in equity during the year ended 31 December 2016.
Following the completion of the merger of Standard Life plc and Aberdeen Asset Management plc on 14 August 2017 an amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of Aberdeen and their fair value on that date. Further information on the merger reserve and special reserve is given in Note 29 of the Group financial statements.
Subordinated liabilities M 1,876 – 1,876 Derivative financial liabilities D – 33 33 Other financial liabilities O 19 – 19
Subordinated liabilities M 1,319 – 1,319 Other financial liabilities O 8 – 8
Subordinated notes: 4.25% US Dollar fixed rate due 30 June 2048 $750m £556m – – 5.5% Sterling fixed rate due 4 December 2042 £500m £500m £500m £499m
The Company has surrendered the benefit of its tax losses to underlying subsidiaries for a consideration of £27m (2016: £8m).
Q. Risk management (a) Overview The Company is principally involved in the management of its investments in subsidiaries and is responsible for the raising and allocation of capital to ensure that the operational funding and regulatory capital needs of its subsidiaries are met at all times. The Group’s capital management policies are explained in Note 47 of the Group financial statements.
Through the management of its investment in subsidiaries and capital position, the Company holds financial instruments and is principally exposed to market, credit and liquidity risks.
The risk management processes of the Company are aligned with those of the Group as a whole. Details of the Group’s risk management processes are outlined in the ‘Risk Management’ section within the Strategic report and in Note 39 of the Group financial statements.
(b) Market risk The most significant element of market risk for the Company arises from its exposure to fluctuations in interest rates and equity markets. The Company is exposed to fluctuations in the fair value of future cash flows of financial instruments caused by changes in market interest rates. Financial assets and liabilities which are subject to the most significant exposure to interest rate risk include corporate bonds and money market instruments. The Company is also exposed to fluctuations in equity securities markets, and as a result, changes in the value of its holdings and the return on those holdings.
Derivative instruments may also be utilised to reduce risk arising from exposure to fluctuations in interest rates and equity indices. Transactions in derivatives are undertaken on a regulated market or are with an approved counterparty. In employing derivatives, the Company must always
9. Company financial statements continued have sufficient cash and cash equivalents or underlying assets to cover any potential obligation or exercise right following reasonably foreseeable adverse variations.
Impact on profit after tax 5 4 (6) (4) 3 2 (3) (2) (3) (2) 3 2
The Company’s equity sensitivity to a 1% increase in interest rates is (£15m) (2016: (£17m)) and to a 1% decrease in interest rates is £15m (2016: £17m).
The sensitivity of the Company’s total equity to change in equity security prices in respect of each of the scenarios shown in the preceding tables is the same as the sensitivity of the Company’s profit after tax.
(c)(i) Credit exposure of financial assets The following table provides an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. An explanation of credit ratings is included in Note 39(c) of the Group financial statements.
The total amount in the table below represents the Company’s credit exposure to financial investments at the year end without taking into account any collateral held.
Receivables and other financial assets Cash and cash £m £m £m £m £m £m £m £m £m £m £m £m
At 31 December 2017 and 31 December 2016, no financial assets were past due or impaired.
Liquidity risk is managed through the Group liquidity and capital management policy which is outlined in Note 39(e) of the Group financial statements. The Company is required to manage risk in accordance with Group policy and to take mitigating action as appropriate to operate within defined risk appetites.
Liquidity risk is managed by the Company in consultation with the central Group Treasury function. Liquidity risk is primarily managed by placing limits on the value of financial assets held which are neither quoted nor regularly traded on a recognised exchange and by maintaining a portfolio of committed bank facilities. The Company has access to a syndicated revolving credit facility of £400m which it holds as part of its contingency funding plans. The maturity date of this facility is in 2022 and it is currently undrawn. The Company is also responsible for the definition and management of the contingency funding plan which operates on a continuous basis and is fully documented.
(d)(i) Maturity analysis The analysis that follows presents the cash flow analysis by remaining contractual maturities for subordinated liabilities.
The principal amounts of subordinated liabilities where the counterparty has no right to repayment are excluded from the above analysis along with interest payments on such instruments after 20 years.
Due from related parties: Subsidiaries 70 60 Loans to subsidiaries 324 323
Transactions with related parties carried out by the Company during the year were as follows: £m £m
Where financial instruments arising from transactions with related parties are offset in the statement of financial position, the net position is presented in the tables above.
(b) Compensation of key management personnel The Directors and key management personnel of the Company are considered to be the same as for the Group. Information on both Company and Group compensation paid to Directors and key management personnel can be found in Note 46 of the Group financial statements and the audited section of the Directors’ remuneration report. Information on transactions with/from and balances from/to key management personnel and their close family members can also be found in Note 46 of the Group financial statements. Details of the employee share-based payment schemes operated by the Company are given in Note 45 of the Group financial statements.
T. Fair value of assets and liabilities The Company’s approach to the fair value of assets and liabilities is aligned with the Group policy detailed in Note 41 of the Group financial statements. An analysis of the Company’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes C and L and includes those financial assets and liabilities held at fair value.
(a) Methodology used to determine fair value of assets and liabilities The fair value hierarchy, and the methods and assumptions used to determine fair value by the Company are aligned with the Group, as detailed in Note 41 of the Group financial statements, with the following exceptions: Investments in subsidiaries at FVTPL Investments in subsidiaries at FVTPL comprises £203m (2016: £201m) of investments on a recognised exchange which are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore treated as level 1 investments within the fair value hierarchy.
Investments in subsidiaries at FVTPL 203 201 130 75 – – 333 276
Derivative financial liabilities – – 33 – – – 33 –
U. Events after the reporting date On 23 February 2018 the Group announced the sale of the majority of the business within the Pensions and Savings reportable segment to Phoenix Group Holdings (Phoenix) (the Sale), conditional on shareholder and relevant regulatory approvals. The Sale includes the disposal of Standard Life Assurance Limited (SLAL).
Under the transaction the following businesses will be retained by the Group:  UK retail platforms, including Wrap and Elevate  1825, our financial advice business In addition, the assets and liabilities of both the UK and Ireland Standard Life defined benefit pension plans will be retained by the Group. We are currently considering whether these assets and liabilities should be recognised on the Company statement of financial position post completion.
 recognition of the cash proceeds as detailed above  recognition of an investment in associate relating to the 20% shareholding in the enlarged Phoenix group
Certain APMs that we use were revised following the merger with Aberdeen to reflect the increased asset management focus of the Group, as explained in the relevant sections below. Underlying performance and EBITDA which were APMs previously used by Standard Life plc are no longer reported for the merged Group.
The merger of Standard Life plc and Aberdeen completed on 14 August 2017, with the merger accounted for as an acquisition of Aberdeen by Standard Life plc on that date. The Reported basis results reflect this accounting treatment and therefore Aberdeen results are included from 14 August 2017 only. In our Strategic report we have also presented results on a Pro forma basis to assist in explaining trends by showing a full 12 months performance for the combined Group for both the current year and prior years. Pro forma results for the Group are prepared as if Standard Life plc and Aberdeen had always been merged. The difference between the Reported results and Pro forma results is the results of Aberdeen in the period prior to completion of the merger.
R Measure is a key input to a metric used for Executive remuneration. See page 100 for more information.
Share of associates’ and joint ventures’ tax expense (41) (13) (13) – – – (41) (13) (13)
Profit for the year 732 419 338 282 Standard Life Aberdeen 2017
Analysis of adjusting items The table below provides detail of the adjusting items made in the calculation of adjusted profit before tax.