Life Investments LTIP, Standard Life (Employee) Share Plan, the Sharesave Plan and Sharesave Ireland Plan). As is normal practice, there are employee trusts that operate in conjunction with the Executive LTIP, Group LTIP and Standard Life Investments LTIP and the Standard Life (Employee) Share Plan. On 31 December 2014, the number of unallocated shares held within these trusts was 6,470 in respect of the Standard Life (Employee) Share Plan. In addition, the trusts held 1,081,758 shares acquired to satisfy deferred bonus awards, Executive LTIP, Group LTIP and Standard Life Investments’ LTIP awards and other share plan awards. Of these shares 34,653 are committed to satisfying vested but unexercised awards. The percentage of share capital held by the employee trusts is comfortably less than the 5% best practice limit endorsed by the IA.
Related party transactions All transactions between Directors and the Group are on commercial terms that are equivalent to those available to all employees. During the year to 31 December 2014, the Directors contributed £599,203 (2013: £2,869,942) to products sold by the Group.
Approval This report was approved by the Board on 20 February 2015 and signed on its behalf by: Lynne Peacock, Chairman, Remuneration Committee 20 February 2015 102 Standard Life
• We identified 9 of the Group's reporting units which, in our view, required an audit of their complete financial information, either due to their size and/or their risk characteristics. These focused on the material reporting units within the UK and Europe, Standard Life Investments and Canada.
• Overall we concluded that this gave us the evidence we needed for our opinion on the financial statements as a whole.
• Our risk assessment identified the following as areas of focus specific to our audit of the financial statements: • The valuation of life insurance contract liabilities, focussing particularly on annuitant mortality assumptions • The valuation of identifiable intangible assets arising from business combinations, focussing on intangible assets arising as a result of the acquisition of Ignis Asset Management Limited • The valuation of complex financial investments in the financial statements, particularly focussing on investments where the valuations involved judgements or specialist valuation processes • The presentation and disclosure of the disposal of the Canadian business announced in 2014.
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
• To assist in our evaluation of the methodology applied in the models, we focused on significant changes made to those models by obtaining documentation of the key changes from management and assessing these against relevant financial and regulatory reporting requirements and industry standards
• We assessed the key changes in the methodology and the assumptions used against regulatory and financial reporting requirements and industry standards, in particular for the expected future improvements in annuitant mortality. Having ascertained the extent of a change in the methodology and/or the key assumptions that either individually or collectively could result in a material misstatement, we considered the likelihood of such a change in those key assumptions arising.
Valuation of identifiable intangible asset arising from business combinations Refer to page 56 (Audit Committee Report), page 120 (Critical accounting estimates and judgement), page 122 (Accounting policies) and page 136 (notes). The acquisition of Ignis Asset Management Limited during 2014 required the Directors to make significant judgements with respect to the identification and valuation of an intangible asset acquired, being the value of customer contracts acquired.
We also focused on management’s update to the valuation at the year end to reflect movements in the assumptions as a result of post-acquisition events such as fund flows, discount rate and operating margins. This resulted in an impairment charge of £43 million.
Our approach to testing the valuation of the intangible asset as at the date of acquisition included: • Evaluating the methodology applied to the valuation of customer contracts and assessing whether the assumptions and inputs used in the model reflected the facts and circumstances as at the date of acquisition
• Challenging the assumptions used against our own independent expectations, which were based on our industry knowledge and experience, and checking the consistency of forecast data included in the model with the Group’s own forecasts and business plans approved by the Board.
We tested the value of the intangible asset at year end to assess whether movements in the assumptions were as a results of post-acquisition events, and had been reflected in the value of the intangible asset by: • Agreeing that management’s impairment assessment reflected post acquisition events by checking that changes made to the assumptions were supported by appropriate evidence
• Evaluating and challenging changes in the forecast fund flows and obtaining evidence to support the historic accuracy of management’s forecasting process
• Challenging changes in the discount rate and obtaining evidence to support the change in risk profile of the forecasts which were being reflected in the change in the discount rate
• The selection of future rental income and discount rate assumptions for valuing real estate investments.
• Understanding and assessing the models and inputs used for a sample of derivative investments across the investment portfolio for which there is no active market price available. This included recalculating the sample of valuations using independent models and assessing data inputs against recognised independent market data providers.
Based on our audit work we found that the judgements used were consistent with prior years and industry practice and that the inputs and assumptions used were within ranges which we considered to be acceptable.
• Assessing the valuation of assets and liabilities in the Canadian business to consider whether any revaluation or impairment was required by considering the headroom between the fair value less costs to sell and the carrying value of assets and liabilities in the Group
The Group is now reported in four segments being UK and Europe, Standard Life Investments, Asia and Emerging Markets and Other, and the Canadian operations which are treated as discontinued. These segments are disaggregated into reporting units. The Group’s financial statements are a consolidation of these reporting units.
We identified nine of the Group's reporting units which, in our view, required an audit of their complete financial information, either due to their size and/or their risk characteristics. These focused on the material reporting units within the UK and Europe, Standard Life Investments and Canada. In addition, specific audit procedures on certain account balances and transactions were performed at a further 13 reporting units within the Group across all segments. Additional procedures were also performed at the Group-level over the Group consolidation and other reporting units in order to obtain further audit evidence. Overall we concluded that this gave us the evidence we needed for our opinion on the financial statements as a whole.
Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality £37million (2013: £40 million).
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
In our opinion: • The information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements • The information given in the Corporate Governance Statement set out on pages 48 to 70 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.
Directors’ remuneration Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Corporate governance statement Under the Companies Act 2006, we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility.
Under the Listing Rules, we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review.
Our responsibilities and those of the directors As explained more fully in the Directors’ responsibilities statement set out on page 47, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • Whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed • The reasonableness of significant accounting estimates made by the Directors • The overall presentation of the financial statements.
(a) The maintenance and integrity of the Standard Life plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Consolidated income statement For the year ended 31 December 2014 restated1 Notes £m £m
Profit before tax expense attributable to equity holders’ profits 422 423
Total tax expense 11 292 280 Less: Tax attributable to policyholders’ returns (250) (222) Tax expense attributable to equity holders’ profits 11 42 58 Profit for the year from continuing operations 380 365 Profit for the year from discontinued operations 12 127 131 Profit for the year 507 496
Attributable to: Equity holders of Standard Life plc 503 466 Non-controlling interests 33 4 30 507 496 Earnings per share from continuing operations Basic (pence per share) 13 15.8 14.2 Diluted (pence per share) 13 15.7 14.1
Earnings per share Basic (pence per share) 13 21.1 19.7 Diluted (pence per share) 13 21.0 19.6 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
IFRSs adopted in the period and the classification in the current year of the Group’s Canadian business as discontinued operations. Refer to Group accounting policies – (a) Basis of preparation and Note 12 – Discontinued operations.
Items that will not be reclassified subsequently to profit or loss: Remeasurement gains on defined benefit pension plans 38 292 70
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 11 - (2)
Items that may be reclassified subsequently to profit or loss: Fair value gains on cash flow hedges 1 -
Total comprehensive income for the year from discontinued operations 109 113
Adjusted for the following items Short-term fluctuations in investment return and economic assumption changes 15 73 88 (22) (70) (92)
Restructuring and corporate transaction expenses (109) (31) (140) (71) (2) (73)
Share of associates’ and joint ventures’ tax expense 2 (5) - (5) (7) (1) (8)
Segmental analysis (b) Reportable segments – Group operating profit, revenue and asset information. 2 Dubai business, the closure of which was announced in November 2014, is included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the pro forma reconciliation above includes the reclassification of Dubai results between discontinued and continuing operations. Comparatives have been restated.
Assets Intangible assets 16 565 300 Deferred acquisition costs 17 771 905 Investments in associates and joint ventures 18 4,508 1,784 Investment property 19 9,041 8,606 Property, plant and equipment 20 186 219 Pension and other post-retirement benefit assets 38 760 432 Deferred tax assets 21 33 121 Reinsurance assets 34 6,036 6,173 Loans 22 400 2,924 Derivative financial assets 22 4,021 1,991 Equity securities and interests in pooled investment funds 22 71,327 84,654 Debt securities 22 64,441 69,209 Receivables and other financial assets 22 1,248 1,107 Other assets 26 307 272 Assets held for sale 27 29,338 121 Cash and cash equivalents 22 10,617 10,322 Total assets 203,599 189,140 Equity Share capital 29 239 238 Shares held by trusts 30 1 (6) Share premium reserve 29 1,115 1,110 Retained earnings 31 1,816 1,391 Other reserves 32 1,501 1,494 Equity attributable to equity holders of Standard Life plc 4,672 4,227 Non-controlling interests 33 278 333 Total equity 4,950 4,560 Liabilities Non-participating insurance contract liabilities 34 21,841 28,312 Non-participating investment contract liabilities 34 88,207 97,659 Participating contract liabilities 34 31,276 30,447 Reinsurance liabilities 34 - 316 Deposits received from reinsurers 35 5,642 5,589 Third party interest in consolidated funds 33 15,805 16,058 Borrowings 35 44 95 Subordinated liabilities 35 1,612 1,861 Pension and other post-retirement benefit provisions 38 44 104 Deferred income 39 276 316 Deferred tax liabilities 21 214 178 Current tax liabilities 21 172 55 Derivative financial liabilities 24 1,693 932 Other financial liabilities 35 3,690 2,510 Other liabilities 41 100 148 Liabilities of operations held for sale 27 28,033 - Total liabilities 198,649 184,580 Total equity and liabilities 203,599 189,140 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation. The Notes on pages 135 to 237 are an integral part of these consolidated financial statements.
interests Total equity 2014 Notes £m £m £m £m £m £m £m £m
Profit for the year from continuing operations - - - 376 - 376 4 380 Profit for the year from discontinued operations - - - 127 - 127 - 127 Other comprehensive income for the year from continuing operations - - - 296 15 311 - 311 Other comprehensive income/(expense) for the year from discontinued operations - - - (15) (3) (18) - (18)
Total comprehensive income for the year - - - 784 12 796 4 800 Distributions to equity holders 15 - - - (386) - (386) - (386) Issue of share capital 29 1 - 5 - - 6 - 6 Reserves credit for employee share-based payment schemes 32 - - - - 27 27 - 27 Transfer to retained earnings for vested employee share-based payment schemes 31, 32 - - - 27 (27) - - - Transfer to retained earnings on sale of owner occupied property 31, 32 - - - 4 (4) - - - Shares acquired by employee trusts - (3) - - - (3) - (3) Shares distributed by employee trusts 31 - 10 - (10) - - - - Other movements in non-controlling interests in the year - - - - - - (59) (59) Aggregate tax effect of items recognised directly in equity 11 - - - 6 (1) 5 - 5
Non-cash items relating to investing and financing activities 45 189 134
Purchase of intangible assets not acquired through business combinations (54) (47)
Capital flows from third party interest in consolidated funds and non-controlling interests 3,434 4,332
Cash and cash equivalents at the beginning of the year 28 10,253 9,889
(a)(i) New standards, interpretations and amendments to existing standards that have been adopted by the Group The Group has adopted the following new International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), interpretations and amendments to existing standards, which are effective by EU endorsement for annual periods beginning on or after 1 January 2014 unless otherwise stated. The Group’s accounting policies have been updated to reflect these.
IFRS 10 Consolidated Financial Statements and amendments to IAS 27 Separate Financial Statements IFRS 10 introduces a single consolidation model to be applied to all entities and replaces previous requirements on control and consolidation in IAS 27 Consolidated and Separate Financial Statements and Standing Interpretations Committee (SIC) 12 Consolidation – Special Purpose Entities. IFRS 10 defines control, determines how to identify if an investor controls an investee and requires an investor to consolidate entities it controls under the new definition. IFRS 10 identifies three elements, all of which must be present for an investor to control an investee, which are as follows: • Power over the investee • Exposure, or rights, to variable returns from its involvement with the investee • The ability to use that power over the investee to affect the amount of the returns.
The standard has been adopted retrospectively subject to the transition guidance which permits retrospective application only in circumstances when the outcome of the control assessment for individual entities at the date of initial application differs from the outcome under the previous accounting policy. The date of initial application for the Group’s financial statements is 1 January 2014.
IFRS 11 Joint Arrangements IFRS 11 defines and establishes accounting principles for joint arrangements and replaces previous requirements in IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. The standard distinguishes between two types of joint arrangements – joint ventures and joint operations – based on how rights and obligations are shared by the parties to the arrangement. Joint operators should recognise their share of the assets, liabilities, revenue and expenses of the interest in accordance with applicable IFRSs. Joint venturers should apply the equity method of accounting prescribed in IAS 28 Investments in Associates and Joint Ventures 2011 to account for their interest. The adoption of IFRS 11 has resulted in six entities which were previously classified as jointly controlled entities under IAS 31 being classified as joint operations. As a result the Group’s share of these entities’ assets, liabilities, revenues and expenses are now recognised in accordance with applicable IFRS. The standard has been applied retrospectively and the impact on the consolidated income statement and the consolidated statement of financial position for the comparative period is shown in the tables in (a)(iii).
IFRS 12 Disclosure of Interests in Other Entities IFRS 12 is a single disclosure standard which applies to all entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 requires entities to disclose information to enable users of the financial statements to evaluate the nature, risks and financial effects associated with interests in other entities. The required disclosures are grouped into the following main categories: • Significant judgements and assumptions • Interests in subsidiaries • Interests in joint arrangements and associates • Interests in unconsolidated structured entities.
The required disclosures are provided in the Group accounting policies, Note 1 – Group structure, Note 18 – Investments in associates and joint ventures, Note 33 – Non-controlling interests and third party interest in consolidated funds and Note 43 – Structured entities.
The impact of the adoption of IAS 28 (2011) is that a number of equity investments in entities over which the Group has significant influence which were previously out of scope of IAS 28 have now been brought into scope resulting in the reclassification of these investments as investments in associates. Where the FVTPL election is available the Group has continued to measure these investments at FVTPL. All other investments in associates are measured using the equity method. The standard has been applied retrospectively and the impact on the consolidated income statement and the consolidated statement of financial position for the comparative period is shown in the tables in (a)(iii).
Other Additionally the Group has adopted the following amendments to existing standards which are effective by EU endorsement from 1 January 2014 and management considers the implementation of these amendments has had no significant impact on the Group’s financial statements: • Amendments to IAS 39 Financial Instruments: Recognition and Measurement • Amendments to IAS 32 Financial Instruments: Presentation • Amendments to IAS 36 Impairment of Assets.
Additionally IFRS 9 removes and replaces the current requirements for hedge effectiveness in IAS 39 and therefore the requirements for the application of hedge accounting. The new requirements change what qualifies as a hedged item and some of the restrictions on the use of some hedging instruments. The accounting and presentation requirements remain largely unchanged. However, entities will now be required to reclassify the gains and losses accumulated in equity on a cash flow hedge to the carrying amount of a non-financial hedged item when it is initially recognised.
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions 1 July 2014 The amendments clarify the requirements for attributing employee and third party contributions to periods of service and recognising employee and third party contributions in certain situations.
Amendment to IAS 16 Property, Plant & Equipment and IAS 38 Intangible Assets: Depreciation and Amortisation 1 January 2016 The amendment clarifies the appropriate application of revenue based depreciation or amortisation. The amendment clarifies that revenue based depreciation is not appropriate for property, plant and equipment and, in most circumstances, revenue based amortisation is not appropriate for intangible assets however this is rebuttable.
Amendment to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 1 January 2016 The amendment addresses an inconsistency between IFRS 10 and IAS 28 and clarifies the treatment of a sale or contribution of assets between investors and associates or joint ventures.
Amendment to IFRS 11 Joint arrangements: Accounting for Acquisitions of Interests in Joint Operations 1 January 2016 The amendment to IFRS 11 requires the application of business combination accounting for the acquisition of the interest in a joint operation which constitutes a business.
Additionally the amendments clarify the circumstances in which the exemption for investment entities from preparing consolidated financial statements apply and that only a subsidiary which is not an investment entity and provides support services to an investment entity is consolidated.
(a)(iii) Impact of retrospective application of new standards, interpretations and amendments to published standards The following tables show the impact of the accounting policy changes as a result of the adoption of the new consolidation standards, (IFRS 10, IFRS 11, and IAS 28 (2011)) on the consolidated income statement for the year ended 31 December 2013.
Total tax expense 305 7 - - 312 (32) 280 Effect of restatement analysed as
Tax expense attributable to policyholders’ returns 215 7 - - 222 - 222
Attributable to: Equity holders of Standard Life plc 493 - - - 493 (113) 380 Non-controlling interests 30 - - - 30 - 30
Investment in associates and joint ventures 328 - (60) 1,516 1,784 Investment property 8,545 - 61 - 8,606 Derivative financial assets 1,767 224 - - 1,991 Equity securities and interests in pooled investment funds 90,316 (4,146) - (1,516) 84,654 Debt securities 62,039 7,170 - - 69,209 Receivables and other financial assets 1,042 65 - - 1,107 Other assets 269 2 1 - 272 Cash and cash equivalents 9,104 1,213 5 - 10,322
Total liabilities 180,045 4,528 7 - 184,580 Effect of restatement analysed as
Third party interest in consolidated funds 11,803 4,255 - - 16,058 Derivative financial liabilities 795 137 - - 932 Other financial liabilities 2,367 136 7 - 2,510
Group accounting policies continued (a) Basis of preparation continued (a)(iii) Impact of retrospective application of new standards, interpretations and amendments to published standards continued In addition to the above, the Group has restated comparative periods presented in the cash flow statement. The overall impact is a decrease in net cash flows from operating activities for the year ended 31 December 2013 of £612m, and an increase in net cash flows from financing activities for the year ended 31 December 2013 of £1,832m. There was no impact on cash flows from investing activities.
Consolidation assessment Assessment of control (b)(i) and Notes 1 and 43
(a)(v) Exchange rates The income statements and cash flows, and statements of financial position of Group entities that have a different functional currency from the Group’s presentation currency have been translated using the following principal exchange rates: statement (average rate)
Joint operations are accounted for by recognising the Group’s share of the assets, liabilities, revenues and expenses of the arrangement in accordance with applicable IFRSs. Joint ventures are accounted for using the equity method.
Investments in associates and joint ventures that are accounted for using the equity method are initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the associate and joint ventures. The Group’s share of post-acquisition profit or loss of its associates and joint ventures is recognised in the consolidated income statement and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.
The Group’s investment in associates and joint ventures recognised in the consolidated statement of financial position includes goodwill, net of any impairment loss, identified on acquisition.
Unrealised gains on transactions between the Group and its associates and joint ventures accounted for using the equity method are eliminated to the extent of the Group’s interest in the associates and joint ventures. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. The accounting policies of associates and joint ventures accounted for using the equity method have been changed where necessary to ensure consistency with the policies adopted by the Group.
(b)(iii) Structured entities The Group has investments in a range of investment vehicles including open-ended investment companies (OEICs), unit trusts and limited partnerships. These vehicles are structured in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity and as such are classified as structured entities. The Group’s ownership interest in these vehicles can vary
(b) Basis of consolidation continued (b)(iii) Structured entities continued from day to day based on the Group and third party participation in them. Where Group companies are deemed to control such vehicles, they are consolidated. Where the Group has an investment but not control over these types of entities, the investment is classified as an investment in associate where the Group has significant influence, or as equity securities and pooled investment funds in the consolidated statement of financial position.
The identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. The consideration transferred in a business combination is measured at fair value at the acquisition date. Any asset or obligation for contingent consideration arising from an acquisition is recognised at fair value at the acquisition date on the consolidated statement of financial position and subsequent changes in fair value are recorded in other income in the consolidated income statement. Acquisition-related costs are expensed when incurred.
(c)(ii) Group reconstructions The Group uses merger accounting principles to account for Group reconstructions which are not business combinations within the scope of IFRS 3 Business Combinations. Under the principles of merger accounting, assets and liabilities transferred to a new entity are recorded in the new entity at the carrying value they were measured at by the transferor. No goodwill is recognised as a result of such transactions.
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 the foreign currency translation reserve in equity. Where the unallocated divisible surplus changes as a result of such exchange differences which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the consolidated income statement but is recognised in equity (refer also to policy (h)(iii)).
The exchange rates used to translate financial statements of Group entities that have a different functional currency than the Group’s presentation currency are shown in (a)(v) Exchange rates.
(e) Segmental reporting The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed and the way in which key financial information used by the executive team to review performance is presented.
The Group has written insurance and investment contracts which contain discretionary participating features (e.g. with profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These 122 Standard Life
Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts the product class is separated into the insurance element, a non-participating investment element and a participating investment element, so that each element is accounted for separately.
(g) Revenue recognition (g)(i) Deposit accounting for non-participating investment contracts Contributions received on non-participating investment contracts are treated as policyholder deposits and not reported as revenue in the consolidated income statement.
For debt securities classified as available-for-sale (AFS), interest income recognised in the consolidated income statement is calculated using the effective interest rate (EIR) method.
Rental income is recognised in the consolidated income statement on a straight-line basis over the term of the lease.
(g)(iv) Fee and commission income All fees related to unit linked non-participating investment contracts are deemed to be associated with the provision of investment management services. Fees related to the provision of investment management services and administration services are recognised as the services are provided. Front-end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the expected life of the contract. Ongoing fees that are charged periodically, either directly or by making a deduction from invested funds, are recognised as received, which corresponds to when the services are provided.
Commissions received or receivable are recognised as revenue on the commencement or renewal date of the related policies. However, when it is probable that the Group will be required to render further services during the life of the policy, the commission is deferred as a liability and is recognised as the services are provided.
Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under policy (f).
The recoverable amount of an asset is the greater of its net selling price (fair value less costs to sell) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or group of units, to which the asset belongs.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated, from the acquisition date, to each of the Group’s cash generating units or groups of cash generating units that are expected to benefit from the business combination. The carrying amount of goodwill for each cash generating unit or group of cash generating units is reviewed when changes in circumstances or events indicate that there may be uncertainty over its carrying value, and at least annually.
Goodwill is carried at cost less any accumulated impairment losses and is included in intangible assets.
(j)(ii) Intangible assets Intangible assets are recognised on the consolidated statement of financial position if it is probable that the relevant future economic benefits attributable to the asset will flow to the Group and they can be measured reliably and are either identified as separable (i.e. capable of being separated from the entity and sold, transferred, rented or exchanged) or they arise from contractual or other legal rights, regardless of whether those rights are transferable or separable.
Intangible assets are recognised at cost. For intangible assets acquired in a business combination, the cost is the fair value at the acquisition date.
• Other acquired intangible assets – between two and six years.
(k) Deferred acquisition costs (k)(i) UK and Europe – insurance and participating investment contracts Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that is subject to the Prudential Regulation Authority (PRA) realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts, acquisition costs, which include both incremental acquisition costs and other indirect costs of acquiring and processing new business, are deferred.
Trail or renewal commission on non-participating investment contracts where the Group does not have an unconditional legal right to avoid payment, is deferred at inception of the contract and an offsetting liability for contingent commission is established.
(m) Property, plant and equipment Owner occupied property consists of land and buildings owned and occupied by the Group. Owner occupied property is recognised initially at cost and subsequently at fair value at the date of revaluation less any subsequent accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset into working condition for its intended use. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Prior to the demutualisation of The Standard Life Assurance Company (SLAC), increases in the fair value of owner occupied property were recognised in the unallocated divisible surplus and following the demutualisation of SLAC, all fair value increases are recognised in the revaluation reserve in equity. Where the unallocated divisible surplus changes as a result of fair value increases which are attributable to participating policyholders, this change in the unallocated divisible surplus is not recognised in the consolidated income statement but through equity. Decreases in the fair value of owner occupied property that offset previous increases in the same asset were recognised in the unallocated divisible surplus prior to the demutualisation of SLAC and are recognised in the revaluation of owner occupied property reserve in equity after the demutualisation of SLAC. All other decreases are charged to the consolidated income statement for the period.
Owner occupied property is depreciated on a straight-line basis over its estimated useful life, generally between 30 and 50 years. The depreciable amount of an asset is determined by the difference between the fair value and the residual value. The residual value is the amount that would be received on disposal if the asset was already at the age and condition expected at the end of its useful life. Equipment is stated at historical cost less depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation on equipment is charged to the consolidated income statement on a straight-line basis over its estimated useful life of between two and fifteen years. The residual values and useful lives of the assets are reviewed at each reporting date and adjusted if appropriate.
Current tax and deferred tax is recognised in the consolidated income statement except when it relates to items recognised in other comprehensive income or directly in equity, in which case it is credited or charged to other comprehensive income or directly in equity respectively.
Reinsurance recoveries due from reinsurers and reinsurance premiums due to reinsurers under reinsurance contracts that are contractually due at the reporting date are separately recognised in receivables and other financial assets and other financial liabilities respectively.
(p) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets classified as loans include loans secured by mortgages and loans secured on policies.
cannot yet be identified with the individual financial assets in the Group. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant.
If there is no evidence of impairment on an individual basis, a collective impairment review is undertaken whereby the assets are grouped together, on the basis of similar credit risk characteristics, in order to calculate a collective impairment loss. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
Loans which are subject to collective impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans after the minimum number of payments under the renegotiated terms have been collected. Individually significant loans whose terms have been renegotiated are subject to ongoing review to determine whether they remain impaired or past due.
All derivative instruments are classified as held for trading (HFT) except those designated as part of a hedging relationship. Hedge accounting policies are described in policy (q)(i).
Instruments classified as HFT or as at FVTPL are measured at fair value with changes in fair value recognised in the consolidated income statement.
Debt securities designated as AFS are measured at fair value. For these instruments interest calculated using the effective interest rate method is recognised in the consolidated income statement. Other changes in fair value and any related tax are recognised in other comprehensive income and recorded in a separate reserve within equity until disposal or impairment, when the cumulative gain or loss is recognised in the consolidated income statement with a corresponding movement through other comprehensive income. An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows.
The Group discontinues hedge accounting in the following circumstances: • It is evident from effectiveness tests that the hedge is not, or ceased to be, highly effective • The hedging instrument expires, or is sold, terminated or has been exercised, or • The hedged item matures or is sold or repaid.
Group accounting policies continued (q) Equity securities, debt securities and derivatives continued (q)(i) Hedge accounting continued change in fair value of the derivative is recognised directly in the cash flow hedges reserve in equity. Any ineffectiveness is recognised immediately in the consolidated income statement. Amounts that have been recognised directly in the cash flow hedge reserve are recognised in the consolidated income statement in the same period or periods during which the hedged item affects the profit or loss.
If the net investment hedge ceases to meet the relevant hedging criteria, hedge accounting is discontinued and gains and losses accumulated in equity remain in equity until the disposal of the net investment, at which point the amounts are included in the consolidated income statement.
If the Company or its subsidiaries purchase any equity instruments of the Company, the consideration paid is treated as a deduction from total equity. Any corresponding obligation to deliver a fixed number of the Company’s equity instruments is offset within the shares held by trusts balance in equity. Where such shares are sold, if the proceeds are equal to or less than the purchase price paid, the proceeds are treated as a realised profit in equity. If the proceeds exceed the purchase price, the excess over the purchase price is transferred to the share premium reserve.
(t)(iii) Reserve arising on Group reconstruction The reserve arising on Group reconstruction represents the difference between the fair value and book value of the assets and liabilities of the Group at the time when merger accounting principles are applied under accounting policy (c)(ii) on Group reconstructions. A component of the reserve arising on Group reconstruction is released to retained earnings on disposal of entities that were involved in the related Group reconstruction.
Further details on these policies and the policies for the measurement of non-participating investment contracts are given in policies (v), (w) and (x).
The WPBR is primarily based on the retrospective calculation of accumulated assets shares. The aggregate value of individual policy asset shares reflects the actual premium, expense and charge history of each policy. The net investment return credited to the asset shares is consistent with the return achieved on the assets notionally backing participating business. Any mortality deductions are based on published mortality tables adjusted where necessary for experience variations. For those asset shares on an expense basis, the allowance for expenses attributed to the asset share is, as far as practical, the appropriate share of the actual expenses incurred or charged to the fund. For those on a charges basis, the allowance is consistent with the charges for an equivalent unit linked policy. The FPRL comprises other components such as a market consistent stochastic valuation of the cost of options and guarantees.
(v) Participating contract liabilities and non-participating insurance contracts continued (v)(i) Participating contract liabilities continued The Scheme provides that certain defined cash flows (recourse cash flows) 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 Shareholder Fund (SHF) or the Proprietary Business Fund (PBF) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL.
Under the PRA realistic basis, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on nonparticipating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
In relation to the HWPF, amounts are considered to be allocated to equity holders when they emerge as recourse cash flows within the HWPF. The Scheme permits the HWPF to enter into loans, the repayment of which is contingent on the emergence of recourse cash flows (contingent loan agreement). The Scheme requires that an amount equal to the loan proceeds received on a contingent loan agreement (securitisation receipt) is transferred to the SHF or PBF of SLAL. When the HWPF enters into a contingent loan agreement and the securitisation receipt transferred to the SHF or PBF is in the form of an instrument whose cash flows are contingent on the emergence of recourse cash flows within the HWPF, the obligation to transfer, and the subsequent transfer of, the securitisation receipt is not treated as an allocation to equity holders from the HWPF. In this case the obligation of the HWPF to repay the contingent loan agreement, in excess of repayments reflecting emerged recourse cash flows, is not considered to be a recognised liability of the HWPF in the determination of the UDS.
As a result of the policies for measuring the HWPF’s assets and all its other recognised liabilities: • The UDS of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future recourse cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the Realistic Balance Sheet value and IFRS accounting policy value of all assets and all liabilities other than participating contract liabilities recognised in the HWPF
respectively. Otherwise it is recognised as a separate amount reflected in liabilities comprising participating contract liabilities and UDS.
(v)(ii) Non-participating insurance contract liabilities UK and Europe The liability for annuity in payment contracts is measured by discounting the expected future annuity payments together with an appropriate estimate of future expenses at an assumed rate of interest derived from yields on the underlying assets.
Other non-participating insurance contracts are measured using the gross premium method. In general terms, a gross premium valuation basis is one in which the premiums brought into account are the full amounts receivable under the contract. The method includes explicit estimates of premiums, expected claims and costs of maintaining contracts. Cash flows are discounted at the valuation rate of interest determined in accordance with Prudential Regulation Authority (PRA) requirements.
For non-participating insurance contracts issued by SLCC, the Canadian regulatory valuation technique is applied. Under Canadian regulations, liabilities are determined according to the Canadian Asset Liability Method (CALM). Assets and liabilities are projected under a number of different economic scenarios. These scenarios include the current yield curve as at the valuation date and a number of various rising and falling interest rate environments. Under each scenario, the assets required to support the liabilities are the value of assets which will achieve zero surplus at the end of the projection period. In this valuation allowance is made for income taxes arising from differences between tax and accounting bases that are policy related. Under CALM the deferred taxes recognised under IAS 12 relating directly to policy related items included in the computation of liabilities are eliminated in the liabilities and discounted deferred taxes are added. The liability is set equal to the greatest value of the required assets.
(z) Subordinated liabilities Subordinated liabilities are initially recognised at the value of proceeds received net of issue expenses. The total finance costs are charged to the consolidated income statement over the relevant term of the instrument using the effective interest rate. The carrying amount of the debt is increased by the finance cost in respect of the reporting period and reduced by payments made in respect of the debt in the period.
For defined benefit plans, the liability recognised on the consolidated statement of financial position is the present value of the defined benefit obligation less the fair value of plan assets. If the fair value of the plan assets exceeds the defined benefit obligation, a pension surplus is only recognised if the Group considers that it has an unconditional right to a refund. The amount of surplus recognised will be limited by tax and expenses. Plan assets exclude any insurance contracts or non-transferable financial instruments issued by the Group. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method whereby estimated future cash outflows are discounted using interest rates of high quality corporate
(aa) Pension costs and other post-retirement benefits continued bonds denominated in the currency in which the benefits will be paid of similar term as the pension liability. Where appropriate these interest rates are adjusted to take account of abnormal market conditions. Remeasurements, which include gains and losses as a result of changes in actuarial assumptions, the effect of the asset ceiling and returns on plan assets (other than amounts included in net interest) are recognised in other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.
(bb) Deferred income Front-end fees on service contracts, including investment management service contracts, are deferred as a liability and amortised on a straight-line basis to the consolidated income statement over the period services are provided.
(dd) Non-current assets held for sale Assets and liabilities of operations and individual non-current assets which have been classified as held for sale are presented separately in the consolidated statement of financial position. Operations and individual non-current assets are classified as held for sale when their carrying amount will be recovered principally through a sale transaction.
Individual non-current assets classified as held for sale are measured at the lower of their carrying amount and their fair value, less the estimated incremental costs that are directly attributable to the disposal (excluding finance costs and income tax expense), other than financial assets and investment property which continues to be measured based on the accounting policies that applied before they were classified as held for sale. No depreciation or amortisation is charged on an asset once it has been classified as held for sale.
If the equity instruments do not vest until the employee has fulfilled specified vesting conditions, the Group presumes that the services to be rendered by the employee as consideration for those equity instruments will be received in the future, during the period of those vesting conditions (vesting period). Therefore, the Group recognises the charge in respect of those services as they are rendered during the vesting period with a corresponding credit to the equity compensation reserve in equity.
(jj) Operating profit continued Operating profit also excludes the impact of the following items: • Restructuring costs and significant corporate transaction expenses • Impairment of intangible assets • Profit or loss arising on the disposal of a subsidiary, joint venture or associate • Amortisation of intangibles acquired in business combinations • Changes in Canada insurance contract liabilities as a result of the resolution of the tax position of individual matters relating to prior years • Items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group.
(kk) Earnings per share 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 less the weighted average number of shares owned by the Company and employee trusts that have not vested unconditionally to employees.
Diluted earnings per share can also be calculated by adjusting profit or loss for the effects of changes in income, expenses, tax and dividends that would have occurred had the dilutive potential ordinary shares been converted into ordinary shares.
Alternative earnings per share is calculated on operating profit before tax. Refer to policy (jj) for details of the adjusted items.
The following are particulars of the Company’s principal subsidiaries at 31 December 2014 which are unlisted entities except where indicated. Only the undertakings of the Company whose results or financial position, in the opinion of the Directors, principally affect the consolidated financial statements of the Group are listed below as permitted by Section 410(2) of the Companies Act 2006. A complete list of the Company’s subsidiaries is available as an attachment to the Company’s Annual Return.
Ignis is reported in the Group’s Standard Life Investments reportable segment.
At the acquisition date the consideration, net assets acquired and resulting goodwill were as follows: 1 July 2014 Notes £m Purchase consideration Cash 385 Contingent consideration liability 1 Contingent consideration asset (20) Total purchase consideration 366 Fair value of net assets acquired: Customer-related intangible assets 16 208 Cash and cash equivalents 88 Other financial assets 76 Deferred tax assets 21 6 Other assets 13 Deferred tax liability 21 (40) Trade payables (37) Accruals (36) Other liabilities (17) Goodwill 16 105
Customer-related intangible assets relate to the existing investment management agreements in place at the acquisition date between Ignis and Phoenix Group, as well as other retail and institutional clients. The deferred tax liability of £40m relates to the temporary difference arising from the recognition of the customer-related intangible assets and will be released as these intangible assets are amortised or impaired.
If the acquisition had occurred on 1 January 2014, the Group’s total revenue and profit from continuing operations for the year would have increased by £66m and £5m to £16,654m and £385m respectively.
2. Segmental analysis (a) Basis of segmentation The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed. The Group’s reportable segments are as follows: Continuing operations: Standard Life Investments Standard Life Investments provides a range of investment products for individuals and institutional customers through a number of different investment vehicles. Investment management services are also provided by Standard Life Investments to the Group’s other reportable segments. This segment includes the Group’s share of the results of HDFC Asset Management Company Limited.
UK and Europe UK and Europe provide a broad range of long-term, savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
Asia and Emerging Markets The businesses included in Asia and Emerging Markets offer a range of savings and investment products and comprise wholly owned operations in Hong Kong and Singapore and investments in joint ventures in India and China.
Fee based revenue 686 802 53 - (108) 1,433 219 1,652 Spread/risk margin - 183 - - - 183 191 374
Total income 686 985 53 - (108) 1,616 410 2,026 Acquisition expenses - (229) (3) - - (232) (73) (305) Maintenance expenses (450) (376) (49) - 108 (767) (221) (988) Group corporate centre costs - - - (54) - (54) - (54) Capital management - 10 - (8) - 2 15 17 Share of associates’ and joint ventures’ profit before tax2 21 - 18 - - 39 - 39
Discontinued operations1 Total 31 December 2013 Notes £m £m £m £m £m £m £m £m Fee based revenue 514 795 54 - (107) 1,256 203 1,459 Spread/risk margin - 162 - - - 162 351 513 Total income 514 957 54 - (107) 1,418 554 1,972 Acquisition expenses - (227) (16) - - (243) (82) (325) Maintenance expenses (339) (358) (43) - 107 (633) (243) (876) Group corporate centre costs - - - (53) - (53) - (53) Capital management - 3 - (13) - (10) 16 6 Share of associates’ and joint ventures’ profit before tax2
Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.
2 Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the reconciliation includes the reclassification of Dubai results between discontinued and continuing operations.
Spread/risk - 16 - - - 16 9 25 Assets not backing products in long-
Discontinued operations Total 31 December 2013 (restated)1 £bn £bn £bn £bn £bn £bn £bn £bn Assets under administration Fee based 90 114 - - (13) 191 19 210 Spread/risk - 15 - - - 15 8 23 Assets not backing products in longterm savings business - 6 - - - 6 2 8 Joint ventures - - 2 - - 2 - 2 Other corporate assets 1 - - 1 (1) 1 - 1 Total assets under administration 91 135 2 1 (14) 215 29 244 Third party AUA (79) Reinsurance assets 6 Deferred acquisition costs 1 Assets attributable to third party interest in consolidated funds and noncontrolling interests 16 Other 1 Total assets per consolidated statement of financial position 189 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
(c) Total revenue by geographical location Total revenue from continuing operations as presented in the consolidated income statement split by geographical location in which it was earned is as follows: £m £m
UK 8,345 7,382 Canada - 1,345 Rest of the world 1,447 398 Total 9,792 9,125 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
(a)(i) UK and Europe Standard Life Assurance Limited The main entity in the UK and Europe 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, German and Irish branches • Heritage With Profits Fund (HWPF) – includes UK, German and Irish branches • German With Profits Fund (GWPF) • German Smoothed Managed With Profits Fund (GSMWPF) • UK Smoothed Managed With Profits Fund (UKSMWPF).
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (a) How the business is held in the Group’s insurance entities continued (a)(iii) Canada The Canadian business is included as discontinued operations following the announcement on 3 September 2014. The main entity in the Canada reportable segment that issues insurance and investment contracts is The Standard Life Assurance Company of Canada (SLCC). SLCC operates a fund structure under which certain recognised assets and associated liabilities are allocated to either segregated funds or a participating fund. Its remaining recognised assets are managed together to support other contract liabilities and to contribute to equity holders surplus. Where a customer chooses to invest on a segregated fund basis, the assets and associated liabilities for such segregated fund investment elements are held in the segregated funds. SLCC’s segregated funds operate on a similar basis to SLAL’s unit linked funds. Any liabilities for insurance features or financial guarantees contained within a contract that has a segregated fund investment element are held outside the segregated funds. Deferred income and deferred acquisition costs arising on contracts that have a segregated fund investment element are also held outside the segregated funds.
SLAL operates a Canada branch. A separate sub-fund of the PBF is maintained for this branch. All contracts issued from SLAL’s Canadian PBF are wholly reinsured to SLCC.
For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2014 is £343m (2013: £274m) and this represents approximately 8% (2013: 8%) 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 the shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.
classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract. German unitised with profits deferred annuity contracts (fee business) German unitised with profits deferred annuities contracts are written in the PBF with the participating investment elements being transferred to the GWPF and, to a significantly lesser extent, to the GSMWPF. The death benefit under all of the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the nominal fund, and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.
HWPF participating contract allocations of regular and final bonuses This section firstly describes the method used by the Group to determine the regular and final bonuses allocated to participating contracts held in the HWPF. It then describes the significant types of insurance and investment contracts held in that fund, the nature of any guarantees provided and significant reinsurance contracts. As shown in the market risk sensitivity analysis in Note 42(b), there is no impact on shareholder equity arising from contracts in the HWPF for either of the market movements scenarios. As explained in the limitations of the sensitivity analysis, this is because although shareholders are potentially exposed to the full cost if the assets of the HWPF are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.
Under contracts effected in connection with house purchase, the death benefit is guaranteed. Under other regular premium contracts, at any time after the first ten years, the Group may review the status of the contract and, if it deems it necessary, the sum assured may be reduced, within the limits permitted.
German unitised with profits contracts (fee business via German additional expenses basis) Unitised with profits German contracts held in the HWPF mainly consist of endowment assurances and deferred annuities, under which a percentage of each premium is applied to purchase 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 nominal fund 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 Irish 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 used to allocate units in one or more unit linked funds held in the PBF. Such contracts include hybrid contracts (see accounting policy (f)) resulting 146 Standard Life
in the unit linked investment elements being classified as non-participating investment contracts. The major unit linked pension contracts include Individual Personal Pension Plans (retail), Group Personal Pension Plans, Executive Pensions and Stakeholder (corporate) and Trustee Investment Plans (institutional).
UK and Irish unit linked life contracts (fee business via RCF) This class of business comprises principally unit linked investment bonds (e.g. Capital Investment Bonds), classified as nonparticipating investment contracts and the unit linked investment element of Homeplan contracts, classified as non-participating insurance contracts. No significant guarantees, other than the guaranteed death benefit on Homeplan contracts, are provided under these contracts. The costs of contracts invested in unit linked funds are recovered by deduction of asset management charges from the unit linked funds which are transferred from the PBF to the HWPF.
UK and Irish annuity-in-payment contracts (spread/risk business in relation to longevity risk transferred to 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.
The longevity risk on certain non-participating annuity-in-payment contracts held in the HWPF has been transferred to the PBF. The market risk on certain annuities has been transferred to the PBF.
The total liability at 31 December 2014 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £1,972m (2013: £2,113m) and this represents approximately 21% (2013: 22%) of the total liability for UK annuity contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.
UK other non-participating contracts (spread/risk business via RCF) This class of business consists primarily of deferred annuities that provide guaranteed annuity payments from the retirement age associated with the relevant pension plan. The payments depend on the survival of a life or lives with or without a guarantee period and may reduce on a specified death or increase each year at a predefined rate or in line with the increase in UK RPI. These contracts are classified as non-participating insurance contracts. (b)(iii) Asia and Emerging Markets – Insurance and investment contracts Unit linked life contracts (fee business) The main contract issued by SLA is the Harvest 101 product. It is a regular premium savings product with a term ranging from five to 25 years. The customer has the option to invest in unit linked funds offered by SLA and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the 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) Canada – Insurance, investment and reinsurance contracts The Canadian business is included as discontinued operations following the announcement on 3 September 2014.
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(iv) Canada – Insurance, investment and reinsurance contracts continued linked to CPI is approximately £346m (2013: £394m). This represents approximately 9% (2013: 9%) of the total liability for Canadian annuity-in-payment contracts.
Universal Life contracts (fee business and spread/risk business) The main Universal Life contract, Perspecta, is a non-participating whole life assurance contract. Perspecta was closed to new business in 2012. Premiums may be invested in term investment funds (TIFs), segregated funds or mutual funds. Premiums invested in TIFs are placed on deposit at rates of interest guaranteed for periods from one day to 20 years. The rate offered is determined with reference to the financial conditions at the time of premium payment. The contract provides life cover and, in addition, on death the value of the segregated funds is guaranteed never to be less than 75% of premiums deposited into those funds, adjusted for expense charges and any withdrawals. At 31 December 2014, the liability for these policies is £1,668m (2013: £1,227m).
Perspecta contracts issued after November 2003 provide lower interest rate guarantees for terms of at least three years. There is no guarantee that a term with a 3% minimum guaranteed rate will be offered and the TIF investment option can be withdrawn.
Perspecta policyholders have the option to switch into TIFs some or all of their investments in the other investment options and can increase their premiums up to statutory limits. The guarantees that then apply are those set when the contract was effected.
A reduction of 1% in the yield curve would increase the value of the guarantees by £29m (2013: £19m). At 31 December 2014, the liability for all the TIFs (i.e. pre and post November 2003) is £55m (2013: £74m).
SLCC has entered into contracts to reinsure mortality risk arising under these Universal Life contracts. Under these reinsurance contracts, the reinsurers receive regular reinsurance premiums throughout the period until death claims arise on the underlying contracts based on payment schedules established at inception of the reinsurance contract. SLCC receives payments from the reinsurers on the death of the Universal Life policyholders to cover the death benefit due. Registered and non-registered savings plans (fee business and spread/risk business) This category comprises individual and group non-participating savings contracts. These contracts permit investment into term funds or segregated funds.
Premiums invested in term funds are placed on deposit at rates of interest guaranteed for a selected term. The rate offered depends on financial conditions at the time of deposit. Proceeds at the end of a guarantee period may be reinvested at the then current rates. The components of contracts invested in term funds are classified as non-participating investment contracts, for all contracts sold prior to May 2014. Individual Ideal Savings term funds issued after 1 May 2014 have an accidental death benefit in the contract, and are therefore classified as non-participating insurance contracts.
Where premiums on individual contracts are invested in segregated funds a death benefit guarantee applies being the greater of the segregated fund value and 100% of the net deposits. In addition provided that the monies have been invested for a minimum of 10 years, the maturity benefit is the greater of the segregated fund value at the maturity date and 75% or 100% of premiums invested, depending on the guarantee option selected, less any cash values previously paid out. Otherwise the maturity benefit is the fund value. The cost of all these guarantees including those in respect of registered retirement income plans (see below), net of supporting fees, has been calculated in accordance with local regulations and results in a increase in liabilities of £32m (2013: decrease £6m) being required. The components of individual contracts invested in segregated funds are classified as non-participating insurance contracts.
The value of the liabilities in respect of guaranteed benefits is 42% (2013: 42%) of the participating contract liability value which is set equal to the value of the fund in which the contracts participate.
Non-participating life contracts (spread/risk business) This category comprises whole life and term assurance contracts where the guaranteed benefit is payable on death. These contracts are classified as non-participating insurance contracts. This category is closed to new business.
Interest and similar income Cash and cash equivalents 80 88 Loans 7 6
Rental income 19 450 446 Net fair value gains on investment property 19 825 277
Fee income on investment contracts at fair value 619 580 Fee income from third party funds under management 305 178 Fee income deferred during the year 39 (35) (36) Amortisation of deferred income 39 66 73 Release of deferred income 39 5 - Other fee and commission income 25 21 Total fee and commission income from continuing operations 985 816 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Interest expense 11 9 Commission expenses 234 273 Staff costs and other employee-related costs 8 577 525 Operating lease rentals 30 34 Auditors’ remuneration 9 7 5 Depreciation of property, plant and equipment 20 14 13 Impairment losses on property, plant and equipment 20 - 5 Impairment losses reversed on property, plant and equipment 20 (4) (2) Amortisation of intangible assets 16 41 29 Impairment losses on intangible assets 16 47 - Other 457 397 1,414 1,288 Acquisition costs deferred during the year 17 (143) (146) Impairment of deferred acquisition costs 17 9 6 Amortisation of deferred acquisition costs 17 150 141 Total other administrative expenses from continuing operations 1,430 1,289 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Employee share-based payments 48 27 2 29 32 4 36 Total staff costs and other employee-related costs 577 143 720 525 154 679 1 Comparatives for the year ended 31 December 2013 have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to Note 12 – Discontinued operations.
The average number of staff employed by the Group during the year: UK and Europe 3,986 3,951
Total auditors’ remuneration 6.6 2.1 8.7 5.2 1.9 7.1 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
10. Restructuring and corporate transaction expenses Total restructuring and corporate transaction expenses incurred from continuing operations during the year were £106m (2013: £73m) which includes £11m of deal costs (2013: £11m) relating to acquisitions as described in Note 1 – Group structure (b) Acquisitions. The remaining expenses relate to a number of business unit restructuring programmes, Solvency 2 and the closure of the Dubai business.
Restructuring and corporate transaction expenses used to determine operating profit from continuing operations 109 71 1 Dubai business, the closure of which was announced in November 2014, is included as a discontinued operation for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement.
Restructuring and corporate transaction expenses of £31m (2013: £2m) are used to determine operating profit before tax from discontinuing operations. In 2014 these expenses relate to the sale of the Canadian business and the closure of the Dubai business. Refer to Note 2 – Segmental analysis.
The share of tax of associates and joint ventures from continuing operations is £5m (2013: £7m) and is included in profit before tax in the consolidated income statement in ‘Share of profit from associates and joint ventures’.
(a) Current year tax expense restated1 Notes £m £m Current tax: Adjustment to tax expense in respect of prior years (7) (36)
Deferred tax: Deferred tax expense arising from the current year 21 17 174
Current tax on net change in financial assets designated as available-for-sale 6 (3)
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss 6 (3)
Tax relating to items taken directly to equity 21 (5) (8)
Policyholder tax (net of tax at UK standard rate) 196 170
Adjustment to current tax expense in respect of prior years (7) (36)
Adjustment to deferred tax expense in respect of prior years (6) 5
3. Financial information – Notes to the Group financial statements continued 12. Discontinued operations On 3 September 2014 the Group announced its intention to sell its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife). The results of the Canadian business have been classified as discontinued operations and the associated assets and liabilities have been classified as held for sale as at 31 December 2014. Refer to Note 27 – Assets and liabilities held for sale.
(a) Consolidated income statement of discontinued operations The profit included in the consolidated income statement in respect of the discontinued Canadian operations is as follows: Revenue Gross earned premium 1,720 1,479 Premium ceded to reinsurers (36) (46) Net earned premium 1,684 1,433 Investment return 2,914 2,259 Fee and commission income 124 130 Other income 17 20 Total revenue from discontinued operations 4,739 3,842
Restructuring and corporate transaction expenses 21 2 Other administrative expenses 430 472
Total administrative expenses 451 474 Change in liability for third party interest in consolidated funds 80 131 Finance costs 9 10 Total expenses from discontinued operations 4,547 3,679
Profit before tax expense attributable to equity holders’ profits 188 163
Attributable to: Equity holders of Standard Life plc 127 131 Non-controlling interests - 154 Standard Life
Total items that will not be reclassified subsequently to profit or loss (17) 37
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (5) 4
Other comprehensive income/(expense) for the year from discontinued operations (18) (18)
Total net cash flows 51 156 13. Earnings per share (a) Basic earnings per share Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally to employees.
Profit attributable to equity holders of Standard Life plc from continuing operations (£m) 376 335
Profit attributable to equity holders of Standard Life plc from discontinued operations (£m) 127 131
Basic earnings per share from discontinued operations (pence per share) 5.3 5.5
Basic earnings per share (pence per share) 21.1 19.7 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
3. Financial information – Notes to the Group financial statements continued 13. Earnings per share continued (b) Diluted earnings per share Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares – share awards and share options awarded to employees.
Adjusted for the following items Short-term fluctuations in investment return and economic assumption changes 15 0.6 73 3.1
Profit attributable to equity holders of Standard Life plc 376 15.8 127 5.3 1 Dubai business, the closure of which was announced in November 2014, is included as discontinued operations for segmental reporting purposes under IFRS 8 as this is reflective of the presentation of information provided to the Chief Operating Decision Maker. Dubai was previously included in Asia and Emerging Markets. Under IFRS 5, Dubai does not constitute a discontinued operation and is included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Dubai results between discontinued and continuing operations.
Discontinued operations 2013 £m p per share £m p per share Operating profit before tax 506 21.4 245 10.3 Tax on operating profit (77) (3.2) (64) (2.7) Share of associates’ and joint ventures’ tax expense (7) (0.3) (1) -
Operating profit after tax 422 17.9 180 7.6 Adjusted for the following items
Share of joint ventures and associates tax expense (5) (0.2) - -
Share of joint ventures and associates tax expense (7) (0.3) (1) -
Restructuring and corporate transaction expenses (71) (3.0) (2) (0.1) Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters - - (15) (0.6)
14. Non-operating items The Group focuses on operating profit as a measure of its performance, which incorporates expected returns on investments backing equity holder funds with a consistent allowance for corresponding expected movements in equity holder liabilities. The methodology used in calculating operating profit is outlined below.
In respect of debt securities at fair value through profit or loss, the expected rate of return is determined based on the average prospective yields for the debt securities actually held or, in respect of the Canadian operations, is determined by the Appointed Actuary in Canada. For debt securities classified as available-for-sale that support liabilities measured at amortised cost, the expected rate of return is the effective interest rate adjusted for an allowance, established at initial recognition, for expected defaults. If debt securities classified as available-for-sale are sold, any gain or loss is amortised within the expected return over the period to the earlier of the maturity date of the sold debt security, or the redemption date of the supported liability.
Hence when management or the Canadian tax authorities successfully challenge an historic tax position which results in a change in the difference between the undiscounted and discounted deferred taxes relating directly to the tax treatment of insurance contract liabilities, a change in insurance contract liabilities is recognised in the consolidated income statement thus impacting profit before tax. This change in insurance contract liabilities is removed when determining operating profit before tax. As this amount unwinds under CALM in future years, the associated change in insurance contract liabilities is also excluded from operating profit before tax.
Other Non-operating items also includes restructuring and corporate transaction expenses as discussed in Note 10 – Restructuring and corporate transaction expenses.
Gross amount At 1 January 2013 71 30 177 37 315 Additions 40 29 25 22 116 Other - - - (2) (2) At 31 December 2013 111 59 202 57 429 Reclassified to held for sale during the year - - - (4) (4) Additions 1 105 208 33 10 356 Impairment losses recognised 7 - (43) (4) - (47) Other - - (1) - (1) At 31 December 2014 216 224 230 63 733 Accumulated amortisation At 1 January 2013 - (13) (73) (15) (101) Amortisation charge for the year1 - (5) (20) (5) (30) Other - - - 2 2 At 31 December 2013 - (18) (93) (18) (129) Reclassified to held for sale during the year - - - 2 2 Amortisation charge for the year 7 - (15) (21) (5) (41) At 31 December 2014 - (33) (114) (21) (168) Carrying amount At 1 January 2013 71 17 104 22 214 At 31 December 2013 111 41 109 39 300 At 31 December 2014 216 191 116 42 565 1 The amortisation charge for the year ended 31 December 2013 includes £1m in respect of discontinued operations.
The Group’s goodwill of £216m (2013: £111m) has been acquired through a series of business combinations, and additions in the year to 31 December 2014 relate to the acquisition of Ignis. The cash-generating units to which goodwill is attributed is £71m (2013: £111m) to the UK and Europe business unit and £145m (2013: £nil) to the Standard Life Investments business unit.
(a) Investments in associates Included in associates and joint ventures accounted for using the equity method is an investment in the following associate. The HDFC Asset Management Company Limited manages a range of mutual funds and provides portfolio management and advisory services.
The Group’s share of post-acquisition movements in reserves of HDFC Asset Management Company Limited which have been recognised directly in equity, have not been reflected in the carrying value of the associate. As a result there is a difference between the carrying value of the associate and the Group’s share of net assets.
3. Financial information – Notes to the Group financial statements continued 18. Investments in associates and joint ventures continued (a) Investments in associates continued In addition to the above, the Group has investments in associates measured at FVTPL of £4,264m (2013: £1,515m), none of which are considered individually material to the Group as the investments are primarily held by unit linked and segregated funds (2013: none). The aggregate financial information of these associates is as follows: Associates at FVTPL 2014 2013 £m £m
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.
(b) Investments in joint ventures The following are particulars of the Group’s principal joint ventures, both of which are unlisted: HDFC Standard Life Insurance
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: restated1 £m £m
Reclassified as held for sale during the year (43) (9) (52)
Reclassified as held for sale during the year - 5 5
At 31 December 2014 138 48 186 1 For the year ended 31 December 2014 £1m (2013: £6m) of disposals and adjustments relates to equipment with net book value of £nil and is no longer in use. 2 Revaluations for the year ended 31 December 2013 includes £17m in respect of discontinued operations. 3 The impairment reversed/(recognised) arose due to changes in the market value of a number of properties relative to their original deemed cost. 4 Impairment losses reversed/(recognised) for the year ended 31 December 2013 includes £nil in respect of discontinued operations. 5 Depreciation charge for the year ended 31 December 2013 includes £1m in respect of discontinued operations.
If owner occupied property was measured using the cost model, the historical cost before impairment would be £155m (2013: £180m). Where the expected residual value of owner occupied property is in line with the current fair value, no depreciation is charged. Equipment primarily consists of computer equipment.
The methods and assumptions used to value owner occupied property are set out in Note 44 – Fair value of assets and liabilities.
Less: Current tax recoverable classified as held for sale - -
Less: Current tax liabilities classified as held for sale 27 (3) -
Total tax liabilities 386 233 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
All current tax assets and liabilities as at 31 December 2014 and 31 December 2013 are expected to be recoverable or payable in less than 12 months. Deferred tax assets and liabilities are expected to be recovered or settled after more than 12 months.
3. Financial information – Notes to the Group financial statements continued 21. Tax assets and liabilities continued (a) Recognised deferred tax
Net investment hedge Cash flow hedge Total 2014 Notes £m £m £m £m £m £m £m Investments in associates and joint ventures 18 4,264 - - 2 - - 4,266
Derivative financial assets 24 - 1,937 - - 54 - 1,991 Equity securities and interests in pooled investment funds 42 84,654 - - - - - 84,654
Debt securities 42 68,526 - 683 - - - 69,209 Receivables and other financial assets 25 - - - 1,107 - - 1,107
The amount of debt securities expected to be recovered or settled after more than 12 months is £49,896m (2013: £54,443m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
3. Financial information – Notes to the Group financial statements continued
24. Derivative financial instruments The Group uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve efficient portfolio management. The Group designates certain derivative financial instruments as cash flow hedges and net investment hedges to mitigate risk, as detailed below. Derivative financial instruments that are not designated part of a hedge relationship are held for trading under IAS 39 Financial Instruments: Recognition and Measurement.
Derivative financial instruments 42 122,205 4,021 1,693 96,281 1,991 932 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Derivative assets of £2,708m (2013: £930m) are expected to be recovered after more than 12 months. Derivative liabilities of £738m (2013: £228m) are expected to be settled after more than 12 months.
Forward foreign exchange contracts with an aggregate notional principal amount of £1,135m (2013: £20m) and a net fair value asset position of £1m (2013: £nil) were designated as hedges of a portion of the expected cash proceeds from the sale of the Canadian business in 2015 and future cash flows arising from revenue receivable in foreign currency in 2014 and 2013. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2014 and 2013, the ineffectiveness recognised in the consolidated income statement that arises from these cash flow hedges was less than £2m.
Equity derivatives: Bond derivatives: Interest rate derivatives: Foreign exchange derivatives: Other derivatives: Derivative financial instruments held for trading 119,963 4,012 1,681 95,378 1,937 932 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Net derivative financial instruments cash inflows/(outflows) 590 239 (62) (226) (262) (152) 127 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
The amount of receivables and other financial assets expected to be recovered after more than 12 months is £56m (2013: £94m).
The amount of other assets expected to be recovered after more than 12 months is £37m (2013: £44m).
Investment property classified as held for sale at 31 December 2013 related to property for which contracts had been exchanged during 2013 but the sale had not completed, and was included in the Group’s UK and Europe reportable segment. During the year to 31 December 2014 these properties were sold and a loss of £1m was recognised and included in investment return in the consolidated income statement.
(a) Assets and liabilities of operations held for sale On 3 September 2014 the Group announced its intention to sell its Canadian business to The Manufacturers Life Insurance Company (MLC), a subsidiary of Manulife Financial Corporation (Manulife). As discussed in Note 51 – Events after the reporting date, the sale of the Group’s Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc.) and Canadian investment management business (Standard Life Investments Inc.) completed on 30 January 2015. Under the agreements entered into in September 2014, the assets and liabilities of the SLAL Canada Branch will transfer once certain conditions to completion, including regulatory approval, are fulfilled. The assets and liabilities of the Canadian business held for sale at 31 December 2014 are as follows: Financial instruments Other
Investments in associates and joint ventures 33 - - - 70 103
Receivables and other financial assets - - - 214 - 214
Total assets of operations held for sale 23,688 44 365 3,236 1,921 29,254
3. Financial information – Notes to the Group financial statements continued 27. Assets and liabilities held for sale continued (a) Assets and liabilities of operations held for sale continued
Subordinated liabilities 37 - - 223 - - 223 Pension and other post-retirement benefit provisions - - -
Other liabilities - - - - 32 32 Total liabilities of operations held for sale 28. Cash and cash equivalents £m £m
Cash and cash equivalents 10,617 10,322 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Shares issued in respect of share incentive plans 287,120 - 283,126 -
The Group also operates long-term incentive plans (LTIPs) for executives and senior management and a Sharesave (Save-as-youearn ) scheme for all eligible employees. During the year ended 31 December 2014, 14,509,687 (2013: 18,169,290) and 2,960,207 (2013: 185,662) ordinary shares were issued in relation to LTIP and Sharesave schemes respectively.
All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and the same rights to receive dividends and other distributions declared or paid by the Company.
The EST purchases and holds shares in the Company for delivery to employees under various employee share schemes. Sharebased liabilities to employees may also be settled by the issue of new shares which may also be held in trust until delivery to employees. The number of shares held in trust for the purposes of settling employee share schemes at 31 December 2014 were 1,081,758 (2013: 3,112,350).
Recognised in profit for the year attributable to equity holders 503 466
Aggregate tax effect of items recognised in other comprehensive income - - - - (11) - - - - (11) Total items recognised in other comprehensive income (1) 3 (43) 15 38 - - - - 12 Recognised directly in equity Transfer to retained earnings on sale of owner occupied property (4) - - - - - - - - (4)
Reserves credit for employee share-based payment schemes - - - - - - 27 - - 27 Vested employee share-
Dividends and distributions - - - - - - - - - - Aggregate tax effect of items recognised directly in equity - - - - - - (1) - - (1) Total items recognised directly within equity (4) - - - - - (1) - - (5)
Balance at 31 December 2014 comprises: Total reserve before with profit fund adjustment 66 3 324 54 13 3,108 52 241 (2,100) 1,761 Total with profit fund adjustment (46) - (214) - - - - - - (260)
The with profit fund adjustment represents the cumulative amounts transferred to the unallocated divisible surplus as they represent movements attributable to participating policyholders, which would otherwise have been included in other reserves.
At 1 January 10 - 269 (24)) - 3,108 55 261 (2,100) 1,579 Recognised in other comprehensive income Fair value gains on cash flow hedges - - - - - - - - - -
Aggregate tax effect of items recognised in other comprehensive income (5) - - - 7 - - - - 2 Total items recognised in other comprehensive income 15 - (116) 63 (25) - - - - (63)
Recognised directly in equity Transfer to retained earnings on sale of owner occupied property - - - - - - - - - - Reserves credit for employee share-based payment schemes - - - - - - 32 - - 32 Vested employee share-
33. Non-controlling interests and third party interest in consolidated funds (a) Non-controlling interests The movement in non-controlling interests during the year was: Foreign exchange differences on translating foreign operations (4) 2
Summarised financial information for SLEPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2014 and 2013 which is SLEPET’s financial reporting date and is considered indicative of the interest that non-controlling interests of SLEPET have in the Group’s activities and cash flows. The financial statements of SLEPET for the years ended 30 September 2014 and 2013 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 2014 and 2013 respectively.
(b) Third party interests in consolidated funds The movement in third party interest in consolidated funds during the year was: £m £m
At 1 January 16,058 9,906 Reclassified as held for sale during the year (965) - Foreign exchange differences on translating foreign operations (137) (75) Change in liability for third party interest in consolidated funds2 758 960 Net contributions and movements between classifications of investments 328 5,459 Distributions (237) (192) At 31 December 15,805 16,058 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation. 2 Change in liability for third party interest in consolidated funds for the year ended 31 December 2013 includes £131m in respect of discontinued operations.
3. Financial information – Notes to the Group financial statements continued 34. Insurance contracts, investment contracts and reinsurance contracts 2014 2013 Notes £m £m
Non-participating insurance contract liabilities 31,266 28,312 Less: Non-participating insurance contract liabilities classified as held for sale 27 (9,425) - 34(a) 21,841 28,312
Non-participating investment contract liabilities 104,059 97,659 Less: Non-participating investment contract liabilities classified as held for sale 27 (15,852) - 34(b) 88,207 97,659
Participating insurance contract liabilities 16,099 15,060 Less: Participating insurance contract liabilities classified as held for sale (702) - 34(a) 15,397 15,060
Participating investment contract liabilities 15,193 14,707 Less: Participating investment contract liabilities classified as held for sale (2) - 34(a) 15,191 14,707
Unallocated divisible surplus 688 680 Less : Unallocated divisible surplus classified as held for sale - - 34(d) 688 680
(a) Insurance contracts, participating investment contracts and reinsurance contracts (a)(i) 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
Reinsurance contracts Net 2014 £m £m £m £m £m £m At 1 January 15,060 28,312 14,707 58,079 (5,857) 52,222 Reclassified as held for sale during the year (667) (8,135) (3) (8,805) (123) (8,928) 14,393 20,177 14,704 49,274 (5,980) 43,294 Expected change (1,014) (717) (701) (2,432) 350 (2,082) Methodology/modelling changes (3) (81) 44 (40) - (40) Effect of changes in Economic assumptions 356 1,625 (344) 1,637 (410) 1,227 Non-economic assumptions 37 (65) (52) (80) 7 (73) Effect of Economic experience 2,092 207 1,319 3,618 6 3,624 Non-economic experience 79 (264) 252 67 (1) 66 New business 42 1,000 22 1,064 (12) 1,052 Total change in contract liabilities 1,589 1,705 540 3,834 (60) 3,774 Foreign exchange adjustment (585) (41) (53) (679) 4 (675) At 31 December 15,397 21,841 15,191 52,429 (6,036) 46,393 Reinsurance assets (6,036) Reinsurance liabilities - (6,036)
Economic assumptions reflect changes in fixed income yields, leading to lower valuation rates on non-participating business, and other market movements.
Total change in contract liabilities1 (972) (40) (308) (1,320) 683 (637)
(a)(ii) Non-participating insurance contracts – principal assumptions UK and Europe For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation. The basis is considered prudent in each aspect. In particular, options and guarantees have been provided for on prudent bases.
For equity assets, the current dividends and earnings are considered and, if necessary, a deduction is made to reflect sustainability. Similarly, a deduction to the yields on property assets is made where necessary, to reflect sustainability and also to allow for the possibility of rental defaults. 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 Irish annuity business and German non-participating insurance business within the PBF where the internal rate of return of the assets backing the liabilities is used.
(a) Insurance contracts, participating investment contracts and reinsurance contracts continued (a)(ii) Non-participating insurance contracts – principal assumptions continued The valuation interest rates used are: 1. Business held within the PBF
Individual and group in deferment Males: 71.5% AMC00 Males: 73.7% AMC00
Individual after vesting (business written after 10 July 2006) Males: 92.2% RMC00 Males: 88.8% RMC00
Individual after vesting (business written prior to 10 July 2006) Males: 96.7% RMC00 Males: 97.5% RMC00
Group after vesting (business written prior to 10 July 2006) Males: 110.7% RMV00 Males: 111.1% RMV00
In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. This is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.8% for males and 1.5% for females in 2014 (1.9% for males and 1.6% for females in 2013). The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2013 is a model that was published towards the end of 2013.
Canada The liabilities of the Canadian business have been classified as held for sale at 31 December 2014. The Canadian economic environment at the reporting date is used to determine the expected interest rates for the current valuation. The expected experience scenario of risk free rates is derived from the yield curve of Canadian federal bonds at that date, as summarised below: Yield curve – by duration 2014 2013
The following table shows other key investment returns used in the asset and liability projections under Canadian Asset Liability Method (CALM): These investment returns are net of investment expenses and are prudent assumptions as they include risk margins determined in line with Canadian standards of practice. A further drop in the asset values of 30% for equity securities and 20% for property is applied, consistent with Canadian standards of practice, to allow for adverse deviations in projecting cash flows arising from capital gains on non-fixed income assets.
(a) Insurance contracts, participating investment contracts and reinsurance contracts continued (a)(ii) Non-participating insurance contracts – principal assumptions continued
65%-121% of base table (where base table is 71-75% of CIA 97-04)
Non-economic assumptions The expense and mortality assumptions are best estimate assumptions determined from the Group’s recent analyses. They are consistent with the assumptions for non-participating insurance contracts and any explicit margins for prudence are removed.
A withdrawal investigation is carried out each year and assumptions are set with reference to recent levels taking into account any trends evident. However, in general the participating business is not particularly sensitive to the overall level of withdrawals. For non-participating insurance business, appropriate allowances are made for withdrawals on certain term assurance contracts.
(b) Non-participating investment contracts The change in non-participating investment contract liabilities was as follows: 2014 2013 Notes £m £m
At 31 December 35 88,207 97,659 1 Change in non-participating investment contracts recognised in the consolidated income statement includes £1,845m in respect of discontinued operations.
(c) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 42 – Risk management. 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.
Change in UDS recognised in the consolidated income statement (71) (40)
Third party interest in consolidated funds 42 15,805 - - - 15,805
Total 111,340 932 - 12,432 124,704 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
Subordinated notes 5.5% Sterling fixed rate due 4 December 2042 £500,000,000 499 £500,000,000 499 3.938% Canadian dollar fixed/floating rate due 21 September 2022 CA$400,000,000 223 CA$400,000,000 229
Mutual Assurance Capital Securities 6.546% Sterling fixed rate perpetual £300,000,000 317 £300,000,000 316 5.314% Euro fixed/floating rate perpetual €360,000,000 294 €360,000,000 315
Less: Subordinated liabilities classified as held for sale 3.938% Canadian dollar fixed/floating rate due 21 September 2022 27 CA$400,000,000 (223) - - Total subordinated liabilities 42 1,612 1,861
The difference between the fair value and carrying value of the subordinated liabilities is presented in Note 44 – Fair value of assets and liabilities.
The classification of amounts due under the subordinated guaranteed bonds and Mutual Assurance Capital Securities are determined by the interaction of these arrangements with the internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company, as set out below.
The Canadian dollar subordinated debenture notes were issued by The Standard Life Assurance Company of Canada (SLCC) on 21 September 2012 and have been classified as held for sale at 31 December 2014. The maturity date of the notes is 21 September 2022. SLCC has the option to redeem the notes at par on or after 21 September 2017. If the notes are not redeemed the interest rate payable will be reset each quarter to 2.1% over the three month Canadian Dealer Offered Rate (CDOR) rate payable quarterly in arrears. Interest is payable each six months in arrears up to 21 September 2017. The notes are direct, unsecured obligations of SLCC that rank subordinate to all policyholder liabilities and senior creditors of SLCC.
Mutual Assurance Capital Securities (MACS) The MACS were issued on 4 November 2004. The payment of principal and interest in respect of the MACS is irrevocably and unconditionally guaranteed by SLAL. The claims of the holders of the MACS to payment under the guarantee will rank below the
Defined benefit Defined contribution UK The Group’s largest defined benefit plan is for employees in the UK. It closed to new entrants in November 2004 and changed from a final salary basis to a revalued career average salary basis in 2008. Employees will stop accruing further defined benefit pension under the plan from April 2016.
The 2014 administration expenses of this plan were met by the Group.
from 31 December 2009, with future accrual from that point on a career average revalued earnings (CARE) basis.
The last actuarial valuation of the plan was effective 31 December 2013, at which time the plan was 113% funded on an ongoing basis.
Plan regulations The plans are administered according to local regulations in each country. Responsibility for the governance of the plans rests with the relevant trustee boards (or equivalent). Trustee boards comprise a mixture of company nominated, member nominated and independent representatives.
Contributions to plans Defined benefit Defined contribution 2014 2013 2014 2013 £m £m £m £m
Expense recognised in the consolidated income statement 8 (39) (36) 1 Comparative periods presented have been restated to reflect classification in the current year of the Group’s Canadian business as discontinued operations. Refer to
Present value of unfunded obligation - (8) (8) (73) - (7) (64) (71)
Gain from change in financial assumptions (375) - (375) - (375)
The following table shows the movement in the defined benefit asset for the year ended 31 December 2013: Present value of obligation Fair value of plan assets Total
Remeasurements Return on plan assets, excluding amounts included in interest expense - 248 248 - 248
Gain from change in demographic assumptions (25) - (25) - (25)
Gain from change in financial assumptions (70) - (70) - (70)
Change in effect of limit on plan surplus - - - (51) (51) Remeasurement (losses)/gains recognised in other comprehensive income2 (96) 248 152 (51) 101
At 31 December (2,683) 3,244 561 (233) 328 1 Total expense includes £16m for the year ended 31 December 2013 in respect of discontinued operations. 2 Remeasurement (losses)/gains includes £31m for the year ended 31 December 2013 in respect of discontinued operations.
Equity securities and interests in pooled investment funds 1,220 1,405 49 51 146 134 1,415 1,590
Assets measured at fair value based on level 2 or 3 inputs
Total assets measured at fair value based on level 2 or 3 inputs 1,248 655 13 9 59 51 1,320 715
Derivative financial instruments are used to modify the profile of the assets of the plans to better match the plans’ liabilities and to execute specific strategies as defined within the plans’ investment guidelines. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.
3. Financial information – Notes to the Group financial statements continued 38. Pension and other post-retirement benefit provisions continued (e) Principal assumptions The principal economic assumptions for the plans are shown below: UK Canada UK Canada
The most significant non-economic assumption is post-retirement longevity. The assumptions (along with sample expectations of life) are illustrated below: Normal
The UK plan (the Group’s dominant post-retirement defined benefit plan) uses both bonds and derivatives to hedge out yield risks on the plan’s funding basis, rather than the IAS 19 basis, which is expected to minimise the plan’s need to rely on support from the Group.
At 31 December 276 316 1 Additions during the year to 31 December 2013 includes £nil in respect of discontinued operations. 2 Amortised to the consolidated income statement as fee income for the year to 31 December 2013 includes £nil in respect of discontinued operations.
The amount of deferred income expected to be settled after more than 12 months is £216m (2013: £252m).
The amount of other financial liabilities expected to be settled after more than 12 months is £57m (2013: £196m).
The amount of other liabilities expected to be settled after more than 12 months is £15m (2013: £13m).
The amount of total provisions expected to be settled after more than 12 months is £10m (2013: £10m).
42. Risk management (a) Overview (a)(i) Application of the risk management framework
The risk management framework used by the Group in 2014 to identify, assess, control and monitor risks is set out in the Corporate Governance report. This includes information on the use of qualitative risk appetite statements and quantitative risk limits in order to manage the Group’s risks.
For the purposes of managing risks to the Group’s financial assets and financial liabilities, the Group considers the following categories: Risk Definition
Conduct The risk that through our culture, strategies, decision-making and behaviours we do not deliver fair outcomes for our customers.
Strategic The risk associated with the robustness of the strategic planning process and the threats to the achievement of the Group’s strategy.
Standard Life Investments SLIH and all its subsidiaries (excluding SLI Inc.)
Asia and Emerging Markets4 SLIL (excluding unit linked funds)3 SLA (excluding unit linked funds)
Interests in Indian and Chinese JVs n/a SLIL unit linked funds3 SLA unit linked funds
Market The shareholder is directly exposed to the impact of movements in equity and property prices, interest rates and foreign exchange rates on the value of assets held by the shareholder business and the associated movements in the value of liabilities.
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (a) Overview continued (a)(i) Application of the risk management framework continued
TPICF & NCI are not exposed to demographic and expense risk.
The shareholder is exposed to operational and strategic risk arising across the four risk segments and any losses incurred are typically borne by the shareholder.
As noted in Group accounting policies (a) Basis of preparation, the consolidated financial statements for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the year. The tables throughout this note have been restated to reflect this.
Standard Life Financial Inc. and Standard Life Investments Inc. collectively were sold on 30 January – refer to Note 51 – Events after the reporting date. Comparatives for the year ended 31 December 2013 have not been restated to reflect the sale. The transaction does not impact the classification of the Group’s assets and liabilities within the risk segments.
The assets and liabilities of the Canadian business have been reclassified as held for sale in the Group’s consolidated statement of financial position for the year ended 31 December 2014 as detailed in Note 27 – Assets and liabilities held for sale, and the split of these assets and liabilities into risk segments is shown in (f).
Equity securities and interests in pooled investment funds at FVTPL 31 172 9,658 10,952 55,471 66,475 6,167 7,055 71,327 84,654
Receivables and other financial assets 468 471 98 97 534 441 148 98 1,248 1,107
Third party interest in consolidated funds - - - - - - 15,805 16,058 15,805 16,058
Net inter-segment assets/(liabilities) 628 535 (477) (306) (133) (222) (18) (7) - -
The Group manages market risks through the use of a number of controls and techniques including: • Defined lists of permitted securities and/or application of investment constraints and portfolio limits • Clearly defined investment benchmarks for policyholder and shareholder funds • Stochastic and deterministic asset/liability modelling • Active use of derivatives to improve the matching characteristics of assets and liabilities.
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 that are appropriate to the liabilities or are held to match the cash flows anticipated to arise in the business. A combination of limits by name, sector and credit rating are used where relevant to reduce concentration risk among the assets held.
(b)(i)(i) Group exposure to equity risk The Group is subject to equity price risk due to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk: • Direct equity shareholdings in the shareholder business and the Group defined benefit pension funds • Burnthrough from the with profits funds where adverse movements in the market values and returns on holdings in the equity portfolios of these funds mean the assets of the with profits funds are not sufficient to meet their obligations • The indirect impact from changes in the value of equities held in funds from which management charges are taken.
The shareholder and participating business exposure to equity markets in Canada has been significantly reduced by the sale of the Group’s Canadian business on 30 January 2015. Information on the shareholder and participating business’ exposure to equity markets due to the assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f).
The main financial assets held by the Group which give rise to interest rate risk are debt securities, loans and cash and cash equivalents. The main financial liabilities giving rise to interest rate risk principally comprise non-unit linked insurance, participating and non-participating investment contract liabilities and subordinated liabilities. Derivative financial instruments held by the Group also give rise to interest rate risk.
Total liabilities (7,511) (6,021) (702) (660) (8,728) (8,490) (39) (44) (26) (27) (30) (10) (17,036) (15,252) Net investment hedges 1,107 883 - - (1,085) (870) (22) (13) - - - - - - Cash flow hedges 1,100 (20) 18 20 (1,118) - - - - - - - - - Non designated derivatives 433 404 (427) (402) - (38) (1) - 15 37 (20) (1) - -
Other currencies includes assets of £15m (2013: £55m) and liabilities of £16m (2013: £nil) in relation to the fair value of derivatives used to manage currency risk. The principal source of foreign currency risk for shareholders arises from the Group's investments in overseas subsidiaries and joint ventures.
Total liabilities (40,341) (39,256) (9,142) (8,091) (858) (813) - - (26) (3) (19) (1) (50,386) (48,164) Non designated derivatives 1,471 1,237 (1,109) (1,076) - - - - (329) 12 (33) (173) - -
There are no net investment hedges or cash flow hedges in the participating business. Other currencies includes assets of £29m (2013: £9m) and liabilities of £14m (2013: £1m) in relation to the fair value of derivatives used to manage currency risk exposures.
Changes in equity security and property prices and/or fluctuations in interest rates will affect non-participating unit linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit linked and segregated funds is included in the sensitivity analysis where there is an impact on the value of other statement of financial position items, the change in unit linked liabilities and the corresponding asset movement has not been presented. This is also true of the other with profits funds with the exception of the German With Profits Fund (GWPF). As at 31 December 2014 there is no direct impact of market risk on the sensitivity of GWPF. However, there is an indirect impact on the PBF due to a realistic Capital Support Arrangement (CSA) that was introduced during 2011 for the GWPF. This provides support by reducing the liability to transfer future annual management charges to the PBF hence increasing the assets on the statement of financial position to the extent necessary to avoid a realistic deficit (if possible). There is no impact on GWPF participating liabilities. At 31 December 2014 support is provided under the realistic CSA and there is an increase in expense reserves in the PBF. Further realistic support would be required for the decrease in interest rate sensitivity and this is included within the non-participating insurance contract liabilities in the table below. Earnings over a period may be reduced as a consequence of the impact of market movements on charges levied on unit linked business, segregated fund business and other with profits fund business. For example, if the tests had been applied as at 1 January, the profit during the year would have varied due to the different level of funds under management. In illustrating the impact of equity/property risk, the assumption has been made, where relevant, that expectations of corporate earnings and rents remain unchanged and thus yields change accordingly. The sensitivities take into account the likely impact on individual Group companies of local regulatory standards under such a scenario.
Limitations The sensitivity of the Group’s profit after tax and equity from continuing operations is non-linear and larger or smaller impacts should not be derived from these results. The sensitivity analysis represents the impact on profit at the year end that the changes in market conditions can have. The sensitivity will vary with time, both due to changes in market conditions and changes in the actual asset mix, and this mix is being actively managed. The results of the sensitivity analysis may also have been different from those illustrated had the sensitivity factors been applied at a date other than the reporting date.
Equity markets Property markets Interest rates 2014 +10% -10% +20% -20% +10% -10% +20% -20% +1% -1% Increase/(decrease) in profit after tax of continuing operations £m £m £m £m £m £m £m £m £m £m Shareholder business UK and Europe: Assets backing non-participating liabilities - - - - - - - - (595) 721 Non-participating insurance contract liabilities - - - - - - - - 567 (702) Non-participating investment contract liabilities - - - - - - - - - -
Participating business UK and Europe: 1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement. 3 The interest rate sensitivity is a parallel shift subject to a floor of nil.
The Company within other shareholder business classifies certain debt securities which back subordinated debt liabilities as assets available-for-sale (AFS). This reduces the impact of the mismatch between the measurement bases used for these assets and the liabilities they are backing. The Group’s sensitivity of profit after tax of continuing operations to changes in interest rates does not include the impact of changes in interest rates for these AFS assets.
Standard Life Investments 3 (3) 5 (5) - - - - - - Asia and Emerging Markets: Deferred acquisition costs 2 (2) 3 (3) - - - - (3) 3 Assets backing non-participating insurance contract liabilities - - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - - - Non-participating investment contract liabilities - - - - - - - - - -
The shareholder is also not exposed to the credit risk from the assets held by third parties in consolidated funds and noncontrolling interests and therefore these have been excluded from the following quantitative disclosures.
The tables that follow provide an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. For those financial assets with credit ratings assigned by external rating agencies, classification is within the range of AAA to BBB. AAA is the highest possible rating and rated financial assets that fall outside the range of AAA to BBB have been classified as below BBB with rules followed for determining the credit rating to be disclosed when different credit ratings are assigned by different external rating agencies. For those financial assets that do not have credit ratings assigned by external rating agencies but where the Group has assigned internal ratings for use in managing and monitoring credit risk, the assets have been classified in the analysis that follows as ‘internally rated’, with the exception of Canada’s loans secured by mortgages. These mortgages have been analysed in the table based on the internal ratings assigned to them. If a financial asset is neither rated by an external agency nor ‘internally rated’, it is classified as ‘not rated’. The total amounts presented represent the Group’s maximum exposure to credit risk at the reporting date without taking into account any collateral held. The analysis also provides information on the concentration of credit risk.
The 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.
The following tables show the shareholder and participating businesses’ exposure to credit risk from financial assets analysed by credit rating and country.
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (c) Credit risk continued (c)(i) Credit exposure continued Shareholder business An analysis of financial assets by credit rating is as follows: Loans to associates and joint ventures
Neither past due nor impaired: Internally rated - - 3 2 - - - - 764 356 - - - - 767 358 Past due - - - - - - - - - - 20 16 - - 20 16 Impaired - - - - - 19 - - - - - - - - - 19 Total 2 2 47 182 4 2,549 18 111 7,235 11,816 468 471 976 959 8,750 16,090
The shareholder business’ exposure to credit risk from financial assets has been significantly reduced by the sale of the Group’s Canadian business on 30 January 2015. Information on the shareholder business’ exposure to credit risk due to assets and liabilities of the Canadian business being reclassified as held for sale has been presented in section (f). An analysis of debt securities by country is as follows: Government, Provincial and
Municipal1 Banks Other financial institutions Other corporate Other2 Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m £m £m UK 565 360 377 507 1,286 889 1,330 955 - 69 3,558 2,780 Canada 3 2,463 25 354 - 265 1 1,929 - - 29 5,011 Australia - - 72 108 6 17 10 4 - - 88 129 Austria 25 20 - - - - - - - - 25 20 Belgium - - 25 27 - - 11 10 - - 36 37 Denmark - - 41 4 - - 16 15 - - 57 19 Finland - - 25 45 - - - - - - 25 45 France 209 22 228 236 - - 347 432 - - 784 690 Germany 87 302 115 84 1 1 300 328 - - 503 715 Greece - - - - - - - - - - - - Ireland - - - - 3 3 - - - - 3 3 Italy - - 36 34 - - 86 71 - - 122 105 Japan - - 119 110 10 30 32 29 - - 161 169 Mexico 1 - - - - - 112 82 - - 113 82 Netherlands - - 313 398 - - 24 14 - - 337 412 Norway - - - - - - 40 37 - - 40 37 Portugal - - - - - - - - - - - - Spain - - 37 9 - - 52 39 - - 89 48 Sweden - - 38 26 1 1 66 59 - - 105 86 Switzerland - - 87 54 - - 7 22 - - 94 76 US - 12 302 229 133 456 283 314 - - 718 1,011 Other 48 - 61 125 2 5 11 10 226 201 348 341 Total 938 3,179 1,901 2,350 1,442 1,667 2,728 4,350 226 270 7,235 11,816 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada. 2 This balance primarily consists of securities held in supranationals.
Participating business An analysis of financial assets by credit rating is as follows: Reinsurance assets Loans Derivative financial assets Debt
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (c) Credit risk continued (c)(i) Credit exposure continued An analysis of debt securities by country is as follows: Government, Provincial and
As at 31 December 2014 £m £m £m £m Financial assets Derivatives1 3,051 (1,057) (1,863) 131 Securities lending - - - - Total financial assets 3,051 (1,057) (1,863) 131 Financial liabilities Derivatives1 (1,260) 1,057 194 (9) Total financial liabilities (1,260) 1,057 194 (9) 1 Only OTC derivatives subject to master netting agreements have been included above.
As at 31 December 2013 £m £m £m £m Financial assets Derivatives1 1,367 (451) (812) 104 Securities lending 146 - (146) - Total financial assets 1,513 (451) (958) 104 Financial liabilities Derivatives1 (496) 451 43 (2) Total financial liabilities (496) 451 43 (2) 1 Only OTC derivatives subject to master netting agreements have been included above.
As described in section (b), the Group risk management framework defines market risk as the risk that arises from the Group’s exposure to market movements, which could result in the income, or value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts. The movement in the fair value of loans and receivables incorporates both movements arising from credit risk and resulting from changes in market conditions. (c)(v)(ii) Financial liabilities designated at FVTPL The Group has designated unit linked non-participating investment contract liabilities as at FVTPL. As the fair value of the liability is based on the value of the underlying portfolio of assets, the movement, during the period and cumulatively, in the fair value of the unit linked non-participating investment contract liabilities, is only attributable to market risk.
Expenses The Group defines expense risk as the risk that expense levels will be higher than assumed. This can arise from an increase in the unit costs of the Group or its businesses or an increase in expense inflation, either Group specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can reflect an increase in liabilities or a reduction in expected future profits.
Profit is directly exposed to the risk of expenses being higher than otherwise expected. They can be further affected if it is considered necessary, or prudent, to increase provisions to reflect increased expectations of future costs of policy administration.
(d)(ii) Sensitivity to demographic and expenses risk analysis Recognition of profit after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Group’s insurance and investment contract liabilities, as described in Note 3 – Business written in the Group’s insurance entities.
When the sensitivities presented in the table above are applied to other with profits funds, there are no significant impacts on net liabilities after reinsurance, equity or profits for either investment or insurance contracts. Amounts in the table above are presented net of tax and reinsurance.
For the participating business, the tables above illustrate the impact of demographic and expense risk on the recourse cash flows from the HWPF, which have been determined in accordance with the Scheme and take into account the need to consider the
3. Financial information – Notes to the Group financial statements continued 42. Risk management continued (d) Demographic and expense risk continued (d)(ii) Sensitivity to demographic and expenses risk analysis continued impact of risk on the financial position of the HWPF before any recourse cash flows can be transferred to the SHF. The terms of the Scheme provide for the retention of recourse cash flows under certain circumstances to support the financial position of the HWPF. Refer to Section (b)(ii).
Business units undertake periodic investigations into liquidity requirements, which include consideration of cash flows in normal conditions, as well as investigation of scenarios where cash flows differ markedly from those expected (primarily due to extreme policyholder behaviour).
As a result of the policies and processes established to manage risk, the Group considers the extent of liquidity risk arising from its activities to be de-minimis.
Greater than 20 years No defined maturity Total 2014 £m £m £m £m £m £m £m £m
Non-participating insurance contract liabilities 550 1,629 1,651 1,274 959 3,109 - 9,172
Non-participating insurance contract liabilities 4,161 1,573 1,284 535 226 237 - 8,016
The principal amounts of financial 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. Also excluded are deposits received from reinsurers.
The Group also had unrecognised commitments in respect of financial instruments as at 31 December 2014 of £312m and £nil with a contractual maturity of within one year and between one and five years respectively (2013: £377m and £nil).
(f) Financial assets and liabilities of Canadian operations held for sale As described in Note 27 – Assets and liabilities held for sale, the Group has reclassified the assets and liabilities of its Canadian business as held for sale. These held for sale financial assets and liabilities continue to be recognised on the consolidated statement of financial position and valued in accordance with the relevant accounting policy.
The table that follows provides an analysis of the Group’s financial assets and liabilities held for sale by risk segment: Notes
Derivative financial assets 44 - - - 44 Equity securities and interests in pooled investment funds 176 232 11,909 644 12,961
Other liabilities of operations held for sale 675 718 15 954 2,362
The shareholder and participating business exposure to market, credit, demographic expense and liquidity risk has been significantly reduced by the sale of the Group’s Canadian business on 30 January 2015. The financial assets and liabilities of the Canadian business have been reclassified as held for sale at 31 December 2014 as the carrying amounts will be rewarded principally through sale rather than through continuing use.
The Group’s risk management activities in relation to these assets and liabilities have been adapted as a result of the exposure to the credit risk of the purchaser.
(g) Securities lending arrangements The Group’s Canadian business enters into securities lending arrangements as part of its normal operating activities. The assets and liabilities of the Canadian business were classified as held for sale at 31 December 2014. Assets are pledged by third parties as collateral to support this activity. Collateral held by the Canadian business in respect of securities lending agreements at 31 December 2013 was £153m of securities. The fair value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value fluctuates. The Canadian business does not have the right to sell or repledge the collateral.
The types of operational risk to which the Group is exposed are identified using the following operational risk categories: • Fraud or irregularities • Regulatory or legal • Customer treatment • Business interruption • Supplier failure • Planning • Process execution • People.
Strategic risk The Group defines strategic risk as the risk associated with the robustness of the strategic planning process and the threats to the achievement of the strategy. Strategic risks are considered across the Group through the business planning process. The strategic risks to which the Group is exposed are quantified in terms of profitability and severity and are reviewed on a regular basis.
43. Structured entities A structured entity is defined as an entity where control is not necessarily held through voting rights linked to ownership stake but rather through rights arising from contractual agreements that give power to direct the relevant activities. The Group’s interests in structured entities is comprised of investments in a range of investment vehicles. The principal types of structured entities in which the Group has an interest include: • Pooled investment funds managed internally and externally, including OEICs, SICAV, unit trusts and limited partnerships • Debt securitisation vehicles which issue asset-backed securities.
(b) Unconsolidated structured entities The Group has both investments in and other interests in unconsolidated structured entities. The Group has not provided any noncontractual financial or other support to any unconsolidated structured entities and there are no current intentions to do so.
(b)(i) Investments in unconsolidated structured entities The following table shows the carrying value of the Group’s investments in unconsolidated structured entities by line items in the consolidated statement of financial position and by risk segment as defined in Note 42 – Risk management.
Third party interest in consolidated funds and non-controlling interests Total 2014 £m £m £m £m £m
Investment in associates 4,264 Equity securities and interests in pooled investment funds 19 92 15,845 1,199
The asset value of these unconsolidated structured entities including the portion in which the Group has no interest is as follows: £m
(d) Methods and assumptions used to determine fair value of assets and liabilities Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given below. These methods and assumptions include those used to fair value assets and liabilities held for sale, including the individual assets and liabilities of operations held for sale.
Equity instruments listed on a recognised exchange are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.
Investment property and owner occupied property The fair value of investment property and all owner occupied property is valued by external property valuation experts. The current use is considered the best indicator of the highest and best use of the Group’s property from a market participants’ perspective. No adjustment has been made for vacant possession for the Group’s owner occupied property.
Derivative financial assets and derivative financial liabilities The majority of the Group’s derivatives are over-the-counter (OTC) derivatives which are fair valued using valuation techniques based on observable market data and are therefore categorised as level 2 investments within the fair value hierarchy.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2014 and 31 December 2013 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.
Classified as held for sale Total Level 1 Level 2 Level 3 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m £m £m
Investments in associates at FVTPL 4,264 1,515 33 10 4,297 1,525 4,214 1,525 - - 83 -
Derivative financial assets 4,021 1,991 44 - 4,065 1,991 971 624 3,094 1,367 - - Equity securities and interests in pooled investment vehicles 71,327 84,654 13,035 19 84,362 84,673 83,521 83,607 1 - 840 1,066
Debt securities 64,441 69,209 11,059 - 75,500 69,209 23,780 22,199 50,077 45,711 1,643 1,299 Contingent consideration asset 20 - - - 20 - - - - - 20 -
Debt securities 7,235 11,816 5,934 - 13,169 11,816 981 904 10,952 9,980 1,236 932 Contingent consideration asset 20 - - - 20 - - - - - 20 - Total shareholder business 7,323 12,655 6,788 29 14,111 12,684 1,265 1,117 11,120 10,155 1,726 1,412 Participating business Investments in associates at FVTPL 535 354 - - 535 354 452 354 - - 83 -
Derivative financial assets 1,649 661 - - 1,649 661 332 213 1,317 448 - - Equity securities and interests in pooled investment vehicles 9,658 10,952 232 - 9,890 10,952 9,526 10,281 - - 364 671
Derivative financial assets 643 387 - - 643 387 181 134 462 253 - - Equity securities and interests in pooled investment vehicles 6,167 7,055 644 - 6,811 7,055 6,541 6,722 - - 270 333
There were no transfers between levels 1 and 2 during the period (2013: none). Refer to 44(d)(iii) for details of movements in level 3.
The table that follows presents an analysis of the Group’s liabilities measured at fair value by level of the fair value hierarchy for each risk segment as set out in Note 42 – Risk management.
Derivative financial liabilities 1,187 519 2 - 1,189 519 319 256 870 263 - - Total unit linked and segregated funds 89,390 95,786 13,736 -
Derivative financial liabilities 409 238 1 - 410 238 88 122 322 116 - - Third party interest in consolidated funds and non-
(d)(iii) Reconciliation of movements in level 3 instruments The movements during the year of level 3 assets and liabilities held at fair value, excluding assets and liabilities held for sale, are analysed below.
Reclassified as held for sale - - (1,233) (92) (42) - (1) - (945) - - - Total gains/(losses) recognised in the consolidated income statement 2 - 825 315 4 (3) (31) 89 38 (77) (124) (45) Purchases 101 - 1,033 615 - - 112 93 439 402 35 7 Settlement - - - - - - - - - - (3) (3) Sales (20) - (128) (712) - - (306) (244) (87) (227) - - Transfers in to level 3 - - - - - - 1 15 436 194 - - Transfers out of level 3 - - - - - - (1) (9) (659) (312) - - Foreign exchange adjustment - - (14) (103) - (5) (4) 5 (2) (83) - -
Total gains recognised in revaluation of owner occupied property within other comprehensive income1 - - - - 5 68 - - - - - - Other - - 16 (11) - - - (1) - - - - At 31 December 83 - 9,041 8,542 138 171 836 1,066 519 1,299 (1,338) (1,246) 1 Movements recognised in the income statement and other comprehensive income for the year ended 31 December 2013 includes discontinued operations.
Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions For the majority of level 3 investments, the Group does not use internal models to value the investments but rather obtains valuations from external parties. The Group reviews the appropriateness of these valuations on the following basis: • For investment property and owner occupied property (including property that is classified as held for sale), the valuations are obtained from external valuers and are assessed on an individual property basis. The principle assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the following table using knowledge of the investment property market.
Investment property and owner occupied property 124 Market comparison Estimated value per square metre
Fair value 2013 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 7,174 Income capitalisation Equivalent yield
(e) Assets and liabilities not carried at fair value The table below presents estimated fair values of assets and liabilities whose carrying value does not approximate fair value. Fair values of assets and liabilities are based on observable market inputs where available, or are estimated using other valuation techniques.
Non-participating investment contract liabilities 35,27 4 2,392 2,118 - 2,122 2,392 2,285 2,545
Loans measured at amortised cost primarily include commercial mortgages within the Group’s commercial mortgage portfolio. The fair value of these loans is estimated using a discount rate adjustment technique which is an income approach. The key inputs for the valuation model are contractual future cash flows, which are then discounted using a discount rate that is determined by adding a spread to the current risk free rate from government bonds with terms that match the mortgage loans’ terms. The spread is derived from market information available on current mortgage rates which is considered to be observable.
3. Financial information – Notes to the Group financial statements continued 45. Statement of cash flows The tables below provide further analysis of the balances in the statement of cash flows.
Change in liability for third party interest in consolidated funds (2,458) 893
Non-cash and other items 189 134 1 Comparative periods presented have been restated to reflect retrospective application of changes to accounting policies as a result of new IFRSs adopted in the period. Refer to Group accounting policies – (a) Basis of preparation.
(c) Other In the ordinary course of business, Standard Life Trust Company (SLTC) enters into agreements which contain guarantee provisions for clearing system arrangements related to investment activities. Under such arrangements, the company, together with other participants in the clearing systems, may be required to guarantee certain obligations of a defaulting member. The guarantee provisions and amounts vary based upon the agreement. The company cannot estimate the amount, if any, that may be payable upon default. To facilitate its participation in the clearing system SLTC has provided as security a bank credit facility up to a maximum of CA$84m.
(b) Unrecognised financial instruments The Group has committed the following unrecognised financial instruments to customers and third parties. 2014 2013 £m £m
Later than one year and no later than five years 61 51
(ii) Short-term incentive plan (annual bonus deferred shares) The majority of the members of the executive and senior management including executive Directors participate in the Group annual bonus. Under the terms of the 2014 and 2013 annual bonus, half of any bonus earned by executive Directors and members of the executive team above 25% of salary will be settled in nil-cost options which are deferred for a period of two years, subject to the deferred amount being worth 10% or more of salary. Further details of the annual bonus are set out in the Directors’ remuneration report.
Share awards (i) Share incentive plan The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,800 (the maximum limit increased from £1,500 from 1 September 2014). The Group offers to match the number of shares bought up to a value of £25 each month. The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.
Exercisable at 31 December 10,365 9,931 - 227,318 157p 34,407 63,320 - 2,950 167p Weighted average remaining contractual life of options outstanding (years) 2.40 1.81 1.19 2.76 - 1.41 2.62 1.21 2.58 -
3. Financial information – Notes to the Group financial statements continued 48. Employee share-based payments continued (a) Options granted continued The following table shows the range of exercise prices of options outstanding at 31 December 2014. All options are exercisable for a period of six months after the vesting date.
(b) Share incentive plans The terms and conditions of the ongoing arrangements are set out in the table below and are based on the weighted average number of awards. 2014 2013
Fair value per granted instrument at grant date 389p 361p 1 Included in the number of instruments granted are 53,598 (2013: 58,657) rights to shares granted to eligible employees in Canada, Germany and Austria.
(c) Employee share-based payment expense The amounts recognised as an expense in Note 8 for equity-settled share-based payment transactions with employees are as follows: restated1 £m £m
Additionally, the Group incurred an expense for cash-settled share-based payment schemes from continuing operations of £2m in 2014 (2013: £3m) and £nil (2013: £1m) from discontinued operations. The liability for cash-settled share-based payments outstanding at 31 December 2014 is £6m (2013: £5m).
49. Related party transactions (a) Transactions and balances with related parties In the normal course of business, the Group enters into transactions with related parties that relate to insurance and investment management business.
Transactions with related parties carried out by the Group during the year were as follows: restated1 £m £m Sale to
Associates 451 717 Joint ventures 1 13 Other related parties 94 31 830 687 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Sales to and amounts due from other related parties include management fees received/receivable from non-consolidated investment vehicles managed by Standard Life Investments.
In addition to the amounts shown above, the Group’s defined benefit pension plans have assets of £1,553m (2013: £782m) invested in investment vehicles managed by the Group.
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 42 – Risk management.
The PRA requires all insurance companies and financial conglomerates to maintain capital resources in excess of their capital resources requirement (CRR). Capital resources include the assets in excess of liabilities, valued on a regulatory basis, and certain other components of capital. Certain items that are classified as liabilities under IAS 32 Financial Instruments: Disclosure and Presentation are treated as capital under the regulatory basis. For the Group, this applies to its subordinated guaranteed bonds, Mutual Assurance Capital Securities and subordinated notes. The CRR represents the total of the individual capital resources requirements of each regulated company in the Group.
Any surplus within the PBF is attributable to equity holders. Capital within the PBF may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund and any further restrictions imposed by the Scheme. The regulatory results of SLAL have the most significant impact on the Group capital position. The other significant components are the held for sale insurance entities in Canada and insurance entities in Asia and non-insurance entities, including Standard Life Investments Limited and Standard Life plc.
Held outside life assurance funds - - 884 884 1,418 2,302 931 3,233 Held within life assurance funds - 1,439 - 1,439 - 1,439 - 1,439 Equity attributable to ordinary equity holders of Standard Life plc - 1,439 884 2,323 1,418 3,741 931 4,672
Other sources of capital Subordinated liabilities - - - - 223 223 1,318 1,541 Internal subordinated liabilities - - 819 819 - 819 (819) -
Participating Insurance contracts 15,397 - - 15,397 702 16,099 - 16,099 Investment contracts 15,191 - - 15,191 2 15,193 - 15,193 Total participating contract liabilities 30,588 - - 30,588 704 31,292 - 31,292
Other non-participating Insurance contracts 10,760 5,877 - 16,637 5,178 21,815 3 21,818 Investment contracts - 295 - 295 1,819 2,114 - 2,114 Total other non-participating liabilities 10,760 6,172 - 16,932 6,997 23,929 3 23,932
Total contract liabilities 41,348 99,835 - 141,183 25,431 166,614 3 166,617 1 Capital resources amounting to £183m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,533m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column. 2 Contract liabilities include the contract liabilities of the Canadian business classified as held for sale. Refer to Note 27 – Assets and liabilities held for sale.
Participating Insurance contracts 14,393 - - 14,393 667 15,060 - 15,060 Investment contracts 14,704 - - 14,704 3 14,707 - 14,707 Total participating contract liabilities 29,097 - - 29,097 670 29,767 - 29,767
Other non-participating Insurance contracts 11,027 4,557 - 15,584 4,709 20,293 3 20,296 Investment contracts - 293 - 293 2,099 2,392 - 2,392 Total other non-participating liabilities 11,027 4,850 - 15,877 6,808 22,685 3 22,688 1 Capital resources amounting to £115m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,078m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.
3. Financial information – Notes to the Group financial statements continued 50. Capital statement continued Movements in capital The movements in the total capital resources shown in the capital statement are set out below.
Based on draft regulatory returns at 31 December 2014, SLAL had available capital resources of £5,862m (2013: £6,782m) and a CRR of £3,637m (2013: £3,846m). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis. However, the CRR reflects the higher value required as a result of the application of the realistic peak.
Other activities At 31 December 2014, capital resources of £1,224m (2013: £1,299m) and capital subject to constraints of £185m (2013: £104m) relate to the Group’s investment management businesses and group corporate centre activities.
SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. At Group level only subordinated liabilities issued to external parties are included in the Group’s capital resources.
Group capital requirement The Group must also calculate a group regulatory capital position under the Insurance Groups Directive (IGD). The IGD calculation is a prudent aggregate value for the Group’s capital resources. The capital held within the long-term business funds of approximately £4,714m (2013: £5,019m) is restricted to the level of the CRR of those funds of £3,637m (2013: £3,846m). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
Contract liabilities The process used to determine the assumptions that have the greatest effect on the measurement of contract liabilities (including options and guarantees), the quantified disclosure of those assumptions, and the terms and conditions of options and guarantees relating to life assurance contracts that could in aggregate have a material effect on future cash flows are disclosed in Note 3 – Business written in the Group’s insurance entities and Note 34 – Insurance contracts, investment contracts and reinsurance contracts. The sensitivity of contract liabilities to changes in market conditions, key assumptions and other variables, and assumptions about management actions in response to changes in market conditions, are disclosed in Note 42 – Risk management.
Independent Auditors’ Report to the Directors of Standard Life plc Report on the European Embedded Value – financial information
What we have audited The European Embedded Value financial information (the EEV financial information) basis, which is prepared by Standard Life plc (the ‘Company’), comprises: • The EEV consolidated income statement and EEV consolidated statement of comprehensive income for the year then ended • The EEV consolidated statement of financial position as at 31 December 2014 • The notes to the EEV financial information, which includes the EEV basis set out in Notes 1 to 12 and other explanatory information.
What an audit of the EEV financial information involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining evidence about the amounts and disclosures in the EEV financial information sufficient to give reasonable assurance that the EEV financial information is free from material misstatement, whether caused by fraud or error. This includes an assessment of: • Whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed • The reasonableness of significant accounting estimates made by the Directors • The overall presentation of the EEV financial information.
In addition, we read all the financial and non-financial information in the Annual report and accounts 2014 to identify material inconsistencies with the audited EEV financial information and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Our responsibility is to audit and express an opinion on the EEV financial information in accordance with applicable laws and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinion, has been prepared for and only for the Company’s directors as a body in accordance with our letter of engagement dated 31 July 2014 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
EEV consolidated income statement For the year ended 31 December 2014
EEV operating profit after tax from continuing operations 581 88 669 395 19 414
EEV operating profit/(loss) after tax from discontinued operations 227 (9) 218 289 (20) 269
EEV operating profit/(loss) after tax 808 79 887 684 (1) 683
Restructuring and corporate transaction expenses (39) (55) (94) (40) (17) (57)
Other EEV non-operating items - (55) (55) - (14) (14) EEV non-operating (loss)/profit after tax from continuing operations (17) (110) (127) 401 (31) 370 EEV non-operating profit/(loss) after tax from discontinued operations 182 (8) 174 (65) - (65)
EEV profit/(loss) after tax from continuing operations 564 (22) 542 796 (12) 784
Items from continuing operations that will not be reclassified subsequently to profit or loss: Remeasurement gains on defined benefit pension plans2 292 70
Total items from continuing operations that will not be reclassified subsequently to profit or loss 283 48
Items from continuing operations that may be reclassified subsequently to profit or loss: Fair value losses on cash flow hedges2 1 -
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (6) 3
Total items from continuing operations that may be reclassified subsequently to profit or loss (5) (32)
Total EEV comprehensive income for the year from continuing operations 820 800
Analysed by: Present value of in-force (excluding TVOG) 6,076 - 6,076 5,553 - 5,553
Segmentation Under the EEV Principles and Guidance, we are required to provide business classifications which are consistent with those used for the primary statements. In the Group financial statements, the Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8 Operating segments. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business.
Sale of Canada and closure of Dubai As explained in Note 51 to the IFRS consolidated financial information, on 3 September 2014 the Group announced that it had entered into an agreement to sell its Canadian business to The Manufacturers Life Insurance Company. The sale of the Group’s Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc.) and Canadian investment management business (Standard Life Investments Inc.) completed on 30 January 2015 and the results of the Canadian business, including Canada non-covered business and Standard Life Investments Inc., are reported as EEV Discontinued operations. Comparative amounts for the year ended 31 December 2013 are reported on the same basis to allow more meaningful comparison. EEV results for Discontinued operations include a closing non-trading adjustment at 31 December 2014 to value the Canadian business at sale proceeds less estimated costs to sell.
On 5 November 2014, the Group announced the closure of the Dubai business. The results of this business are included as EEV Discontinued operations, consistent with the IFRS segmental reporting treatment. Dubai was previously included in Asia and Emerging Markets. Comparative amounts for the year ended 31 December 2013 have been restated. EEV results for Discontinued operations include a non-operating adjustment to eliminate the PVIF for the Dubai business.
3. Financial information – Notes to the EEV financial information continued 2. Analysis of movement in EEV Covered
Lower new business contribution in UK and Europe is partly due to lower sales of annuities following the 2014 Budget and lower sales of institutional pensions, offset by improved margins on group pensions business.
EEV non-operating profit of £47m includes a loss of £127m from continuing business and a profit of £174m from discontinued operations. The continuing business loss of £127m includes a loss of £160m from the impact of UK regulations that restrict charges in qualifying workplace pension schemes, a £34m impairment of intangible assets and £94m of restructuring expenses; partly offset by a profit of £181m from favourable investment returns. The £174m profit from discontinued business includes a £200m profit from favourable investment returns and the impact of lower bond yields in Canada, offset by £26m of restructuring costs incurred in the closure of the Dubai operations and the costs incurred in preparation for the sale of the Canadian business.
Group Free surplus Required capital Free surplus EEV net worth Free surplus Required capital Free surplus EEV net worth £m £m £m £m £m £m £m £m
EEV non-operating capital and cash generation (4) 37 (118) (85) (22) (95) (31) (148)
Look through transfer of net worth (105) - 105 - (93) - 93 -
3. Financial information – Notes to the EEV financial information continued 3. Analysis of movement in net worth continued (b) Covered business operating net worth movement analysis 4. Analysis of movement in PVIF (including TVOG and cost of required capital) 2014 2013
The other PVIF movement in 2014 of negative £72m is the closing PVIF adjustment for Canada. Refer to Note 1 – Basis of preparation.
Free surplus movement: Required capital movement: Operating net worth movement: 246 Standard Life
5. PVNBP, new business contribution and margin of continuing operations 2014 2013
PVNBP – Spread/risk and Other 155 449 604 361 465 826
New business contribution – Spread/risk and Other 14 20 34 41 16 57
PVNBP margin % – Spread/risk and Other 9.3 4.7 5.9 11.4 3.5 6.9 6. Monetisation profile closing PVIF1 and new business PVIF1 of continuing operations
3. Financial information – Notes to the EEV financial information continued 7. Reconciliation of operating profit to EEV operating capital and cash generation continued
Markets Other Discontinued operations Total 2013 £m £m £m £m £m £m
Operating profit/(loss) after tax 328 149 - (55) 180 602 Impact of different treatment of assets and actuarial reserves (30) - (2) - (4) (36)
EEV operating capital and cash generation 409 70 (26) (55) 184 582
EEV operating profit/(loss) after tax – PVIF (28) - 44 - 85 101
EEV operating profit/(loss) after tax 381 70 18 (55) 269 683 1 Deferred acquisition costs (DAC) and deferred income reserve (DIR).
Net assets attributable to equity holders on an IFRS basis 4,672 4,227
The discontinued TVOG in Canada grew by £47m, due to both market movements and new business written in the year.
Cash and bond returns These variables are calibrated using government strips.
Equity returns The volatility of equity returns is calibrated to the market prices of a range of FTSE 100 and Dow Jones Euro Stoxx options.
For the UK and Europe, the model is calibrated to property-implied volatility of 13% for 31 December 2014 and 15% for 31 December 2013.
3. Financial information – Notes to the EEV financial information continued 10. Principal economic assumptions – deterministic calculations – covered business 31 December 2014 31 December 2013
Risk-free rate: UK / SLIL 1.86 3.01 3.01 1.74 Europe 0.54 1.94 1.94 1.32 Canada 2.23 3.16 3.16 2.32 Hong Kong 1.99 1.92 1.92 0.91 India1 7.55 - 8.01 - China1 3.93 - 4.94 -
Equity returns: Canada 8.60 8.60 Other Risk-free rate + 3%pa Risk-free rate + 3%pa
Property returns: Canada 8.60 8.60 Other Risk-free rate + 2%pa Risk-free rate + 2%pa
3 This represents the current rate. The rate in subsequent years is based on a moving 30-year bond yield less a 2% deduction, subject to a floor of 1.50%. * For UK immediate annuity new business, economic assumptions are updated every quarter.
Under the 10% decrease in maintenance expenses scenario, a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a. Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases.
Markets Total continuing business 31 December 2014 £m £m £m £m £m £m Base Value 4,615 410 5,025 177 29 206 Risk discount rates +1% (341) (17) (358) (27) (4) (31) Risk discount rates -1% 408 20 428 32 5 37 Interest returns +1% 45 (6) 39 6 1 7 Interest returns -1% (219) 3 (216) (16) (2) (18) Fall in equity market values by 10% (260) (7) (267) (30) - (30) Fall in property market values by 10% (24) (1) (25) (3) - (3) Maintenance expenses -10% 176 4 180 24 1 25 Lapse rates -10% 125 10 135 20 2 22 Annuitant mortality -5% (115) - (115) (1) - (1) Non-annuitant mortality -5% 8 3 11 1 - 1
The UK and Europe embedded value sensitivity numbers above include the movement in HWPF and GWPF TVOG. The HWPF and GWPF TVOG movement has a material impact only under the interest returns sensitivities, where it contributes £109m under the interest returns +1% sensitivity and (£243m) under the interest returns -1% sensitivity. The UK and Europe new business contribution sensitivity numbers above include the movement in the GWPF TVOG. There is no new business in the HWPF TVOG. The GWPF TVOG movement has no material impact on new business contribution sensitivity numbers.
12. EEV Methodology As explained in Note 1 – Basis of preparation, the results of the Canadian business, including Canada non-covered business and Standard Life Investments Inc., are now reported as EEV discontinued operations. Discontinued operations non-trading adjustments include a closing adjustment to value the Canadian business at sale proceeds less estimated costs to sell. The EEV methodology below applies to the trading and non-trading results before this closing adjustment.
The Group’s covered business is its life assurance and pensions businesses in the UK and Europe (UK, Ireland and Germany including Austria), Canada and Asia and Emerging Markets, as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.
UK and Europe covered business also includes: • Non-insured self invested personal pension (SIPP) business • Those elements of Wrap business that are contained within a long-term product wrapper, i.e. bonds, SIPPs and mutual funds • Mutual funds sold by the UK business • Standard Life Savings Limited • The Group’s offshore bond business which is sold by Standard Life International Limited (SLIL).
Non-covered business EEV operating profit after tax is represented by operating profit after tax as adjusted for Standard Life Investments and other look through profits which are recognised in covered business.
Transfer back of look through net worth from covered business Covered business includes the profits and losses arising from non-covered businesses providing investment management and other services to the Group’s life and pensions businesses (‘look through’). As a result, the profits and losses on an IFRS basis have been removed from the relevant non-covered segments and are instead included within the EEV results of the covered businesses.
Allowance for risk Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways: • Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate • Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments • Allowing for the time value of options and guarantees (TVOG).
The market risk margin effectively removes the impact of assuming higher than risk free returns on the discounted EEV result. In this way, the benefits of assuming higher than risk free investment returns on future cash flows are largely offset by using a higher discount rate. The market risk margin does not remove returns above risk free on illiquid assets (e.g. corporate bonds and mortgages) where these are matched to appropriate liabilities (e.g. immediate annuities). The non-market risk margin is intended to allow for the risk that non-market experience in future years may differ from that assumed. Allowance has been made for non-market risk by applying stress tests to PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests. The main elements of non-market risk which are allowed for are persistency, mortality, operational and expense risk assumptions. Benefits of diversification between risk types are allowed for in deriving the non-market risk margins in line with our internal capital model. Separate risk discount rates are calculated for in-force and new business for the principal geographic segments (UK, Europe, SLIL UK, Canada and Hong Kong). In addition, for UK and Europe, separate risk margins are calculated for business that originated in the HWPF and the PBF.
Market risk margins and any cost of required capital adjustment are reviewed at each valuation date, with non-market risk margins generally reviewed in detail once a year.
Within the EEV results for the India and China JV businesses, PVIF and cost of required capital are calculated using a ‘risk neutral’ approach, whereby projected investment returns and discount rates are based on risk free rates. As a result, there is no need for an additional market risk margin in the discount rate. Non-market risk is deducted directly from PVIF using a ‘cost of capital’ approach on the risk capital arising from the key sources of non-market risk. For the India and China JV businesses, this methodology would give a similar result to the methodology used in the UK, Europe, Canada and Hong Kong, since the calibration of a risk discount rate would have allowed for the market and non-market risks.
The levels of required capital in the current EEV calculations are therefore as follows: • UK and Europe (business in HWPF) – no capital requirement in excess of statutory reserves or asset shares is valued in the
EEV • UK and Europe (business in equity holder owned funds) – 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life’s internal risk-based capital requirement • Canada – the level of required capital is taken as 160% of minimum continuing capital and surplus requirements (MCCSR) • Asia and Emerging Markets – required capital is generally based on the local statutory capital requirements.
UK and Europe – HWPF The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, equity holder cash flows from the HWPF are held back if required to cover HWPF liabilities on the Prudential Regulation Authority realistic or regulatory basis. This option for the UK, Germany and Ireland results in the loss of cash flows when the HWPF has insufficient assets to pay guaranteed policy benefits. The main options and guarantees within the HWPF in respect of UK and Europe business relate to with profits business and include minimum guaranteed rates of return.
• Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds.
Equity holder assets are at risk if the resources of these with profits funds are insufficient to pay the guaranteed benefits. The level of TVOG has been calculated using stochastic techniques. TVOG has reduced both NBC and closing PVIF for Germany.
An adjustment is made within free surplus to allow for the potential cost of a selection of guaranteed annuity benefits on unit linked and smoothed-managed business within Germany.
Expense assumptions Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions. For mature businesses, no credit is taken for future cost reduction programmes until the benefits have been delivered. For start-up businesses, expense over-runs are permitted where these are expected to be short-lived.
Restructuring and corporate transaction expenses are consistent with those identified in the Group operating profit adjustments. Refer to the Group financial statements Note 10 – Restructuring and corporate transaction expenses for further detail. In addition, restructuring and corporate transaction expenses for covered business include associated impacts on PVIF and cost of required 254 Standard Life
capital. Acquisition costs used within the calculation of NBC reflect the full acquisition expenses incurred in writing new business in the period.
New business Definition of new business New business includes new policies written during the period and some increments to existing policies. The value of new business includes the value of expected renewal premiums where these are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are deemed likely to renew.
New business contribution (NBC) The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC is calculated as at the end of the reporting period.
Present value of new business premiums (PVNBP) New business sales are expressed as PVNBP calculated as total single premiums received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums are the same as those used to calculate NBC, except that PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate.
Where AFS assets are held by an EEV non-covered entity, unrealised gains and losses do not impact EEV profit after tax and are recorded within the EEV consolidated statement of comprehensive income.
Subordinated liabilities The liabilities in respect of the UK subordinated debt plus the subordinated debt issued by Canada form part of covered business and have been deducted at market value within EEV.
Our opinion In our opinion the financial statements, defined below: • Give a true and fair view of the state of the company’s affairs as at 31 December 2014 and of its profit and cash flows for the year then ended • Have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
Certain disclosures required by the financial reporting framework have been presented elsewhere in the Company financial statements (the ‘Annual report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • Whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed • The reasonableness of significant accounting estimates made by the Directors • The overall presentation of the financial statements.
In addition, we read all the financial and non-financial information in the Annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion: • The information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements • The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • We have not received all the information and explanations we require for our audit • Adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us • The financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion, information in the Annual report is: • Materially inconsistent with the information in the audited financial statements • Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit • Is otherwise misleading.
We have reported separately on the Group financial statements of Standard Life plc for the year ended 31 December 2014.
Stephanie Bruce (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 20 February 2015 (a) The maintenance and integrity of the Standard Life website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Shares acquired by employee trusts - (3) - - - (3)
Other comprehensive income for the year - - - - (14) (14)
Total comprehensive income for the year - - - 566 (14) 552
Shares distributed by employee trusts Q - 12 - (12) - -
Company statement of cash flows For the year ended 31 December 2014 restated1 Notes £m £m
Cash and cash equivalents at the beginning of the year N 40 22
Interest received A 2 2 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
(a)(i) New standards, interpretations and amendments to published standards that have been adopted by the Company
The impact of the adoption of IAS 27 is that investment vehicles such as open-ended investment companies (OEIC’s), unit trusts and limited partnerships over which the Company is deemed to have control must be classified as investments in subsidiaries. The Company has elected to measure this category of investment in subsidiaries at fair value through profit and loss (FVTPL). This results in an investment in a highly liquid short-term investment fund being reclassified from cash and cash equivalents to investments in subsidiaries at FVTPL.
The impact on the statement of financial position at 31 December 2013 as a result of the retrospective application of the amendment to IAS 27 (2011), is a decrease in cash and cash equivalents of £142m and an increase in investments in subsidiaries of £142m. There is no impact from this new standard on the statement of comprehensive income for the year ended 31 December 2013.
The impact of the adoption of IAS 28 (2011) is that an equity investment in an entity over which the Company has significant influence which was previously out of scope of IAS 28 has now been brought into scope resulting in the reclassification of this investment as an investments in associates on the statement of financial position. The Company has elected to continue to measure this investment at FVTPL.
The impact on the statement of financial position at 31 December 2013 as a result of the retrospective application of IAS 28 (2011), is a decrease in equity securities and interests in pooled investment funds of £12m and an increase in investments in associates and joint ventures of £12m. There is no impact from this new standard on the statement of comprehensive income or statement of cash flows for the year ended 31 December 2013.
Company accounting policies continued (a) Basis of preparation continued (a)(i) New standards, interpretations and amendments to published standards that have been adopted by the
(a)(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Company Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Company’s annual accounting periods beginning on or after 1 January 2015. The Company has not early adopted the standards, interpretations and amendments described below: IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018) IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows only two measurement categories for financial assets: amortised cost and fair value. All equity 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 measured at fair value through other comprehensive income or FVTPL depending on the business model it is held within or whether the option to adopt FVTPL has been applied. 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 may now be recognised prior to a loss event occurring. Financial liabilities may be designated as at FVTPL. The amortised cost measurement basis is applied to most other financial liabilities. For financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability’s credit risk are recognised directly in other comprehensive income.
Investments in Associates and Joint Ventures: Applying the Consolidation Exception (effective for annual periods beginning on or after 1 January 2016)
• Amendments to IAS 1 Presentation of Financial Instruments: Disclosure Initiative (effective for annual periods beginning on or after 1 January 2016).
(a)(iv) Critical accounting estimates and judgement in applying accounting policies The preparation of financial statements requires management to make estimates and assumptions and exercise judgements in applying the accounting policies that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas where judgements, estimates and assumptions have the most significant effect on the amounts recognised in the consolidated financial statements are as follows: Financial statement area Critical accounting judgements, estimates or assumptions Related accounting policies and notes
The Company has certain subsidiaries which are investment vehicles such as open-ended investment companies (OEIC’s), unit trusts and limited partnerships whose primary function is to generate capital or income growth through holding investments. This category of subsidiary is held at FVTPL since they are managed on a fair value basis.
Investments in subsidiaries include loans to subsidiaries that meet the definition of equity instruments. Refer to (g) for more information on the measurement of loans to subsidiaries.
Where the Company has an investment in associate, a portion of which is held indirectly through a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at fair value through profit or loss (FVTPL) in accordance with IAS 39.
Translation differences on non-monetary items, such as equity securities held at FVTPL, are reported as part of the fair value gain or loss within investment return in the statement of comprehensive income. Translation differences on financial assets and liabilities held at amortised cost are included in the relevant line in the statement of comprehensive income.
For debt securities classified as available-for-sale (AFS), interest income recognised in the statement of comprehensive income is calculated using the effective interest rate (EIR) method.
Company accounting policies continued (e) Impairment of non-financial assets The carrying amounts of non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, at least at each reporting date. An impairment loss is recognised in the statement of comprehensive income for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount of an asset is the greater of its net selling price (fair value less costs to sell) and the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit, or group of units, to which the asset belongs.
Deferred tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities.
Current and deferred tax is recognised in the income statement except when it relates to items recognised in other comprehensive income or directly in equity, in which case it is credited or charged to other comprehensive income or directly in equity respectively.
(g) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
Management determines the classification of loans at initial recognition. Certain loans are designated as at FVTPL as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis so as to maximise returns either for policyholders or equity holders. All other loans are classified as loans and receivables. Loans classified as at FVTPL are measured at fair value with changes in fair value recognised in the consolidated income statement.
If there is objective evidence that an impairment loss has been incurred on loans carried at amortised cost, the amount of the impairment loss is calculated as the difference between the present value of future cash flows, discounted at the loan's original effective rate, and the loan’s current carrying value. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. Subsequent recoveries are credited to the consolidated income statement.
(h) Debt securities and derivatives Management determines the classification of debt securities and derivatives at initial recognition.
Certain debt securities are designated as at FVTPL as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis so as to maximise returns either for policyholders or equity holders. All other debt securities are designated as AFS.
(i) Financial guarantee contracts A financial guarantee contract is a contract that requires the Company to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. The Company recognises and measures financial guarantee contracts in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Company initially recognises and measures a financial guarantee contract at its fair value. At each subsequent reporting date, the Company measures the financial guarantee contract at the higher of the initial fair value recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue and the best estimate of the expenditure required to meet the obligations under the contract at the reporting date, determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(k) Equity (k)(i) Share capital and shares held by trusts An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in the share premium reserve. Incremental costs directly attributable to the issue of new equity instruments are shown in the share premium reserve as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments in a business combination are excluded from the consideration transferred.
(k)(ii) Merger reserve If the Company issues shares at a premium in connection with the acquisition of an equity holding in another entity and the conditions for merger relief under section 612 of the UK Companies Act 2006 are met, which permits the difference between the issue value and nominal value of the shares issued to be transferred to a reserve other than the share premium account, such differences are transferred to the merger reserve. A component of the merger reserve attached to the acquisition of an entity is released to retained earnings on disposal, part disposal or impairment of the interest in that entity.
(o) Dividend distribution Final dividends on share capital classified as equity instruments are recognised in equity when they have been approved by equity holders. Interim dividends on these shares are recognised in equity in the period in which they are paid.
Fair value of options granted under share incentive plans is determined using a relevant valuation technique, such as the Black Scholes option pricing model. For cash-settled share-based payment transactions, services received are measured at the fair value of the liability using an option pricing model. The fair value of the liability is remeasured at each reporting date and any changes in fair value are recognised in the statement of comprehensive income for the year.
For equity-settled share-based payment transactions, the fair value of services received is measured by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date, which is the date that the Group and the employees have a shared understanding of the terms and conditions of the award. If that award is subject to an approval process then the grant date is the date when that approval is obtained. Market vesting conditions and non-vesting conditions, such as the requirement of employees to save in the Save-as-you-earn scheme, are included in the calculation of the fair value of the instruments at the date of grant. Vesting conditions which are not market conditions are included in assumptions about the number of instruments that are expected to vest. The charge in respect of the services received is recharged by the Company to the subsidiary which receives the services of the employees.
If the equity instruments granted vest immediately, the employees become unconditionally entitled to those equity instruments. Therefore, the Company immediately recognises an amount due from subsidiaries in respect of the services received in full with a corresponding credit to the equity compensation reserve in equity.
Financial assets and liabilities are offset and the net amount reported on the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset, any related interest income and expense is offset in the company statement of comprehensive income.
Notes to the Company financial statements A. Investment return restated1 £m £m
C. Staff costs and other employee-related costs 2014 2013 Notes £m £m
The average number of staff during the year was: Group corporate centre 443 456
Total average number of staff 443 487 1 Staff who work in the Group’s Asia and Emerging Markets business based in the UK.
Further information on the Group’s pension plans and the changes agreed during the year to the employee pension the Group provides, is given in Note 38 of the Group financial statements.
The Finance Act 2013 further reduced the UK corporation tax rate to 20% with effect from 1 April 2015. This rate has been applied in calculating the UK deferred tax position at 31 December 2014.
Tax at UK corporation tax rate of 21.5% (2013: 23.25%) (115) (127)
At 31 December 5,833 5,413 1 Comparatives for the year ended 31 December 2013 have been restated to reflect retrospective application of changes to accounting policies as a result of new
Details of the Company’s principal subsidiaries are given in Note 1 of the Group financial statements. On 19 June 2014 the Company sold 100% of the share capital of Standard Life Wealth Limited (SLW) to Standard Life Investments (Holdings) Limited (SLIH), another wholly owned subsidiary of the Company. The consideration received was equal to 123,200,000 newly issued £1 ordinary shares of SLIH. As the carrying value of SLW on the Company’s statement of financial position at the date of disposal was £123m no gain or loss was recognised in the statement of comprehensive income.