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Message from the Chairman 2 Co-Chief Executives’ overview 4 Our business and values 8
Financial information 7. Independent audit report 106 8. Group financial statements 117 9. Company financial statements 225
The Annual report and accounts 2018 and the Strategic report and financial highlights 2018 are published on the Group’s website at www.standardlifeaberdeen.com/annualreport Access to the website is available outside the UK, where comparable information may be different.
Discontinued operations Discontinued operations relate to the UK and European insurance business. The sale of this business to Phoenix completed on 31 August 2018.
The priorities for the year ahead are three-fold. First, improve investment performance, particularly in multi-asset absolute returns and equities, and deliver fresh solutions that meet the needs of an ever more demanding client base. Second, progress integration of the merged businesses and the transition of the technology services that went as part of the Phoenix transaction, so working towards delivering the cost savings promised. And third, deliver the revenue growth potential created both by the merger and the enhanced strategic partnership with Phoenix. All of these are necessary steps to restore value for you, our shareholders.
Management changes Recognising the progress made since the merger, with the encouragement of the Board, the co-CEOs instigated discussions around the management structure best placed to deliver the strategy agreed by the Board. The management changes now being announced are designed to strengthen our client focus, simplify reporting lines and put in place a structure which will facilitate robust execution of the next stages of our transition and transformation programmes.
As previously reported, Cathi Raffaeli joined the Board in August 2018, bringing broad-based financial industry experience and, in particular, knowledge of fintech and high tech services companies. Also as previously announced, Simon Troughton, our Deputy Chairman, will retire at the forthcoming AGM after a 10 year combined association with the Company and Aberdeen Asset Management. His wise counsel has been of great value to the Board over this period and to me as I took up the position of Chairman. Richard Mully has also indicated his intention to step down from the Board at the upcoming AGM, having completed seven years of Board service, in order to concentrate on his other interests. On behalf of shareholders I want to express our deep gratitude for their service and wish them well in their other endeavours.
The year ahead will be challenging and there is a very full schedule of actions that the executive is charged with delivering. There will undoubtedly also be unforeseen events to which we will need to respond. Whatever arises, I am confident that we have all the skills and resources in place within Standard Life Aberdeen to capture the opportunities that arise and deal with the challenges. In my three months in role I have been enormously impressed with the talent and dedication of our employees and it is to them that I pay tribute in closing, for their efforts and support.
Global ambitions I am delighted to be able to share my thoughts for the first time as Chairman of Standard Life Aberdeen. Before I look to the year ahead, I want to share with you a little about what attracted me to the role. In essence, it was through being impressed by the scale of the company’s global ambitions, the trust that our clients and customers put in us and the fact that the world is very much in need of the products and services we offer. I believe these together present an exciting opportunity.
Such a period of change puts considerable demands on any organisation. It is testament to the talented people in Standard Life Aberdeen that they have absorbed the additional integration and transition challenges, while remaining focused on meeting the needs of our clients and customers.
Looking ahead, delivering on our potential The savings and investment industry is evolving rapidly as individuals are faced with taking on more personal responsibility for their longterm needs. Technology is playing a large part to offer a variety of platforms and direct channels to fulfil such savings and investment needs. In the wholesale and institutional space, advanced quantitative tools are enabling more tailored solutions to be developed to meet the complex needs of our clients. Increased investment in our people and research capabilities underpins all of the above. As a client-centric business in an ever changing world we must continue to adapt and evolve to meet observable trends and invest in capabilities to anticipate what lies ahead.
As the UK’s future trading arrangement both with the EU and beyond are clarified, there may be significant market adjustments. Similarly as US/China trade relations develop, markets will reflect the assessed impact of changes to the terms of trade between the world’s two largest economies and the related impact on global supply chains. As active asset managers, these geopolitical events, as they impact markets, provide opportunities to assist clients to seek or protect value for their underlying beneficiaries. It is in such market conditions, perhaps more than others, that our distinctive investment style has the potential to create most value.
After an outstanding career with the Group of some 34 years, Bill Rattray will retire from the Board on 31 May 2019. He will be succeeded by Stephanie Bruce who, subject to satisfying all relevant regulatory requirements and processes, will take up the position of Chief Financial Officer (CFO) and executive Director on 1 June 2019. Stephanie’s appointment will be subject to election by shareholders at the AGM on 14 May 2019.
Q | How has the business performed in 2018? Adjusted profit before tax from continuing operations of £650m was 2% lower than 2017 on a Pro forma basis and included the benefit of our share of Phoenix adjusted profits from 1 September 2018. IFRS profit attributable to equity holders of Standard Life Aberdeen plc increased by 19% to £830m mainly as a result of the £1,780m gain on the sale of the UK and European insurance business, partially offset by an £880m impairment of the Aberdeen Standard Investments goodwill intangible asset.
We have transformed the shape of our business through our integration and the sale of our UK and European insurance business to Phoenix, a significant undertaking. In India, the IPO of HDFC AMC completed in August. The shareholding we retain in the business reflects the potential we see in India’s asset management sector. On 11 March 2019, we also announced an offer for sale process in respect of up to 4.93% of the shares of HDFC Life, our associate life business in India at a floor price of Rs 357.5 per share. Assuming the offer is fully subscribed at the floor price, net sale proceeds are expected to be c£380m.
I am proud of what our people have achieved in 2018 while recognising we have a challenging year ahead to deliver on the potential of our transformed business.
Investment performance over three years was mixed with 50% of total assets under management ahead of benchmark. Over the longer term five year period 62% of total assets under management were ahead of benchmark. The weaker three year performance reflects a challenging period with negative returns within multi-asset absolute return strategies, in particular Global
Absolute Return Strategies (GARS), and weakness in most equity classes other than Asia Pacific. Performance for Fixed income, Cash/Liquidity and Alternatives remain strong over three and five years.
A turnaround in performance may take some time but there are signs of recent improvement in equity investment performance and stronger short-term momentum in absolute returns. We discuss our plans to improve investment performance in more detail on page 20.
Q | Can you explain the benefits from selling the UK and European insurance business to Phoenix? The sale of the business for a total consideration of £3.3bn completed the transformation of Standard Life Aberdeen into a fee based capital-light investment company.
In addition to the cash proceeds, we received shares representing a 19.98% stake in Phoenix which allows us to benefit from their strong position in the UK pensions market and significant growth potential. Our share of the Phoenix results for the four months post transaction contributed £86m to our 2018 adjusted profit.
As well as acting in the best interests of our clients, we need to operate in a way that takes account of our wider responsibilities to society and to help address the long-standing issue of restoring trust across our industry. As active managers, we engage with the companies in which we invest and hold them to account in the way they operate. As members of civic society we work with governments and regulators to improve the efficiency and relevance of capital markets and the sustainability of the returns they deliver.
In 2018, we also conducted an all-employee survey – to find out how our people feel about the significant changes we have been making and how we can help them be more effective. The themes drawn from the survey are already informing new approaches to how we communicate with our colleagues and the work we are doing to enhance our operations. You can read more about how we engage our employees on page 28. Our scale and global ambitions provide opportunities which mean we are an attractive employer to prospective talent.
We previously announced that we expected to incur one-off costs relating to the separation of the business sold to Phoenix of approximately £250m, and there has been no change to this estimate. We agreed a transitional services agreement with Phoenix to ensure that both businesses can continue to operate after completion in the same way as they did before. This arrangement covers functions such as IT, Finance, Risk, HR/People and Premises. We expect full separation to take up to three years to complete.
We have seen changes in our major shareholdings. In February this year, Mitsubishi UFJ Trust and Banking Corporation, which was one of our major shareholders, sold its stake based on changes in the business environment, but reaffirmed that we are an important partner for them in Japan. The ongoing dispute with Lloyds is covered below.
Q | Can you explain why the share price fell significantly in 2018? 2018 has been challenging for asset managers across the world due to significant geopolitical developments and uncertain market conditions. These factors have led to significant share price falls for asset managers generally. For our business, the announcement that Lloyds Banking Group and Scottish Widows wished to terminate arrangements for the assets we manage for them, together with continued net outflows from our flagship products have also had an impact on our share price.
Q | What are the primary issues and concerns for clients? Investment performance is, of course, very important. Aside from this, individual customers need to take increased responsibility for their financial futures. They want to be confident that their choices are the right ones for themselves and their families. We are also, through our decisions and actions, working to restore trust in our industry, as the after-effects of the 2008 crisis continue to be felt.
Increasingly, clients are interested in how we incorporate environmental, societal and governance concerns into our investment process. This includes topics of societal interest like climate change and equal gender representation, both of which are also areas that we can help address through our operational and employee engagement activities.
Q | What are you doing to address these issues? We look to provide solutions that deliver strong investment outcomes while also being affordable, inclusive and easy to understand. On the issue of trust, clients need to see that we are committed to doing the right thing, being transparent in terms of fees and levels of risk. Managing investments actively allows us to navigate volatility, not simply to weather it. To deliver the right outcomes, we also consider how we engage and remain connected. Innovation and technology has made a difference to how we connect our global expertise to support and benefit our investment processes.
With more than £550bn of assets we have the scale to invest and innovate and we will continue to build on our strengths in ‘new active’ through product launches and targeted acquisitions in areas where we are seeing growing client demands.
We are investing to build a modern, dynamic global business which has the talent, scale and high-performing investment solutions to compete against the leading asset management companies across the world.
In addition to providing long-term arrangements in relation to the assets we already manage for Phoenix, the enhanced strategic partnership is expected to deliver incremental assets as Phoenix continues to consolidate life and pensions businesses in the UK and Europe, and expands into the bulk purchase annuity market. We have already started to see the benefits from the enhanced partnership with additional assets secured from Phoenix.
We do the right thing and are empowered to make a difference.
Transforming our business… The sale of our UK and European insurance business to Phoenix in August 2018 marked the completion of our transformation to a fee based capital-light investment company. We have made clear choices, against a backdrop of challenging industry conditions, to get to this point.
Who we are Headquartered in Edinburgh, Standard Life Aberdeen has offices in 54 locations employing 6,000 people. We manage and administer over £550bn of assets worldwide.
Our global scale, expertise and resources enable us to offer a wide range of investment solutions and services. They are designed to meet the changing needs of our customers, who come to us through our direct retail channels or via independent financial advisers, and the needs of our clients, the organisations who represent the financial interests of individuals through our wholesale and institutional channels.
Our company is a combination of global asset management, savings and advice services in the UK, and strategic investments. We have two flagship brands, Aberdeen Standard Investments for global asset management and Standard Life for savings, as well as market-specific brands in areas including financial advice and wealth management.
As part of the sale of our UK and European insurance business, Standard Life Aberdeen entered into an enhanced strategic relationship with Phoenix. This relationship is based on the complementary strengths of each business: Phoenix as an administrator of insurance and long-term savings books, and Standard Life Aberdeen as a leading provider of investment management solutions, adviser platforms and financial advice. The Standard Life brand is owned by us and licensed to Phoenix.
Adapt and excel We don’t stand still. We improve, challenge, learn and innovate to earn our place in the future. We are ambitious, our sights are set on excellence and our minds are open to ideas.
Valuing our savings ecosystem Optimising the breadth and depth of our investment management, platform and advice ecosystem, along with our geographical reach enables us to meet the savings needs of clients and customers around the world.
We aim to become longterm trusted partners for our clients and customers, through our ability to meet their needs effectively. We work to understand what they want and put that at the centre of our decision making. We invest in our brands which are key to sustainable value.
We operate efficiently and effectively – actively managing our balance sheet to ensure we hold enough capital to allow us to invest for future business growth. Through the actions we’ve taken to reshape our business, we’ve created a company that’s well positioned for the long term. We will use our experience to make sure we continue to do the right thing for all our stakeholders.
We aim to reduce our costs by controlling expenses and investing strategically to improve both the scalability and efficiency of our business.
As most costs are relatively fixed and revenue can be impacted by market volatility, we aim to control our costs to be efficient throughout the business cycle.
A collaborative culture Bringing our people together following the merger has helped to create momentum behind our purpose. Over 4,000 of our people are now co-located in our combined offices. This has helped forge stronger relationships and broader networks.
We have improved connectivity across our global team, evolving how our business is structured to create group-wide functions that support the four regions in which we operate – the UK, EMEA, the Americas and Asia Pacific.
Reflecting our markets Our structure also puts us closer to our clients and customers. With teams based in 54 locations around the world, we have a deep understanding of the local markets in which we operate.
Overview Market conditions were challenging and have impacted on net outflows across our regions, including the UK. However, we have seen strong inflows into strategies such as diversified growth, buy and maintain credit, commercial real estate debt, and long-lease property. We have increased client engagement over the year with some major new wins, particularly with local government pension schemes. We also continued to develop our market-leading adviser platforms – Wrap, Elevate and Parmenion – to address client needs.
2018 highlights • Our Better Beta OEIC range, with assets of approximately £28bn, passed its third anniversary and six out of its seven funds achieved first quartile, positive growth performance over this period
• In direct response to adviser market needs we launched the Professional Portfolio Manager, which offers greater digital and automated portfolio management capabilities
• Executed the sale of SLAL to Phoenix, while sustaining momentum in our platforms and advice businesses – we remain the UK's largest adviser platform
We continued to diversify our business including through new opportunities resulting from a wider product suite.
Market opportunities EMEA is one of the largest investment markets in the world with around £14trn of assets. Our strategy focuses on capitalising on this opportunity by launching innovative products to increase our market share.
Germany, Italy and Switzerland are some of our key markets in Continental Europe and we are looking to leverage the global, diversified nature of our company as a differentiator and source of competitive advantage.
Market opportunities The Asia Pacific market has grown steadily in recent years, to around $16trn. Our strategy targets growth by increasing our footprint and global collaboration, developing partnerships across our key markets: Japan, Australia, India and China, and also carefully managing wider opportunities.
2018 highlights • First wholly-owned foreign company to gain an onshore asset management licence in China • IPO of HDFC Asset Management in India completed in August 2018. As part of the IPO we reduced our holding from c38% to c30% for a total net consideration of approximately £180m.
• New fund launches to market, including a domestic China A-Share and a Multi-Asset 360 Income fund in Taiwan
Market opportunities The Americas market is the largest in the world and predicted to grow to over $29trn of assets in 2019. We want to capitalise on this opportunity by differentiating ourselves from the domestic players that currently dominate the market. Our strategy for driving forward the Americas business is focused on three main components: building a ‘new active strategies and solutions’ business, creating scope for reinvestment, and considering bolt-on inorganic options to accelerate and extend our US presence.
A focus on innovation We believe that developing innovative ‘new active’ solutions that focus on outcomes instead of benchmarks is key to the future growth of the business.
As we transform our business, we’re working to identify and understand opportunities and trends that may help our company and industry innovate and improve. Our Artificial Intelligence Global Equity Fund, part of our range of quantitative investment strategies, uses powerful machine learning techniques to quickly analyse evolving financial markets data to identify and recall data patterns.
We also continue to ensure that we are operating efficiently and controlling our costs. This includes the delivery of the merger synergies and the implementation of a simplified global operating model. While change on this scale creates opportunities for our people, cost savings include reductions in employee numbers. We continue to aim to manage much of this through natural employee turnover and to do everything possible to minimise compulsory redundancies.
Str ateg ic r epo r t 17Standard Life Aberdeen 2018
• One of world’s largest active asset managers offering wide ranging equity strategies
Multi-asset We seek to provide better, more predictable outcomes for investors
Diagram shows analysis of total assets under management at 31 December 2018 including strategic insurance partners.
…to extend our capabilities Our investment capabilities are truly global, covering a broad range of markets, asset classes and strategies. Our aim is to drive better investment outcomes for clients and customers.
• Research and insight are used to exploit market inefficiencies and identify the best investment opportunities for client portfolios
• A broad and diverse investment universe through multi-asset investing can enhance return potential and reduce volatility > 150 investment professionals Europe, US & Asia presence Industry leading risk management
Private markets Providing excellent capital growth, income generating or risk adjusted outcomes
• Capabilities across private equity, infrastructure, private credit, real assets and private market solutions
We continue to believe that active investment management delivers superior outcomes for clients over the long term. We believe in a connected team-based ethos, fundamental research delivering insights to exploit market inefficiencies, and the embedding of ESG criteria within our investment approach. We make deliberate, active decisions at each stage of the investment process and believe that all investment approaches require active decision making at some level, whether that be incorporating fundamental discretionary or systematic quantitative techniques.
We have diverse investment capabilities offering a range of outcomes for our clients, including some 100 strategies, all united by these beliefs. For example, within Equities we run a number of strategies under two differentiated but complementary investment styles: Long Term Quality and Focus on Change.
The market environment for active asset managers was challenging in 2018. As one of the largest active managers in the world, we are inevitably affected by these headwinds, and that is clearly reflected in our investment performance. We remain focused on supporting our teams and improving performance, while remaining true to our investment approach.
• Offer a full range of global hedge fund and diversification strategies across the liquidity spectrum
• Highly experienced team in alternative investing supported by global research coverage > 25 investment professionals London & New York Global reach hubs Award winning – innovative solutions
• Our status as one of the world’s largest real estate managers helps credibility, deal flow and our ability to provide a one-stop shop for clients
• Global reach allows us to uncover more investment opportunities that have potential to enhance investors’ returns
• Experienced team managing assets across a range of strategies: traditional passive indexation, enhanced indexation, smart beta and active quant using artificial intelligence
Deliver what matters We relentlessly focus on delivering outcomes that truly matter to our clients and customers. We build trusted relationships. We do the right thing and are empowered to make a difference.
Improving investment performance It’s been a disappointing year for our investment performance, and our long-term approach is being tested by the market environment. Our weaker three year investment performance reflects negative returns within multi-asset absolute return strategies, and weakness in most equity classes other than Asia Pacific and smaller companies. Investment performance remains robust across other asset classes. Investment process evaluation and enhancement is a continuous practice within investment teams, however formal plans have been developed for absolute return and equities.
• Enhanced Board level focus and oversight of actions to improve investment performance
We recognise that improving multi-asset absolute return strategies and equity performance may take some time and will depend partly on market conditions, but we are encouraged by recent performance improvement seen in emerging market equities.
Str ateg ic r epo r t 21Standard Life Aberdeen 2018
We build up insight from clients and customers which helps to inform future product development and innovation. For example, we conducted an online survey in 2018 of our institutional and wholesale clients with respondents representing £31bn in AUM. Strengths included brand loyalty, however certain clients were disappointed with the level of investment performance.
Understanding our people Having people who bring a diverse range of talents and perspectives, and who feel engaged in their roles, is fundamental to the long-term success of our business. It is crucial that we understand their values and what motivates them – and reflect this in the way we operate.
Existing employee representative forums have joined together to form a new single employee forum representing employees in the UK. In Q1 2019, we agreed that one of our non-executive Directors would take on the role of liaising on employee engagement.
How we engage We are active investors. During 2018, we engaged regularly with the boards and senior leaders of companies. We voted at 4,875 shareholder meetings and, in some cases, spoke publicly about areas of concern.
Corporate sustainability is central to our business. We’ve been recognised in high-profile sustainability indices, including the Dow Jones Sustainability Index, where we were ranked in the top 5% for our sector, and also the FTSE4Good index where we were listed in the top 1% of companies. We were also awarded Better Society’s 2018 Financial Services Company of the Year award.
Many of Standard Life’s systems, processes and people transferred; which, combined with a licence granted to Phoenix to use the Standard Life brand, meant customers would have the same experience before and after completion of the sale. They will have continued access to Aberdeen Standard Investments’ investment capabilities; and the advice and platforms businesses are retained by Standard Life Aberdeen.
Phoenix now has a significant presence in Edinburgh. This enhances Scotland’s reputation as a key financial centre, helping attract talented people to the capital.
Further details on how the Directors’ duties are discharged and the oversight of these duties are included in the Governance section on pages 54 to 62 and 75 to 80.
Our investment case Well positioned to benefit from the trends shaping the global savings and investment landscape
• We own significant shareholdings in savings and investment businesses in the growing economies of India and China
• Aberdeen Standard Investments is one of the largest active asset managers in the world
• Offices in 54 locations around the world • Clients in around 80 countries • Partners around the world provide local expertise in some of the world’s largest economies – including Mitsubishi UFJ and Sumitomo Mitsui in Japan, Bosera in China, Manulife and John Hancock in North America, HDFC in India, and Challenger in Australia
• Enhanced partnership with Phoenix providing potential access to up to 10 million customers in the UK
• Scalable through operational leverage, with a clear path to growing profitability
• Proposed new strategic joint venture with Virgin Money/CYBG provides potential opportunity to leverage our platform technology to offer investment solutions to their six million retail customers
• Targeting a cost/income ratio of 60% over the longer term
• £2.6bn of Group cash and liquid resources, providing financial strength and supporting investment in innovation, technology and our people
• Track record of reshaping our balance sheet and returning capital to shareholders
• Combined value of our shareholdings in Phoenix, HDFC Asset Management and HDFC Life at 11 March 2019 was c£4.5bn 23Standard Life Aberdeen 2018
Responding to challenging markets 2018 proved to be a challenging year for markets, which shared little resemblance to the year before. A wide variety of political, economic and financial issues overwhelmed investors across almost all asset classes and regions. Meanwhile volatility, which was largely absent in 2017, reappeared to the detriment of global investors. Most asset classes registered negative returns in 2018.
Source: Refinitiv Datastream, Bloomberg, Aberdeen Standard Investments (as at 31 December 2018)
Geopolitical risk, which had been relatively subdued coming into 2018, became front of mind for investors. US-China relations, especially over trade tensions, deteriorated substantially. Populist gains in Italy, Brazil and parts of Germany, as well as the Democrats’ success in the US mid-term elections, reshaped governments and played through markets. Brexit loomed large at various points, translating to increased volatility in UK assets.
Looking ahead As the effects of tax cuts in the US fade and trade tensions continue, market participants are focused on economic data signalling further slowing in 2019. This has made markets more responsive to bad, relative to good news. Although a number of economic indicators now suggest slowing growth, it should be emphasised that they are not currently signalling imminent recession; indeed the response from governments and central banks makes us more positive on such a view.
The backdrop to the market remains complex and we believe this will continue to impact on returns. That said, we believe our continuous focus on understanding client needs, and on improving and innovating our investment solutions, will create opportunities to manage risk and achieve sustainable goals of growth, income and capital preservation.
Changes to the savings landscape have continued to move risk and responsibility further towards individuals. This trend is driving the need for simpler products and services to help clients and customers invest and save effectively. Changes in pension legislation giving more choice and more responsibility to savers is also increasing demand for financial advice – and from financial advisers for platforms that help them to offer the support that their customers expect.
The global financial crisis damaged trust in financial services organisations. We believe our industry has a duty to build trust through transparency on fees, clarity on risks and education on investment strategy. Asset managers also have a role in developing trust and driving transparency more broadly by challenging the companies in which they invest to provide evidence, not only of their financial returns, but also of their societal and environmental impact.
Successful innovation is a key driver of long-term value for clients and shareholders. The next generation of savers will interact with investments in different ways, as technology provides new tools that allow them to manage their own affairs. Machine learning is playing a growing role in how these tools are developed across our industry. At the same time, cyber security remains a growing issue. Managing the risks is critical for large companies and their customers.
Private markets/ Alternatives $65bn $28bn $47bn $73bn $162bn 25Standard Life Aberdeen 2018
• Enhanced offering to advisers through launch of Professional Portfolio Manager on the Wrap platform
• Ran our institutional and wholesale client survey in our four global regions, to understand factors affecting levels of client satisfaction, engagement, loyalty and advocacy
– Integration completed across our client and consultant facing investment and distribution teams
– New operating model implemented – simplifying our structure and establishing clear functional and regional responsibilities and accountabilities
• Accelerated pace of innovation with 32 fund launches in 2018 compared to 22 in 2017 and around 20 funds in the later stages of development
• Three bolt-on acquisitions accelerated our US capabilities in private markets, closed-ended funds and exchange-traded funds
• Launched an innovative financing strategy for private market funds, developed in collaboration with Phoenix
Optimising the breadth and depth of our investment management, platform and advice ecosystem, along with our geographical reach, enables us to meet the savings needs of clients and customers around the world. We aim to play a stronger role in helping people save effectively and understand the investment solutions which are right for them. We make the most of our strong brands to deliver enhanced value across all of the products and services we offer.
Investment performance1 1 year: 47% (2017: 70%) 3 years2: 50% (2017: 63%) 5 years: 62% (2017: 64%)
• Supporting our teams and improving investment performance through process enhancement plans across all asset classes
• Continue to develop trusted client relationships at a local level, through 23 investment centres worldwide
• In our UK savings business, further invest in our retail platforms to enhance functionality and adviser experience
IFRS profit after tax attributable to equity shareholders £830m (2017: £699m)
• Maintain progress towards combined merger and simplification efficiencies of at least £350m including: – Migration of assets administered by Aberdeen Asset Management to an integrated global investment platform
– Develop working practices to enhance productivity by reducing duplication and delayering of processes
– Further systems integration including single HR platform • Progress implementation of separation plan to reduce transitional services provided by Phoenix • Implement actions to improve employee engagement, based on themes from our company-wide survey
• Develop our connected, global, proprietary research platform incorporating insights into macro and micro investment strategies
• Further expand our ‘new active’ capabilities – including our first Active Macro Systematic fund, applying quantitative principles to multi-asset investing
• Progress build of digitally-enabled advice offering to serve broader retail market
Demonstrating our values in society Our culture encourages playing a role in wider society and supports our people to contribute to the communities around us.
As part of the programme, mentors support young people in their last couple of years of school. To date our people have mentored 113 young people. During 2018, 12 of our people from the Americas, Asia and Europe spent five days in Northern Thailand helping to build a water sanitisation system with the Karen Hilltribes Trust. In December 2018, 16 colleagues travelled to Senegal with buildOn to start building a school. In December 2018, our colleagues voted for our new UK charity partner. We selected a shortlist of charities that may have impacted employees or their friends and families at various stages of their lives. The winner was Dementia UK. The aim of the partnership is to fund the first Admiral Nurses in Scotland, and additional nurses in communities across the UK.
We want to develop a culture that will enable us to be the best that we can – where we are inspired by our differences and united behind a common purpose.
Over the year ahead we will plan actions based on the themes that emerged, and continue to measure engagement, mood and culture across the company.
For all of our employees, we’ve developed guidelines for agile working, supporting them to work where, when and how is most effective for both them and our company. We share case studies among employees to provide insight and examples of how their colleagues work in an agile way.
We have made progress in improving gender representation two leadership levels below CEO level, but we have more work to do at both the Board and Executive Team levels.
We were one of the first asset managers to publish a co-created inclusion strategy which aims to create an inclusive culture by engaging people at all levels of our organisation. The principles that continue to inform our inclusion strategy are: • Being transparent • Promoting our commitment to inclusion • Bringing value to our business
We delivered our first gender action plan and published our refreshed plan outlining areas of focus for the next 12-18 months. We have increased female representation at a senior level by 7% under our Women in Finance Charter commitments, and are now working on sustaining progress. We were also included in the Bloomberg Gender Equality and Equileap Top 200 global indices for the first time.
Our focus on social mobility has gained important external recognition, such as being included as one of the Social Mobility Foundation’s top 50 employers in its Social Mobility Employer Index.
Over 1,100 people contribute to and are supported by our employeeled networks. Championing aspects of diversity and inclusion across our global business, these groups work collaboratively to effect change and are sponsored by our senior leaders. In 2018 we launched a new network supporting mental health awareness and refreshed our LGBT+ network and gender balance network. Through our support for the Armed Forces, to which our Armed Forces network makes a big contribution, we achieved a Gold award from the Ministry of Defence's employer recognition scheme.
Our gender targets As part of our commitments to HM Treasury’s Women in Finance Charter, we have published the following targets for women in different levels in our organisation: Level
2 Target has a tolerance of 3%. 3 Data is prepared in accordance with our reporting methodology and the KPIs are within KPMG’s limited assurance scope. Both KPMG’s limited assurance report and our reporting methodology can be found at www.standardlifeaberdeen.com/annualreport
Continued delivery of cost efficiencies in a difficult market and flows environment
We remain focused on driving operational efficiency and cost control as we move closer to completing the integration and the implementation of our simplified global operating model.
Q | What are the main changes you have made to the reporting of financial performance in this year’s results? The discussion of the results on the following pages focuses mainly on our Continuing operations, excluding the results of the UK and European insurance business which we sold during the year. The results for this disposed business are discussed separately on page 37.
Following the sale of the UK and European insurance business we have also changed how we report our business segment performance to align with how the continuing business is managed and reported internally. The Asset management and platforms segment comprises our asset management (including HDFC Asset Management), platforms and advice businesses. The Insurance associates and joint ventures segment comprises our associate and joint venture life businesses – Phoenix, HDFC Life and HASL.
Q | Can you explain your capital position? Following the sale of our UK and European insurance business to Phoenix, we are now regulated under the CRD IV regime for group-level prudential regulatory capital. Previously, the Group was regulated as an insurance company under Solvency II.
The sale has resulted in a significant reduction in our capital requirements reflecting the completion of our transformation into a fee based, capital-light business; however, the change of regulatory regime meant that our subordinated debt instruments no longer counted as regulatory capital under CRD IV. We therefore undertook a tender to retire two instruments with nominal value of £800m and reached agreement with holders to amend the terms of a $750m bond to comply with CRD IV requirements. The Group total capital requirement under CRD IV is £1.1bn at 31 December 2018.
The sale proceeds enabled us to announce the substantial return of capital to shareholders of up to £1.75bn. We returned £1bn to shareholders by way of a ‘B’ share scheme in November 2018, and have made good progress on our share buyback programme, with £235m completed by the end of 2018.
We remain strongly capitalised with a CRD IV Group regulatory capital surplus of £0.6bn at 31 December 2018. This surplus includes a deduction to allow for the proposed final dividend which will be paid in May 2019, and a deduction for £140m of share buyback which had been announced in 2018 but which is being completed in 2019.
Adjusted profit before tax Continuing operations1 £650m £660m £475m Total £860m £1,039m £854m
3 Percentage of AUM above benchmark. Calculated on a Pro forma basis and gross of fees. A full definition is included in the Glossary on page 253.
Q | Can you explain your profitability and actions taken to reduce costs? Adjusted profit before tax from continuing operations was £650m (2017: £660m Pro forma basis) with lower revenue reflecting the impact of net outflows in 2017 and 2018 partially offset by a reduction in operating costs and the inclusion of our share of Phoenix adjusted profits from 1 September 2018. Net outflows in 2018 were disappointing and this is a key area of management focus.
We continue to make good progress towards our total targeted annual cost savings of £350m to be achieved by end 2020, which reflects both merger synergies and the benefits from simplifying our operating model following the sale of the UK and European insurance business. As at 31 December 2018, actions had been taken to deliver £175m of the annualised costs savings, some of which will not begin to take effect until 2019. This means that we have already delivered 88% of our initial estimate of the merger synergies of £200m, and 70% of the increased target of £250m that we reported in 2017.
IFRS profit attributable to equity holders of Standard Life Aberdeen plc (Comparatives Reported basis)
In both institutional and wholesale the AUM reduction was primarily within equities, which was impacted by outflows reflecting investor sentiment and investment performance concerns as well as market movements, and multi-asset where the AUM reduction primarily related to GARS investment performance. Wholesale AUM was supplemented by corporate actions of £4.8bn in the year. This related to three bolt-on acquisitions which accelerated our US capabilities in private markets, closed ended funds and exchange traded funds.
Wealth/Digital includes our Parmenion platform as well as Aberdeen Standard Capital, our wealth business which was re-branded in January 2019. AUM was broadly stable at £10.9bn.
Net outflows were disappointing, increasing to £40.9bn (2017: £32.9bn) as we saw continued high levels of redemptions. Equities had net outflows of £17.6bn (2017: £10.2bn), reflecting investor sentiment towards emerging markets and equity markets more generally, as well as weaker investment performance. Emerging markets equities saw net outflows of £9.2bn (2017: £2.8bn) and global equities net outflows were £4.1bn (2017: £3.5bn).
Multi-asset saw net outflows of £15.7bn (2017: £6.9bn) due to weaker GARS three year investment performance. GARS dominated with net outflows of £16.7bn (2017: £10.7bn) reducing AUM to £19.9bn (2017: £37.4bn). Multi-asset (excluding GARS) generated net inflows of £1.0bn (2017: £3.8bn) which included continued demand for MyFolio and Parmenion products which delivered net inflows of £1.2bn (2017: £2.0bn) and £1.1bn (2017: £1.3bn) respectively.
Investment performance Investment performance (Pro forma basis) % of AUM ahead of benchmark3
Equities 40 35 31 21 29 28 Fixed income 50 85 76 68 64 69 Multi-asset 20 87 35 85 62 88 Alternatives 77 58 82 86 79 81 Real estate 71 71 56 44 61 40 Quantitative 69 68 59 55 67 75 Cash/Liquidity 81 69 81 63 82 82 Total 47 70 50 63 62 64 3 Investment performance excludes non-discretionary portfolios and funds where no applicable index is available. Includes strategic insurance partners.
Investment performance over three years was mixed, with 50% (2017: 63%) of total assets under management ahead of benchmark on a gross of fees basis. Over the longer term five year period 62% (2017: 64%) of total assets under management were ahead of benchmark. The weaker three year performance reflects a challenging period with negative returns within multi-asset absolute return strategies (in particular GARS), and weakness in most equity classes other than Asia Pacific. Performance for Fixed income, Cash/Liquidity and Alternatives remain strong over three and five years. Investment performance over one year stands at 47% (2017: 70%).
Asset management and platforms Adjusted profit before tax in our Asset management and platforms segment was £510m, a decrease of £92m compared to 2017 on a Pro forma basis of £602m mainly due to lower fee based revenue reflecting the impact of net outflows in 2017 and 2018. This was partially offset by a reduction in expenses.
Adjusted profit before tax in our Insurance associates and joint ventures segment increased by 141% to £140m (2017: £58m) mainly due to the inclusion of our share of Phoenix adjusted profit of £86m from 1 September 2018. Our share of Phoenix adjusted profit before tax included a benefit of £42m from actuarial assumption changes, primarily relating to changes in annuity longevity assumptions.
HDFC Life profits increased in 2018 due to strong premium growth. However our share of profits fell to £42m (2017: £48m) due to the reduction in our shareholding following the IPO in November 2017 and adverse movements in exchange rates. On 11 March 2019, we also announced an offer for sale process in respect of up to 4.93% of the shares of HDFC Life, our associate life business in India at a floor price of Rs 357.5 per share. Assuming the offer is fully subscribed at the floor price, net sale proceeds are expected to be c£380m.
The primary movement in fee based revenue and adjusted operating expenses in 2018 compared to 2017 on a Reported basis is due to the inclusion of a full year’s results from Aberdeen in 2018. The analysis of adjusted profit below compares 2018 to 2017 on a Pro forma basis.
The revenue yield from Strategic insurance partners fell slightly to 13.1bps (2017: 13.7bps).
Revenue from Wrap and Elevate increased by 10% to £142m (2017: £129m) reflecting the continuing growth in our platforms offering. Our retail advice and other business revenue of £43m (2017: £46m) comprises our 1825 advice business revenue of £34m (2017: £32m) and other business of £9m (2017: £14m). Other business fee based revenue includes a one-off reduction in 2018 of £5m following the adoption of the new revenue recognition accounting standard (IFRS 15).
Adjusted operating expenses Adjusted operating expenses decreased by 10% to £1,395m (2017: £1,551m) mainly due to lower staff costs including the benefit from the ongoing merger integration and reduced variable compensation. Expenses also benefited from careful cost control as we responded to lower fee based revenue.
We remain on track to achieve our previously announced targeted annual efficiency savings of over £350m by the end of 2020. The merger integration continues to progress well with the pace of delivery accelerating across many areas of the business and we are making good progress implementing our simplified operating model. As at 31 December 2018, actions have been taken which will deliver £175m of annualised cost savings, benefiting 2018 adjusted operating expenses by c£120m with further benefits to come in 2019.
Equities Fixed income Multi-asset Private markets Alternatives Real estate Quantitative Cash/liquidity Strategic insurance partners Retail – Wrap and Elevate SL Asia Retail advice and other
Profit on disposal of interests in associates 185 319 Restructuring and corporate transaction expenses (239) (162) Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts (1,155) (138) Impairment of associates (228) – Investment return variances and economic assumption changes 54 – Other (14) (15) Total adjusting items from continuing operations (1,397) 4 Discontinued operations 1,519 (44) Total adjusting items 122 (40)
Adjusted diluted earnings per share was 22.5p (2017: Pro forma basis 28.9p, 2017: Reported basis 29.9p).
Adjusted profit before tax – continuing 650 475 Adjusting items – continuing (1,397) 4 Share of associates’ and joint ventures’ tax expense1 (40) (41) (Loss)/profit before tax (787) 438 Tax expense (43) (28) (Loss)/profit for the year from continuing operations (830) 410 Discontinued operations 1,698 322 Profit attributable to non-controlling interests (38) (33) Profit for the year attributable to equity holders of Standard Life Aberdeen plc 830 699 1 2018 Includes £3m (2017: £nil) relating to tax on adjusting items.
The gain in adjusting items from discontinued operations of £1,519m (2017: loss £44m) includes the £1,780m gain on sale. See page 130 for more details.
Comparative on Pro forma basis Comparative on Reported basis Continuing DiscontinuedContinuing Discontinued 22.5p 29.9p 19.3p 15.0p 17.2p 15.1p 17.8p 4.7p 36 Standard Life Aberdeen 2018
Asset management and platforms 420 495 Insurance associates and joint ventures 33 10 Adjusted cash generation 453 505
Discontinued adjusted profit before tax was £210m (2017: £379m) reflecting the 8 month period in 2018 and the benefit of operating assumption and actuarial reserving changes of £91m in 2017 (2018: £nil).
Separation costs We announced in the Sale Circular on 30 May 2018 that we expected to incur one-off costs relating to the separation of the business sold of approximately £250m, and there has been no change to this estimate. The 2018 result for discontinued operations included total separation costs of £133m. £53m was included within restructuring and corporate transaction expenses, and £80m was included in the gain on sale relating to contractual obligations arising from the transaction.
These factors are partially offset by: • The gain arising from the IPO of HDFC Asset Management was subject to tax in India at a rate which is lower than the UK corporation tax rate
• Profits of some of our Asian subsidiaries are taxed at rates lower than the UK corporation tax rate
• A revaluation of deferred tax liabilities relating to intangible assets of the asset management business
• Our share of profit from our associate and joint venture holdings is already included on a net of tax basis and so no further amount is included in the tax expense
The tax expense attributable to adjusted profit before tax totalled £138m (2017: £118m), of which £43m (2017: £41m) represents equity holders’ share of tax which is borne directly by our associates and joint ventures. The effective tax rate on adjusted profit is 21.2% (2017: 24.8%). This reflects costs which are not tax deductible and the tax on associate and joint ventures being at a higher rate than the UK Corporation tax rate.
Shareholder equity IFRS equity attributable to equity holders of Standard Life Aberdeen plc decreased to £7.4bn (2017: £8.6bn) mainly due to distributions to shareholders, including the return of capital. This was partly offset by profitability in the year which included the gain on sale of the UK and European insurance business.
Our balance sheet is significantly simplified following the sale to Phoenix. Total assets reduced to £12.5bn (2017: £198.1bn) and total liabilities reduced to £5.0bn (2017: £189.1bn).
The principal defined benefit staff pension scheme, which is closed to future accrual, continues to have a significant surplus of £1.1bn (2017: £1.1bn). Further details are provided in Note 35.
The Group holds £179m (2017: £193m) in newly established investment vehicles which the Group has seeded. The Group sets limits for investing in seed capital and regularly monitors the exposure. Additional detail is provided in the Risk management Note 39.
Dividends Proposed dividend Our progressive dividend policy is to grow the annual dividend per share at a sustainable rate over the medium term. It is the Board’s current intention that the total annual dividend will be held at the 2018 level of 21.6p while the business is transformed, cost synergies are delivered and future financial performance confirms the sustainability of this level of distribution and provides line of sight to its future growth.
The dividend payment is expected to be £345m. At 31 December 2018 Standard Life Aberdeen plc held £1.3bn of cash and liquid resources and £1.6bn of distributable reserves, which will be used to support the dividend and remaining share buyback programme.
The final dividend, combined with the 2018 interim dividend of 7.3p, brings the total dividend for the year to 21.6p – an increase of 1.4% on the 2017 full year dividend.
Note 47 of the Group financial statements of this report includes a reconciliation between IFRS equity and surplus regulatory capital and also details of our capital management policies.
Holding company cash and liquid resources (2017 on a Reported basis)
Return of capital The general meeting on 25 June 2018 approved a return of capital of £1bn via a ‘B’ share scheme, and a return of up to £750m by a share buyback programme. The ‘B’ share scheme return of £1bn was completed in November 2018 and a further £235m has been returned to shareholders during 2018 under the share buyback programme. As at 11 March 2019, we have returned £358m through the share buyback programme with 132m shares repurchased at an average price of £2.72 per share.
Business plan scenarios: Our business planning process projects the performance, regulatory capital and liquidity of the Group over a three-year period, and considers scenarios including a severe downside. The severe downside scenario assumes a significant global recession; a sharp fall in global equity markets, with markets remaining considerably below recent levels throughout the threeyear period, with bond yields falling through 2019 before steadying and some modest increases in 2020. Our analysis shows that, whilst capital is eroded under this scenario, the strength and quality of our capital base and the range of management actions that are available means that sufficient regulatory capital is maintained.
Stress testing and scenario analysis looks at plausible, adverse individual and combined stresses that could adversely impact profits, capital and liquidity. Stresses are calibrated at a 1-in-200 year probability level or worse. We performed a broad range of stresses during the year which, for the asset management business, included an exploration of: (i) individual stresses applied to fixed interest, equity and property market values, business outflows and expense levels, (ii) sensitivity to combinations of the above, (iii) combined stress scenarios considering market stagnation, poor fund performance and fee pressure.
The platforms business explored: (i) individual stresses applied to fees charged, flows, expenses, persistency and market movements, (ii) sensitivity to combinations of the above, (iii) the sequential analysis of the impact of data breaches on the business.
Assessment of viability: The Directors confirm that they have a reasonable expectation that Standard Life Aberdeen will be able to continue in operation and meet its liabilities as they fall due over the next three years.
Assessment of prospects: Based on the above, the Directors consider the Group’s current transformation plans will preserve the strengths of the existing business, create a compelling offering in response to changing client demands and enable the business model to deliver the vision of strong and sustainable growth. Furthermore, the Group’s financial position and business model are considered to support the assumption in the business plan scenarios that the Group’s dividend policy can be maintained over the planning horizon. The Board would expect to reassess the suitability of this assumption should future conditions be more adverse than those analysed.
Strong risk management underpins our approach to strategic delivery Our approach to risk management Effective risk management is an essential part of delivering our corporate strategy. Our approach is predicated on strong risk awareness and risk accountability across all lines of defence in our business. We believe that this delivers long-term value for our clients, customers and shareholders, and protects their interests.
• Third line: Independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by our internal audit function. This is independent from all other operational functions. It operates subject to supervision and challenge by the Audit Committee.
• Risk assessment: All three lines of defence have their own processes for assessing risk thoroughly in line with their respective roles. There are well developed processes for coordinating viewpoints, challenging specific assessments and escalating points of difference that might warrant action.
• Risk monitoring: The ongoing monitoring of risks and the performance of key controls is a critical activity to allow us to keep track of developments, drive action and ensure appropriate capital allocation
Internal Capital Adequacy Assessment Process (ICAAP) The Group supervisory regime has changed from Solvency II to that of the Capital Requirements Directive. As required under the Capital Requirements Directive, the ERM framework is structured to support a comprehensive ICAAP which covers: • Awareness and understanding of the current and potential risks to the business including both financial and non-financial risks and their potential to affect both long and short-term value
As with any transformational corporate event, there are new risks introduced following the sale of the UK and European insurance business. There are increased dependencies on Phoenix for the efficient and effective operation of the Group through Transitional Services Arrangements and failures of these services could result in detriment to customer and client outcomes and subsequently to the Group’s reputation and future financial performance. The Group has dedicated significant time and resource to structuring the Transitional Services Agreements and their ongoing oversight to mitigate such risks. Additionally, the Group is exposed to the dividend declared by Phoenix through our 19.98% holding and hence unexpected earnings volatility at Phoenix could impact on the Group’s profitability. Our Investment Management Agreements and Ancillary Service Agreements with entities within the Phoenix Group are designed to ensure that service standards are maintained for both clients and customers. We follow our Group policy on material outsourcing arrangements which are subject to oversight by Risk and Compliance.
The delivery of good investment performance and our ability to innovate to respond to changing clients’ needs is fundamental to the Group’s ongoing success as is our ability to effectively distribute our investment solutions. Following the sale of the UK and European insurance business, and the diversification of revenues it previously provided, these key aspects of asset management delivery become even more fundamental to the success of the Group. We recognise that investment performance remains mixed with challenges across key funds and asset classes such as absolute return and equities. This weakened performance has impacted on overall net flows but gross inflows have been encouraging and are spread across a diverse range of capabilities.
Apart from the potential for increased market volatility impacting clients’ investments, we have also had to consider (i) how to maintain the Group’s portfolio management and distribution capabilities for European clients and (ii) the risk that key suppliers to the Group might suffer disruption.
Our ambition is to be an industry leader in conduct governance and the delivery of fair client and customer outcomes. This will be achieved through a strong conduct risk culture and we have made significant strides in this area to benchmark and strengthen our conduct risk framework.
• Risk and control self-assessment process redesigned to fit the capital-light business proposition
• Continued investment in our system capabilities as part of our transformation project will identify synergies and simplify our operating environment
• We listen to our people and seek to understand their views through active leadership and ongoing staff engagement, including periodic surveys
• We operate a global business where our people are able to work across borders and help us achieve our strategic goals
Identification and management of impacts of potential threats to our business requires resilience. Our processes are the safeguards that put the needs of our stakeholders at the heart of our continuity planning. A failure of business continuity could damage our ability to maintain day-to-day activity and serve our clients and customers and cause significant reputational and operational damage. We are exposed to external and uncontrollable events, such as extreme weather, which have an ability to impact our business operations. These events require resilience and continuity processes in order to manage potential impacts. We are well placed to maintain service and view this risk as stable.
• We maintain appropriate business continuity and contingency plans. We have achieved ISO 22301 in relation to fund management activities.
• Our business supports remote access working to manage at times when some of our offices are unable to be accessed
• We hold work area recovery locations as alternatives for our key office locations with capacity for key functions to continue servicing our clients and customers
• We ensure our people are informed of any scenarios whereby physical or remote access is challenged. This communication system is tested regularly.
Our business is built upon our ability to advance alongside the technology available to us. We rely upon a wide range of IT systems and require greater use of online functionality to better serve our clients and our people. Effective management of technology can improve efficiency and cost savings. The risk of operational disruption and data loss is increasing as seen by the rise in phishing and malware attacks. Our exposures extend beyond our Group as we have a number of key suppliers who can be exposed to cyber risks resulting in impacts to our supply chain. This risk applies to our outsourcing of some IT services to Phoenix.
• Security is considered as part of our ICAAP report and considers data security as well as virus and malware attacks
• Delivery plans exist to ensure mitigating actions are in place covering our change risks. Embracing more agile working practices allows us to deliver multi-speed change for our business.
Risk appetite statement: The Company acknowledges that financial crime could arise from either internal or external parties who attempt to defraud the Company or our clients by circumventing our processes or controls, including those operated by our outsourced partners. We have no appetite for knowingly exposing our systems and processes to misuse, or conducting business with clients, suppliers or other third parties intent on misusing our products or services for the purpose of committing financial crime. We will take measures to detect, deter and report such behaviour and activity.
• Our mandatory learning module on anti-financial crime provides our people the necessary information to identify and escalate potential issues
Implementing change activities supports our strategy and business plan. Our complex portfolio of internal change projects coupled with regulatory and political changes mean we face significant delivery challenges where there are competing demands for resources. Completing projects on time and on budget are risks in this space along with failure to meet the objectives of the change. Regulatory pressures continue along with political planning for Brexit. These challenge our deployment of technology, people and capital. We have actively planned for Brexit and other regulatory projects and view our change management trend as stable.
• As part of our stress and scenario testing we have considered change management
• Our second line Risk and Compliance function engages with change activities to ensure appropriate governance is in place
• The second line actively oversees the operation of the Conduct Risk Framework including the governance of conduct risks, the quality of risk assessment and action. We openly engage with our regulators around the world.
• Our outsourcing and third party management policy includes the standards to which we hold our suppliers in relation to both new and existing arrangements
• We are committed to maintaining strong relationships with our external providers to ensure we understand arising risks and that early management can take place
Risk appetite statement: We are committed to operating a robust financial planning and control process to enable strategic and business decisions to be based on robust financial information. We have no appetite for accounting irregularities or making material financial mis-statements.
• Application of robust governance and challenge ensures that where business decisions are made, there is appropriate oversight
• Our financial reporting is aligned to external reporting standards and industry best practices
Risk appetite statement: Standard Life Aberdeen has no appetite for any breach of laws, regulations or prescribed codes that apply to its business. We have no appetite for wilfully breaching contractual obligations where this could give rise to a materially adverse financial or reputational impact on the Group. Financial materiality will be assessed against the materiality threshold used for the Group’s consolidated financial statements in any given reporting period. Where laws require interpretation or where regulations or codes are ambiguous or untested, we will take reasonable steps to determine their applicability, including seeking legal advice where necessary. When determining the appropriate course of action, we will have due regard to fair outcomes for our customers, clients, shareholders and other relevant stakeholders. Where breaches are identified, we will ensure that these are resolved in a timely manner taking into account (where relevant) the interests of customers, clients, shareholders and other stakeholders including, if appropriate, by informing the relevant authorities.
As part of a highly regulated industry globally, we are exposed to a number of different regulators and legal systems. Regulatory or legal change can drive opportunities and threats to our business activities. With current focus on platform activities and asset management fee pressure we are exposed to some risks in this area. An increase in regulatory change and information demands can require a significant diversion of people resource and impact growth opportunities due to climbing compliance costs.
• We are open with our regulators in order to maintain strong relationships and high levels of trust. This allows us to have timely and meaningful discussions on supervisory matters and any areas of potential regulatory change.
• We conduct horizon scanning to plan any upcoming regulatory changes and establish programmes to manage them
Risk appetite statement: The Company has an appetite for strategic risk that arises as a consequence of pursuing its chosen business model. We will proactively identify and understand the strategic risks that it is exposed to, the options available to manage them and ensure that these inform strategy formation and business planning. We have a limited appetite for failing to deliver our business plan objectives as a result of underperformance that is within our direct control. Ongoing performance against the business plan will be closely monitored and prompt action taken to address any material adverse divergence.
Our vision to build a world-class investment company requires us to generate sustainable long-term value for our clients and customers. We utilise active investment management to achieve this outcome. With variable investment performance across our products we are focused on managing our investment performance risks. Managing our strategic goals in line with completing our strategic transition to a capital-light business has created some potential distraction risks. Geopolitical unrest and associated risks can affect the markets in which we operate and impact our reputation Ensuring we have captured the demands and needs of clients and customers and adapting to preference changes can impact our business significantly.
• Ongoing engagement with clients and customers on service and performance
• We proactively manage our relationships with our strategic partners allowing us to expand our existing investment capabilities and diversify our business capabilities
The risks to our business and how they have evolved in 2018 Our approach to managing these risks Link to strategy
Our transition to a fee based model has increased the exposure of our revenue streams to volatility in financial markets given the impact this has on the value of assets on our platforms and under management. The value of our shareholder assets are also exposed to volatility in financial markets. Liquidity risk may impact our business if we were unable to maintain enough liquid capital to cover liabilities as they fall due. Our counterparty exposures have reduced as a result of the sale of our UK and European insurance business. We have effective processes in place to manage our counterparty exposures.
• Through our ICAAP we allocate appropriate capital against our risks and review these risks on an ongoing basis
• Our stress and scenario testing programme cover our financial risks in particular: market, liquidity and counterparty risks
• We maintain a revolving credit facility as part of our contingent funding plans
A responsible approach We hold ourselves to the same high standards that we expect of companies that we invest in.
Sustainability at Board level An update on internal and external environmental, social and governance issues as well as our performance on non-financial measures are provided regularly at Board meetings.
Code of conduct Our Global Code of Conduct, which details the standards of behaviour we expect across the Group, is reviewed and updated annually. All our employees are required to read, agree and adhere to the principles of the code which focuses on doing the right thing and putting our customers and clients at the heart of our business. At the end of February 2019, 95% of employees have confirmed they understand and will comply with the code. Reminders are sent to individuals who have not completed the confirmation and these are escalated through line management. A six-monthly report is presented to the Conduct and Conflicts Committee. If employees have any concerns relating to issues covered by the code such as bribery, environmental or human rights issues, we encourage them to speak to their manager in the first instance; if they feel they cannot raise their concern using their normal reporting line, or wish to raise it anonymously, we provide an independent and confidential Speak Up hotline. Fifteen incidents were reported with investigations carried out in 2018.
Modern slavery statement As a global investment company, we want to do all we can to help tackle human trafficking, forced labour, bonded labour and child slavery. We focus on raising awareness of modern slavery issues, and encouraging good practices among our suppliers and the companies we invest in. We have published our 2018 statement and outcomes on our website, reinforcing our commitment to this important issue.
Financial crime prevention We have a zero tolerance approach to financial crime, bribery and corruption. We have policies, frameworks and controls in place to help ensure that we only receive or pay money to or from clients, third parties, partners and suppliers that we’ve identified as suitable to do business with. We run mandatory annual training for our employees which requires passing a test that confirms their understanding of both our policies and the part our people play. We also maintain a register for gifts and entertainment we receive or provide. We have processes for reporting and reviewing breaches of our policies. In 2018 we had no breaches.
Reporting requirement Relevant policies and publications Where to find more information
Our business practices (page 48) 1 Group policies are published on our website at www.standardlifeaberdeen.com/annualreport 2 Certain Group policies are not published externally.
All APMs should be read together with the Group’s IFRS consolidated income statement, IFRS consolidated statement of financial position and IFRS consolidated statement of cash flows, which are presented in the Group Financial statements section of this report.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in this Strategic report. This includes details on our liquidity and capital management and our viability statement in the Chief Financial Officer’s overview section and our principal risks in the Risk management section. In addition, the Group financial statements section includes notes on the Group’s subordinated liabilities (Note 34), management of its risks including market, credit and liquidity risk (Note 39), its contingent liabilities and commitments (Notes 43 and 44), and its capital structure and position (Note 47).
The Group continues to meet group and individual entity capital requirements and day-to-day liquidity needs. The Company has a revolving credit facility of £400m as part of our contingency funding plans and this is due to mature in 2022. The Group has considerable financial resources together with a diversified business model, with a spread of business and geographical reach. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.
After making enquiries and having assessed the principal risks, the Directors are satisfied that the Group has and will maintain sufficient resources to enable it to continue operating for at least 12 months from the date of approval of the financial statements and therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements. In addition, the Directors have assessed the Group’s viability over a period of three years.
R Remuneration committee RC Risk and capital committee Chair 1 Sir Douglas Flint CBE – Chairman NG 3 Keith Skeoch – Co-Chief Executive Appointed to the Board: November 2018 Appointed to the Board: May 2006
Sir Douglas was appointed Chairman on 1 January 2019, having been a Director since 1 November 2018. He is also chairman of IP Group plc, non-executive director of the Centre for Policy Studies and member of the Global Advisory Council of Motive Partners. Additionally, he is chairman of the Just Finance Foundation, the Corporate board of Cancer Research UK and trustee of the Royal Marsden Cancer Charity. In December 2017 he was appointed by the Chancellor of the Exchequer as special envoy to China’s Belt and Road Initiative. Previously, he served as chairman of HSBC Holdings plc from 2010 to 2017. For 15 years prior to this he was HSBC’s group finance director, joining from KPMG where he was a partner. Between 2005 and 2011 he also served as a non-executive director of BP plc.
Keith was appointed Co-Chief Executive on 14 August 2017. He was formerly Chief Executive of Standard Life plc, having been a Director since 2006 and Chief Executive of Standard Life Investments since 2004. He joined Standard Life Investments Limited in 1999 as Chief Investment Officer after nearly 20 years’ investment experience at James Capel in a number of roles, including chief economist and managing director international equities. He is also a non-executive director of the Financial Reporting Council and a member of the Asset Management Taskforce led by HM Treasury.
As announced, from 13 March Keith will be the sole Chief Executive.
Nationality: British Age: 65 Shares: 64,054 Nationality: British Age: 63 Shares: 1,354,623*
Simon was appointed Senior Independent Director on 1 January 2019, and has been Deputy Chairman since August 2017. Previously, he was a non-executive director of Aberdeen Asset Management PLC from July 2009 and chairman from October 2016. Simon is also chairman of Redburn (Europe) Limited. Previously, he was a partner at Cazenove and Company Limited before moving to Fauchier Partners in 2003 where he became chief operating officer.
As announced, Simon intends to retire from the Board at the conclusion of the 2019 AGM.
Martin was appointed Director and Co-Chief Executive on 14 August 2017. He is co-founder (and former chief executive) of Aberdeen Asset Management PLC, having been a director since 1983. He is a nonexecutive director of Glencore plc, chairman of the Prudential Regulation Authority’s Practitioner Panel and a board member of the Institute of International Finance, as well as a member of the International Advisory Panel of the Monetary Authority of Singapore and the International Advisory Board of British American Business.
As announced, from 13 March Martin will be Vice Chairman of Standard Life Aberdeen and Chairman of Aberdeen Standard Investments.
Bill was appointed Director and Chief Financial Officer on 14 August 2017, having been finance director of Aberdeen Asset Management PLC since January 1991. He is also a non-executive director of Curtis Banks Group PLC. Prior to joining the Aberdeen Group, Bill trained as a chartered accountant with Ernst & Whinney, qualifying in 1982.
As announced, Bill intends to retire from the Board on 31 May 2019.
Jutta was appointed Director on 14 August 2017, having been a nonexecutive director of Aberdeen Asset Management PLC since January 2013. She is also a non-executive director of JPMorgan European Investment Trust plc, NKT A/S, Nilfisk Holding A/S and BBGI SICAV S.A. Previously, she was the executive vice president, chief financial officer of ALK-Abellό A/S.
Appointed Director on 14 August 2017, Rod joined Standard Life Investments in 2002 as Head of Global Fixed Income and was appointed as Head of Investments in 2007 and latterly as Chief Investment Officer in 2013. Previously, he was a managing director at Merrill Lynch Investment Managers, and before that a director at Mercury Asset Management which he joined in 1984.
7 Cathleen Raffaeli – Non-executive Director R RC 11 Melanie Gee – Non-executive Director A RC NG
Appointed to the Board: August 2018 Appointed to the Board: November 2015
Nationality: American Age: 62 Shares: Nil Nationality: British Age: 57 Shares: 67,500
Appointed Director on 1 November 2015, Melanie is also a senior adviser at Lazard and Co. Limited, having been a managing director between 2008 and 2012. Previously, she held various roles with UBS, and was appointed a managing director in 1999. Melanie was a non-executive director of The Weir Group PLC between 2011 and 2017 and the Drax Group plc between 2013 and 2016. She is also chairman of Ridgeway Partners Holdings Limited.
8 John Devine – Non-executive Director A R RC 12 Richard Mully – Non-executive Director R NG
As announced, Richard intends to retire from the Board at the conclusion of the 2019 AGM.
* Shares include qualifying awards as described on page 94 of the Directors’ remuneration report 2018.
G o ver n an c e 53Standard Life Aberdeen 2018
3. Corporate governance statement 3.1 Nomination and Governance Committee report The Nomination and Governance Committee oversees the governance framework so the report on its activities is presented both in summary here and integrated in more detail into the relevant parts of the corporate governance statement.
During 2018, the two main points of focus of the Committee were to ensure that the leadership and governance processes remained strong and effective, both in the run up to completion of the sale of Standard Life’s UK and European insurance business to the Phoenix Group (the Sale) and thereafter, and to conclude the Chair succession process successfully. Throughout the year in conducting these significant transitions, the members of your Board continued to adhere to the highest standards of corporate governance and ethical behaviour in directing the Group’s affairs, reflecting their accountability to you as shareholders. Fulfilling this accountability responsibly is recognised by all your Directors as key to understanding and managing our business effectively, providing engaged leadership, and delivering shareholder value over the longer term. Your Board takes the quality of its own performance seriously and strives to improve performance through annual reviews and continuing self-assessment, as well as learning from and implementing feedback from external reviews. The key governance activities during the year included:  Maintaining high quality membership of the Board and its Committees, including appropriate diversity
 Reviewing the governance content of the Sale Circular  Reviewing the executive governance structures, including the balance between the individual roles and responsibilities of the CoChief Executives and the duties of the key management committees
 Reviewing and conducting oversight of the new operating models within the Group
 Reviewing employee feedback on our purpose, values and culture and executive management’s response thereto
Your Board continues to emphasise the importance of robust governance arrangements in carrying through its responsibilities and I look forward to updating you on the work of the Committee in future reports.
Membership The members of the Committee are the Chair and a number of the independent non-executive Directors. On 1 January 2019, Sir Douglas Flint succeeded Sir Gerry Grimstone as Chair of the Committee. The table below reflects the composition of the Committee and the members’ attendance during 2018: Member Attendance
Sir Gerry Grimstone, Chair until 31/12/2018 5/5 Melanie Gee 5/5 Richard Mully 5/5 Simon Troughton 5/5 Former member
 Reviewing and commenting on the new operating model  Reviewing and assisting in the implementation of the Company’s culture, diversity and inclusion activities, including recommending that a designated non-executive director should be responsible for representing the views of the workforce to the Board
 Reviewing Board diversity, skills and experience  Considering employee feedback on the purpose, values and culture of the Group  Supporting the review of the Board’s effectiveness  Overseeing succession planning, leadership and talent development and diversity levels throughout the Group
 Reviewed the corporate governance statement  Reviewed the Board Committees’ terms of reference  Appointment of subsidiary Board members
 Board and Committee composition  Review of the target operating model for the Group  Diversity and Inclusion review  Review of the Corporate Culture  Appointment of subsidiary Board members  Supporting the externally facilitated Board
Roles and responsibilities The roles and responsibilities of the Board, Chair and Co-Chief Executives are outlined below. The role of the Deputy Chair is to stand in for the Chair in his absence.
 Oversight of culture, our standards and ethical behaviours  Dividend policy  Appointment of the External auditor  Financial reporting which, during 2018 included the impact of the
 How risks are managed, including the Enterprise Risk Management (ERM) framework, risk strategy, risk appetite limits and internal controls
 Significant corporate and other transactions during 2018 which, as well as the Sale, included the initial public offering (IPO) process for our Indian asset management associate HDFC Asset Management Company Limited, preparation for the sale of our Hong Kong subsidiary, Standard Life (Asia) Limited to our Chinese joint venture business, Heng An Standard Life Insurance Company Limited and the proposed joint venture with Virgin Money
 Remuneration policy  Succession planning  The sustainability of the Group’s business and our own sustainability responsibilities to stakeholders, including wider society and the environment
The Chair  Leads the Board and ensures that its principles and processes are maintained  Promotes high standards of corporate governance  Together with the Co-Chief Executives and the Company Secretary, sets agendas for meetings of the Board
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 Speaks on behalf of the Board and represents the Board to shareholders and other stakeholders
 Martin Gilbert has individual accountability for external matters including responsibility for International Activities, Distribution including client engagement and business development, Marketing and Corporate Development
As announced, from 13 March 2019, Keith Skeoch will be sole Chief Executive and Martin Gilbert will be Vice Chairman of Standard Life Aberdeen and Chairman of Aberdeen Standard Investments. In this role, Martin will focus on managing relationships with clients, winning new business and realising the potential from our global network and product capabilities. Both Martin and Keith will continue to report directly to the Chairman.
Throughout 2018, the Company complied with all of the provisions set out in the Code issued by the FRC in April 2016 other than the following: Provision B.3.3. states that ‘The Board should not agree to a full time executive director taking on more than one non-executive directorship in a FTSE100 company, nor the chairmanship of such a company’. For the period 1 January to 16 May 2018 Martin Gilbert held nonexecutive directorships with Sky plc and Glencore plc.
The Group’s Code of Conduct guides our people to do the right thing and complements the Board Charter. It sets out our standards of conduct and culture, and shows the governing principles for operational excellence, compliance responsibilities, customer service, and how we should treat our people, and other stakeholders.
The Committee previously oversaw the implementation of the governance map and processes to support the Senior Insurance Managers Regime (SIMR). During 2018, we began the process to implement the Senior Managers and Certification Regime (SMCR) across the relevant parts of the business, which will conclude in late 2019 when SMCR comes into force for all UK financial services firms.
The roles of the Chair and the Co-Chief Executives are separate. Each has clearly defined responsibilities, which are described in the Board Charter.
The heads of each business function and each region manage their teams within authorities set out in the Board Charter and within an approved scheme of delegation. This includes reporting to the CoChief Executives on how they are complying with Group policies and performing against approved plans and budgets.
The Company Secretary is responsible for advising the Board on governance matters.
You can read more about our Directors in their biographies in Section 2.
Board appointment process, terms of service and role During 2018, the Board composition was reviewed. In order to assist with determining the right balance of skills, diversity, knowledge and expertise for the Board going forward, IBE were engaged to support and facilitate this. IBE conducted individual interviews with each of the
Directors and prepared a report for the Chair to discuss with the Board. The Board is not aware of any other connection between the Group and IBE.
When seeking to make appointments from outside the Group, and having already identified the capabilities needed for Board roles and the succession timeframe, the Committee considers the related role profile submitted to external search consultants along with the request to prepare a list of suitable candidates. The Committee then considers the potential suitable candidates and agrees a shortlist. Following interviews with potential candidates, the Committee then makes recommendations to the Board on any proposed appointment, subject always to the satisfactory completion of all background checks and regulatory notifications or approvals. The other Board members are also offered the opportunity to meet the recommended candidates. The Committee considers the external commitments of candidates to assess their ability to meet the necessary time commitment and whether there are any conflict of interest matters to address. This process was followed for the appointment of Cathleen Raffaeli.
Each non-executive Director is appointed for a three-year fixed term and shareholders vote on whether to elect/re-elect him or her at every AGM. Once a three-year term has ended, a non-executive Director can continue for further terms if the Board is satisfied with the nonexecutive Director’s performance, independence and ongoing time commitment. There is no specified limit to the number of terms that a non-executive Director can serve. The Board recognises the Code provisions regarding length of service when considering whether or not Directors’ appointments should be continued. Taking account of their appointment dates to the predecessor boards, the current average length of service of the non-executive Directors (excluding the Chair) is five years. The Nomination and Governance Committee oversees the process to recommend continued appointments, but members of the Committee do not take part in discussions when their own performance – or continued appointment – is being considered.
Director election and re-election One of the Committee’s duties is to make recommendations regarding the election or re-election by members of any Director. In making its recommendations, the Committee reviews, as applicable, the appropriateness of continued service beyond a term of six years.
Therefore, at the 2019 AGM, all of the current Directors will retire. Sir Douglas Flint and Cathleen Raffaeli, having been appointed since the previous AGM, will retire and stand for election. All the others with the exception of Simon Troughton will stand for re-election.
Sir Gerry Grimstone was Chair of the Board throughout 2018. He retained his non-executive positions with Barclays PLC. He also retained his non-executive positions with Deloitte North West Europe and the UK Government’s Ministry of Defence where he is the lead non-executive. He is also an adviser to the board of the Abu Dhabi Commercial Bank.
Following Kevin’s retirement from the Board, Simon Troughton took on the additional responsibilities of the SID on 1 January 2019. It is intended that Simon will serve as SID until the close of the 2019 Annual General Meeting when he will retire from the Board.
In January 2019, the Board reviewed all previously authorised potential and actual conflicts of interest of the Directors and their connected persons, and concluded that the authorisations should remain in place until January 2020. Under the terms of the approval, conflicted Directors can be excluded from receiving information, taking part in discussions and making decisions that relate to the potential or actual conflict. The Board and relevant Committees follow this process when appropriate.
To carry out the review, senior representatives of IBE were in attendance and observed a Board meeting and a meeting of each Board Committee. They also had access to the papers for each of these meetings. In addition to this observation and analysis, they held individual meetings with each Board member and the key members of the Board and Committee support team. Following this, IBE prepared a draft report for review and discussion. The Board then met specifically to review and discuss the report, and representatives of IBE attended to present the report and recommendations.
 Tone from the top: make sure the Board embodies the behaviours it wishes to see throughout the organisation and is visible enough to set such an example
Director induction and development The Chair, supported by the Company Secretary, is responsible for arranging a comprehensive preparation and induction programme for all new Directors. The programme is tailored to their individual requirements and takes their background knowledge and experience into account. All Directors are required to complete the FCA’s approval process and, if relevant, the PRA’s and FCA’s SMCR notification or approval process before they are appointed and to selfcertify annually that they remain competent to carry out this aspect of their role. These processes continue to adapt to meet evolving best practice in respect of SMCR.
 Focused technical meetings with internal and external experts on specific areas including investments, CRD IV, conduct risk, risk and capital management, and financial reporting
 Meetings with the External auditors and the FCA/PRA supervisory teams
 The Group’s organisational structure, strategy, business activities and operational plans
 The Group’s key performance indicators, financial and operational measures and industry terminology
When Directors are appointed to the Board, they make a commitment to broaden their understanding of the Group’s business. Our corporate centre monitors relevant external governance and financial and regulatory developments and keeps the ongoing Board training and information programme up to date. During 2018, while the Board spent a significant amount of its time discussing the Sale and integration and transformation activities, specific Board awareness sessions took place on cyber risks and security, the UK withdrawal from the EU, the Group’s strategy regarding joint venture operations, staff interaction surveys and corporate culture. Similarly, the relevant Board Committees received updates on developments in financial reporting, remuneration and corporate governance. Non-executive Directors are actively invited to all parts of the Group’s business in order to familiarise themselves with how our business is conducted and to meet with our people.
 To meet with the candidates on the revised list  To reach agreement on candidates to recommend to the Board  To discuss the potential Chair’s fee with the Remuneration
To support the review, the Risk and Compliance function undertook an assessment of the effectiveness of risk management and internal controls in line with the FRC’s guidance on the requirements of the annual review. In carrying out the review, the Risk and Compliance function considered reports presented to the Board, the Group Audit Committee and Risk and Capital Committee during the period. The review also assessed the top control issues escalated to the Board during the period.
To give all shareholders access to the Company’s announcements, all material information reported via the London Stock Exchange’s regulatory news service is published on the Company’s website. We have continued to host formal presentations to support the release of both the full year and half year financial results. These results-related events are also made available live on the Group’s website and have a permanent replay facility. We also undertook a comprehensive programme of investor engagement following the announcement of the Sale including investor presentations and meetings.
Our 2019 AGM will be held in Edinburgh in line with our plan to hold the AGM in Edinburgh and London in alternate years in order to give more shareholders the opportunity to attend.
Board meetings and meeting attendance The Board and its Committees meet regularly, operating to an agreed timetable. Meetings are usually held in Edinburgh or London and, on occasion, at the offices of one of our international businesses. In September 2018, the Board held its meeting in New York. As well as meeting with clients in New York, this allowed the Board to spend time with colleagues in New York, Boston and Philadelphia. During the year, the Board held specific sessions to consider the Group’s strategy and business planning. The Chair and the non-executive Directors also met during the year, formally and informally, without the executive Directors present. At these meetings, matters including executive performance and succession and Board effectiveness were discussed. During 2018 these meetings also covered discussions in relation to the Sale.
Directors are required to attend all meetings of the Board and the Committees they serve on, and to devote enough time to the Company to perform their duties. Board and Committee papers are distributed before meetings other than, by exception, urgent papers which may need to be tabled at the meeting. The Board sometimes needs to call or rearrange meetings at short notice and it may be difficult for all Directors to attend these meetings. If Directors are not able to attend a meeting because of conflicts in their schedules, they receive all the relevant papers and have the opportunity to submit their comments in advance to the Chair or to the Company Secretary. If necessary, they can follow up with the Chair of the meeting. The Board has established the Standing Committee as a formal procedure for holding unscheduled meetings. The Standing Committee meets when, exceptionally, decisions on matters specifically reserved for the Board need to be taken urgently. All Directors are invited to attend Standing Committee meetings. The Standing Committee did not meet during 2018.
The Chair is not a member of the Audit, Risk and Capital, or Remuneration Committees. He may, however, attend meetings of all Committees, by invitation, in order to keep abreast of their discussions. The table below reflects the composition of the Board during 2018 and the members’ attendance. The Board met 10 times during the year.
Chair Sir Douglas Flint (attended as Non-executive Director) 1/1 Sir Gerry Grimstone (Chair until 31/12/2018) 10/10
Former members Julie Chakraverty 3/5 Gerhard Fusenig 10/10 Kevin Parry 10/10 Lynne Peacock 5/5 Akira Suzuki 4/5
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The Board has established Committees that oversee, consider and make recommendations to the Board on important issues of policy and governance. At each Board meeting, the Committee Chairs provide reports of the key issues considered at recent Committee meetings, and minutes of Committee meetings are circulated to the appropriate Board members. The Committees operate within specific terms of reference approved by the Board and kept under review by the Nomination and Governance Committee.
All Board Committees are authorised to engage the services of external advisers at the Company’s expense, whenever they consider this necessary.
The Chair of each Committee and of the Nomination and Governance Committee review Committee membership at regular intervals. The Nomination and Governance Committee considers all proposed appointments before they are recommended to the Board.
Investment Performance Committee In October 2017, following the Merger and further consideration of its oversight responsibilities at that time, the Board established the Investment Performance Committee. This Committee provided insight into investment performance results by asset class, the market and economic environment influencing investment results, supported the review and oversight of performance issues and supported the ongoing innovation and evolution of the investment process and capabilities of the Group.
As a result of this review it was determined that the duties of the Investment Performance Committee should more properly be performed by the full Board, so the Committee was discontinued and its reporting information was built into the Board’s programme. During 2018, the IPC met five times and its members were Gerhard Fusenig (Chair), Melanie Gee, Richard Mully and Kevin Parry. At its meetings, it received and discussed reports on:  Quarterly investment performance  Asset class deep-dives  Market context  Investment governance and oversight  Investment process enhancements
3.2 Audit Committee report The Audit Committee assists the Board in discharging its responsibilities for financial reporting, internal control and the relationship with the External auditors.
 Oversaw the succession process for the Chief Internal Auditor  Reviewed the Solvency and financial condition report as part of the
 Received reports on compliance with the FCA Client Assets Sourcebook (CASS) rules in the Group’s CASS permissioned regulated legal entities
I look forward to engaging with you on the work of the Committee.
John Devine, Chair 10/10 Melanie Gee 10/10 Martin Pike 9/10 Jutta af Rosenborg 9/10
The Committee meets privately for part of its meetings and also has regular private meetings separately with the External auditors, Chief Internal Auditor and Chief Financial Officer. These meetings address the level of co-operation and information exchange and provide an opportunity for participants to raise any concerns directly with the Committee.
 The clarity of the disclosures relating to accounting judgements and estimates
 Outcomes of investigations resulting from whistleblowing  The appointment or dismissal of the Chief Internal Auditor, the approved internal audit work programme, key audit findings and the quality of internal audit work
 The independence of the External auditors, the appropriateness of the skills of the audit team, the approved audit plan, the quality of the firm’s execution of the audit, and the agreed audit and non-audit fees
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In accordance with the Senior Insurance Manager’s Regime, and its replacement the Senior Managers and Certification Regime which came into effect for insurance firms on 10 December 2018, the Audit Committee Chair is responsible for the oversight of the independence, autonomy and effectiveness of our policies and procedures on whistleblowing including the procedures for the protection of staff that raise concerns from detrimental treatment. Throughout the year the Audit Committee Chair met regularly with the Chief Internal Auditor and the Head of Financial Crime to discuss their work, findings and current developments.
3.2.2 Report on the year Audit agenda The Audit Committee has a rolling agenda comprising recurring business, seasonal business and other business.
 Reports from the chairs of the subsidiary audit committees  Updates on work completed by the External auditors  Details of non-audit services requested of the External auditors by business units  Other agenda items
 Solvency II Solvency and financial condition report  Two special meetings on the Sale Circular
 Half year results 2018  External auditors’ review of half year results  Impact on reporting of the Sale  CASS update
The indicative proportion of time spent on the business of the Committee is illustrated below: Jan-Mar
Detail of work The focus of work in respect of 2018 is described below.
The Committee also considered future changes to accounting standards (in particular IFRS 9 Financial Instruments and IFRS 16 Leases) and ensured that the impact of these future changes was appropriately disclosed in the financial statements. The Committee noted that the Group was eligible to defer IFRS 9 until 2020, and had opted to defer the adoption for the Group in 2018 and intends to adopt this new financial instruments standard in 2019.
The Committee reviewed the basis of accounting and in particular the appropriateness of adopting the going concern basis of preparation of the financial statements. In doing so, it considered the Group’s cash flows resulting from its business activities and factors likely to affect its future development, performance and position together with related risks, as set out in more detail in the Strategic report. The Committee recommended the going concern statement to the Board.
Accounting estimates and judgements The Audit Committee considered all estimates and judgements that Directors understood could be material to the 2018 financial statements. The Committee also focused on disclosure of these key accounting estimates and judgements.
In compiling a set of Group financial statements, it is necessary to make judgements and estimates about outcomes that are typically dependent on future events. This is particularly relevant to the defined benefit pension plan surplus which is inherently dependent on how long people live and future economic outcomes. Estimates also impact the value of contingent consideration (indemnities) and our assessment of the carrying value of intangible assets as discussed further below.
3. Corporate governance statement continued 31 December 2018. The Committee noted that under IAS 28 the additional strategic value of our relationship with Phoenix is not taken into account in the impairment assessment. See Note 16.
The Sale will result in the Group incurring separation costs of c£200m in future periods. The Committee considered whether it was appropriate to provide for these costs under IAS 37 and concluded that management’s judgement that a provision should only be recognised for costs for which the Group will not derive ongoing benefits, such as those relating to de-coupling and decommissioning of systems and data, was appropriate. See Note 38 for further details.
Balanced ‘We are fully disclosing our successes, the challenges we have faced in the period, and the challenges and opportunities we anticipate in the future – all with equal importance and at a level of detail that’s appropriate for our stakeholders’
 The layout is clear and consistent and the language used is simple and easy to understand (industry specific terms are defined where appropriate)
 There is a consistent tone across and good linkage between all sections in a manner that reflects a complete story and clear signposting to where additional information can be found
Annual report and accounts specifically from a fair, balanced and understandable perspective and provides feedback to our financial reporting team on whether it conforms to our standards. The members of the IRG are independent of the financial reporting team.
 Three drafts of the Annual report and accounts 2018 were reviewed by the Audit Committee at three meetings. The Committee complemented its knowledge with that of executive management and the Internal and External auditors. An interactive process allowed each draft to embrace contributions.
The Committee also reviewed the use and presentation of APMs which complement the statutory IFRS results in order to give a more complete view of the performance of the business. This review considered guidelines issued by the European Securities and Markets Authority in 2016 and the thematic reviews by the FRC during 2017 and 2018. A Supplementary information section is included in the Annual report and accounts to explain why we use these metrics and to provide reconciliations of these metrics to IFRS measures where relevant. This section also provides increased transparency over the calculation of reported financial ratios.
Adjusted profit before tax is a key profit APM. The Committee considered whether the allocation of items to adjusted profit was in line with the defined accounting policies, was consistent with previous practice and was appropriately disclosed. Where there were judgemental areas, such as in relation to the merger of Aberdeen and
Internal audit operates in accordance with a publicly available global charter which is reviewed by the Committee every year. The overall remit of the function is to protect Standard Life Aberdeen and influence positive change by delivering independent strategic insight and confidence. Their workplan covers all areas of the Group, and is informed by risk based discussions with management, regulators, the External auditors and the Committee, as well as data analytics and testing of business processes and controls.
The Committee approves the scope and content of the annual Internal audit plan, which is updated on a rolling basis to allow Internal audit to address any emerging issues and reflect changes in the Group’s activity.
 Key findings from completed reviews, including the impact on financial reporting processes and related applications
 Separation audit work in relation to the Sale, specifically around data segregation
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3. Corporate governance statement continued assurance programme that included an element of independent external challenge. These processes reported satisfactory results back to the Committee. Based on its annual effectiveness review, the Committee concluded that the function continued to be highly effective.
During the year, a managed transition was completed where the incumbent Chief Internal Auditor took on a new role within the Group. An internal candidate was appointed as Chief Internal Auditor, ensuring continuity.
The Committee complies with the UK Corporate Governance Code, the FRC Guidance on Audit Committees with regard to the external audit tendering timetable, the provisions of the EU Regulation on Audit Reform and the Competition and Markets Authority Statutory Audit Services Order with regard to mandatory auditor rotation and tendering. The Committee will continue to follow the annual appointment process but does not currently anticipate re-tendering the audit before 2026.
Auditor independence The Board has an established policy (the Policy) setting out what nonaudit services can be purchased from the firm appointed as External auditors. The Committee monitors the implementation of the Policy on behalf of the Board. The aim of the Policy, which is reviewed annually, is to support and safeguard the objectivity and independence of the External auditors and to comply with the FRC Ethical standards for auditors (Ethical Standards). It does this by prohibiting the auditors from carrying out certain types of non-audit services to ensure that the audit services provided are not impaired. It also ensures that where fees for approved non-audit services are significant, they are subject to the Committee’s prior approval. KPMG has implemented its own policy preventing the provision by KPMG of non-audit services to FTSE 350 companies which are audit clients.
 Valuation services, including valuations performed in connection with actuarial services or litigation support services
 The majority of legal services  Services related to the audited entity's Internal audit function
 Sustainability audits/reviews  Auditing IT security where this does not extend to designing and implementing internal control or risk management procedures
Having considered compliance with our policy and the fees paid to KPMG, the Committee is satisfied that KPMG has remained independent.
Audit and non-audit fees The Group audit fee payable to KPMG in respect of 2018 was £4.7m (2017: KPMG £5.7m), with the reduction reflecting the impact of the Sale. In addition £1.7m (2017: £1.9m) was incurred on audit related assurance services. Fees for audit related assurance services are primarily in respect of client money reporting and the half year review. The Committee is satisfied that the audit fee is commensurate with permitting KPMG to provide a quality audit and monitors regularly the level of audit and non-audit fees. Non-audit work can only be undertaken if the fees have been approved in advance in accordance with the Policy for non-audit fees. Unless fees are clearly small (which we have defined as less than £75,000), the approval of the whole Committee is now required.
Audit quality and materiality The Committee places great importance on the quality and effectiveness of the External audit. The Senior Statutory Auditor is Jonathan Mills, who is our lead audit partner. The Committee looks to the audit team’s objectivity, professional scepticism, continuing professional education and its relationship with management, all in the context of regulatory requirements and professional standards. Specifically:  The Committee discussed the scope of the audit prior to its commencement
 The Committee approved a formal engagement with the auditor and agreed its audit fee
 The Committee received an update of KPMG’s work, compliance with independence and its findings at nearly every meeting
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3. Corporate governance statement continued 3.3 Risk and Capital Committee report The Risk and Capital Committee supports the Board in providing effective oversight and challenge of risk management and the use of capital across the Group.
During 2018 the overall risk environment for the Group has been at an elevated level given the combination of the integration activity following the 2017 merger of Standard Life plc and Aberdeen Asset Management PLC, and the additional risks arising from the Sale, together with the ongoing level of regulatory change. The Committee kept a close eye on the most significant risks and ensured that these were given good visibility at the Board.
In addition to this, the Committee has continued to provide oversight and challenge in respect of the principal risks faced by the business during 2018. This included:  The risks involved in the delivery of significant regulatory change in response to the second Markets in Financial Instruments Directive (MiFID II) and the General Data Protection Regulation (GDPR)
 The management of operational pressures arising from the delivery of integration and strategic change following the 2017 merger of Standard Life plc and Aberdeen Asset Management PLC
 The political change risk arising from uncertainty regarding the nature and form of the UK’s exit from the European Union
 Process execution risks within the asset management business given the potential for periods of heightened market volatility to result in operational errors
Further details on these and other activities carried out by the Committee during the year can be found in the report that follows.
Martin Pike, Chair 10/10 John Devine 8/10 Melanie Gee 10/10 Former member Julie Chakraverty 3/5 Gerhard Fusenig 9/10
Regular private meetings of the Committee’s members have been held during the year providing an opportunity to raise any issues or concerns with the Chair of the Committee. The Committee’s members have also held regular private meetings with the Chief Risk Officer and the Chief Internal Auditor and have been given additional access to management and subject matter experts outside of the Committee meetings in order to support them in gaining an in-depth understanding of specific topics.
The Risk and Capital Committee helps support this by advising the Board and providing oversight and challenge on:  The Group’s risk appetite, material risk exposures and the impact of these on the levels and allocation of capital
The Committee’s agenda also includes the regular review of minutes from the Standard Life Aberdeen plc Enterprise Risk Management Committee and minutes from those risk committees comprising nonexecutives that operate in Standard Life Aberdeen plc’s directly-held subsidiaries.
During 2018 the risk committee minutes reviewed by the Committee included minutes from meetings of the Aberdeen Asset Management Life and Pensions Limited risk committee and the Standard Life (Asia) Limited risk committee. Prior to the Sale in August the Committee reviewed the minutes of the SLAL risk and capital committee. On completion of the sale, Standard Life Savings Limited became a directly held subsidiary of Standard Life Aberdeen plc and, since then, the Committee has reviewed the minutes from the Standard Life Savings Limited and Elevate Portfolio Services Limited risk committees.
In addition to reviewing these recurring items and undertaking work in connection with the Sale, the Committee provided oversight of a broad range of topics in 2018. This included consideration of:  Status of compliance with MiFID II  Plans to deliver GDPR compliance  Advice to be provided to the Remuneration Committee regarding the delivery of performance in 2017 relative to risk appetites
 Findings included in the 2017 Internal Controls Report issued for Standard Life Investments Limited and Aberdeen Asset Management PLC
 The risk profile of suppliers and the approach adopted in managing supplier risk
 Resources to support the management of supplier risk  Ongoing activity to support GDPR compliance  The remit and resources of the cyber risk management function  Proposals to ensure effective regulatory compliance for the Advice and Platforms business following sale of the UK and European insurance business
 The Group’s current and projected capital position following the transition to reporting under Capital Requirements Directive IV (CRD IV)
Standard Investments  The semi-annual update on cyber risk and security  An update on data privacy and the management of this in 2018  Actions taken to enhance the conduct risk framework  Proposed changes to the risk appetite framework  Risks associated with the 2019 – 2021 business plan
Financial risks Operational risks Conduct risks Sale of UK and European insurance business Other
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After each meeting, the Committee Chair reports to the Board, summarising the key points from the Committee’s discussions and any specific recommendations.
The Committee has continued to support the Board through monitoring exposures against tolerances and appetites throughout the year. This included, prior to announcing the decision to sell the UK and European insurance business, reviewing the likely impact on the Group’s risk profile and capital requirements of the proposed transaction.
In May the Committee reviewed proposals from management to revise the tolerance for operational risk in light of the increased level of change being undertaken by the business in view of the ongoing integration of the asset management business and taking into account the preparation for the Sale. Following completion of the transaction, proposals to rescale this tolerance in line with the refocused business model were presented by management for consideration by the Committee. In both cases the Committee supported management’s proposals and advised the Board accordingly.
At its December meeting the Committee reviewed and challenged proposals presented as part of the annual review of the risk appetite framework. This included reviewing proposed updates to ensure that the Group’s risk appetites and risk limits appropriately reflected changes to the risk profile in view of the ongoing transformation of the business. The Committee recommended and the Board subsequently approved the changes that were presented.
The Committee has continued to receive regular reporting through the Views on Risk report on financial exposures, conduct and operational risks, and the Group’s capital position. Through reviewing the relevant dashboards, commentaries and associated management information, the Committee has monitored risks relative to applicable quantitative and qualitative appetites and views on the resilience of the capital position under current and stressed conditions.
 Combined stresses – looking at simultaneous stresses to a combination of financial and demographic risks
Enterprise Risk Management (ERM) framework During the year the business took the opportunity to refresh the ERM framework used to identify, assess, control and manage the Group’s risks. Details of the proposed changes were presented to the Committee to allow the Committee to consider the structure of the framework and its suitability for identifying, assessing and managing current and new risk types and for reacting to forward-looking risk issues and the changing nature of risks. The Committee supported the proposed changes and considered they would help drive greater risk awareness and accountability across the business.
The changes that were introduced aligned risk and compliance practices to the broader corporate transformation being undertaken, including the introduction of the new operating model, and reflected the impact of the Group moving to the CRD IV capital regime and regulatory developments regarding senior management accountability.
The Committee has continued to obtain assurance regarding the operation of the ERM framework through its review of regular content within the Views on Risk report. In particular we have used our review of the various risk and capital dashboards, including the consolidated dashboard on key conduct risk indicators, to understand the Group’s risk profile and the effectiveness of the framework in supporting the management of these risks.
Following the refresh of the ERM framework the Committee now receives reporting from the Risk and Compliance function on the results of the quarterly risk management survey of regional and functional executives which is used to identify the key risks facing the business. The completion of this survey along with subsequent discussion of the results at ERMC meetings is noted as helping to drive greater risk awareness and accountability. Furthermore, through reviewing the results of the survey, the Committee has been able to ensure there is appropriate focus on these key risks facing the business.
Exceptions-based reporting is provided to the Committee through the Views on Risk report setting out any matters of significance in respect of the results of quarterly policy compliance reporting and actions being taken in response to risk events. These two items also support the Committee in performing its oversight of the ERM framework.
The Committee also receives regular reporting from the Chief Internal Auditor which provides an independent assessment of the internal control environment relating to the operation of the framework.
Corporate and strategic risk reporting The Committee has continued to support the Board in considering the risk aspects of proposed material corporate transactions.
Prior to the final decision being taken to conclude the Sale, the Committee considered the anticipated operational readiness of the business for ‘Day One’ following completion of the transaction. The Committee noted the risks associated with operational readiness and the associated mitigants that were in place. Key items discussed by the Committee in this context included data segregation, cyber risk, conduct risk and regulatory matters. Based on these discussions and the material presented the Committee was able to confirm its support for the proposed deal completion date.
As previously noted in this report, prior to the Sale in August the Committee received minutes from the SLAL risk and capital committee. On completion of the Sale, Standard Life Savings Limited became a directly held subsidiary of Standard Life Aberdeen plc and, since then, the Committee has received minutes from the Standard Life Savings Limited and Elevate Portfolio Services Limited risk committees.
The Committee has also received reporting during the year from the risk committees in place for Aberdeen Asset Management Life and Pensions Limited and Standard Life (Asia) Limited, the latter committee having been established in 2018.
G o ver n an c e 73Standard Life Aberdeen 2018
In addition to the Committee reviewing reporting from the subsidiary risk committees, arrangements also exist for the Committee’s Chair to attend those subsidiary risk committees.
During the year the Committee once again provided advice to the Remuneration Committee regarding the delivery of performance in the context of incentive packages. In particular, the Committee considered whether performance had been delivered in a manner that was consistent with the Group’s strategy, risk appetite and tolerances, and capital position. The provision of this advice helps ensure the Group’s overall remuneration practices are aligned to the business strategy, objectives, culture, values and long-term interests of the Group and that individual remuneration is consistent with and promotes effective risk management.
Committee effectiveness The Committee reviews its remit and effectiveness annually. In 2018 this was carried out by external consultants IBE who produced an independent report on the operation and effectiveness of the Committee.
The report on the operation and effectiveness noted the role of the Committee in supporting the Board and recognised that risk was high on the agenda. The review confirmed that the Committee’s agenda and composition was fit for purpose, highlighting the need for this to be kept under review as business transformation progressed following the Sale.
For 2019, the review highlighted an expectation that to continue to operate effectively the Committee would need to remain focused on key items including MiFID and GDPR compliance as well as cyber and data risk. Plans are already underway to enhance the Committee’s coverage of these items in 2019.
The Directors present their annual report on the affairs of the Standard Life Aberdeen group of companies (the Group), together with the audited International Financial Reporting Standards (IFRS) consolidated financial statements for the Group, financial information for the Group and financial statements for Standard Life Aberdeen plc (the Company) for the year ended 31 December 2018.
The main trends and factors likely to affect the future development, performance and position of the Group are outlined in the Co-Chief Executives’ overview section of the Strategic report. Reviews of the operating and financial performance of the Group for the year ended 31 December 2018 are given in the Strategic report.
Dividends The Board recommends paying a final dividend for 2018 of 14.30p per ordinary share. This will be paid on 21 May 2019 to shareholders whose names are on the Register of members (the Register) at the close of business on 12 April 2019.
As a result, 2,941,738,848 B shares of 33.99 pence each were allotted and issued on 22 October 2018. No application was made to the UK Listing Authority or to the London Stock Exchange respectively, for any of the B Shares to be admitted to the Official List or to trading on the London Stock Exchange’s main market for listed securities, nor were the B Shares listed or admitted to trading on any other recognised investment exchange. The B Shares were redeemed on 24 October 2018 for 33.99 pence per B Share. All B Shares were redeemed and cancelled.
 A certificated share by a person with a 0.25 per cent interest (as defined in the Articles) in the Company, if that person has been served with a restriction notice under the Articles, after failing to provide the Company with information about interests in those shares as set out in the Companies Act 2006 (unless the transfer is shown to the Board to be pursuant to an arm’s length sale under the Articles)
These restrictions are in line with the standards set out in the FCA’s Listing Rules and are considered to be standard for a listed company.
 Make market purchases of the Company’s ordinary shares up to a maximum of 297,908,360 of its issued ordinary shares
Cathleen Raffaeli was appointed to the Board on 1 August 2018. Sir Douglas Flint was appointed to the Board on 1 November 2018 and was appointed Chairman with effect from 1 January 2019. Having been appointed since the last AGM, Cathleen Raffaeli and Sir Douglas will stand for election at the 2019 AGM. It is intended that Stephanie Bruce will succeed Bill Rattray as CFO on 1 June 2019. Whilst Stephanie would not take up her role until then, the Board felt it was important that shareholders were given the opportunity to vote on her election at this year’s AGM.
All remaining Directors as at the date of the AGM will retire at the 2019 AGM and, if they wish to continue in office, will stand for re-election.
No Director has any interest in the Company’s listed debt securities or in any shares, debentures or loan stock of the Company’s subsidiaries. No Director has any material interest in any contract with the Company or a subsidiary undertaking which was significant in relation to the Company’s business, except for the following:  The benefit of a continuing third party indemnity provided by the Company (in accordance with company law and the Articles)
 Service contracts between each executive Director and subsidiary undertakings (Standard Life Employee Services Limited and Aberdeen Asset Management PLC)
Directors’ liability insurance During 2018, the Company maintained directors’ and officers’ liability insurance on behalf of its directors and officers to provide cover should any legal action be brought against them. The Company also maintained pension trustee liability indemnity policies (which includes third party indemnity) for the boards of trustees of the UK and Irish staff pension schemes where required to do so.
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Diversity and Inclusion At Standard Life Aberdeen our Vision for an Inclusive Future aims to create a workplace where everyone feels they can be themselves and are valued for what they bring. We believe that inclusion is core to delivering our company values and developing an environment which enables everyone to perform and progress. By building and sustaining a diverse talent pipeline and enabling people to reach their potential, we will provide our global customers with the diversity of thought and creativity required to bring long-term value.
We have a published inclusion strategy, which was co-created with our people, and which defines our priorities over the next three to five years. Progress against this is reviewed by the Nomination and Governance Committee at every meeting. The strategy aims to embed inclusion in everything we do, and this year we have worked with our Executive team to make sure there are actions in place relevant to their business areas, which build more inclusive workplaces. Our strategy is also about improving transparency in how we talk about and report on diversity in our business. Our transparency was recognised this year by Equileap who ranked us in their Top 200 Global companies for gender equality and also by Bloomberg who included us for the first time in their Gender Equality Index.
We empower people to take an active and collective approach as we all have a role to play in creating an inclusive environment. For example our seven employee network groups support members of the diverse groups and communities they represent, and raise awareness of issues that affect them. With over 1,200 members, our networks continue to expand their global reach, and focus on gender, LGBT+, ethnicity, mental health, young people, carers and armed forces.
You can read our gender pay gap report and our gender and ethnicity action plans on our website www.standardlifeaberdeen.com/annualreport
Engagement In our mood and sentiment survey carried out post-merger in 2017, our employee insights partner Karian and Box believed our results showed a high level of positivity towards the merger in comparison to others in a merger/acquisition situation. In Q4 2018 we ran a global deep dive engagement survey ‘Viewpoints’ based on a number of key organisational themes. This has given us further organisational insight 78 Standard Life Aberdeen 2018
The main themes that emerged from the most recent survey included the need to build, through better communication with our employees, a clearer and more consistent understanding of our strategic direction, and how we can speed elimination of factors that can prevent people from doing their jobs as effectively as possible. Positive feedback centred on how our managers lead through change, colleagues feeling able to be themselves at work and our continued focus on all aspects of inclusion.
 Consider how “employee engagement” can be built into the regular Board reporting templates
Information about stakeholder engagement, together with the section 172 (1) statement, is on pages 22 to 23 of the Strategic report.
Recognising the vital contribution that our people managers make, we recently launched the People Management Academy, an exciting new global framework and learning curriculum designed to enhance the skills and capabilities of line managers. Over 300 line managers enrolled within days for in-person development sessions and the offering will continue to develop throughout 2019, with the addition of new digital and workshop solutions.
We are enthusiastic in deploying a broader range of Apprenticeships to support individuals to combine work and study. This year, we enrolled our first graduate apprentices in study for in-demand industry skills such as cyber security and software development, as well as continuing the focus on working towards qualifications in subjects including Providing Financial Services and Management.
In 2018 we have ensured that employees have been able to continue using intranet services throughout the period of organisational change. As part of the separation programme we created an additional version of the intranet in order that both Standard Life Aberdeen employees, and employees transferring to Phoenix group, were able to access the intranet without disruption. Additionally, we have created a new global communications hub to support Standard Life Aberdeen employees through the transition period. Work is now underway to initiate a digital workplace programme which will see delivery of a new global internet for our transformed Group.
The Company invited over 99% of UK and Ireland based employees to participate in the Standard Life Aberdeen Sharesave plan in 2018 and 1,799 employees accepted the invitation. These employees will have the opportunity to acquire Standard Life Aberdeen plc shares for £2.571 (UK) and €2.857 (Ireland) with their accumulated savings when their savings contracts end in three or five years’ time. At 31 December 2018, 2,522 UK employees in UK and Ireland were saving towards the purchase of Standard Life Aberdeen plc shares through this plan.
Auditors The Audit Committee is responsible for considering the Group’s external audit arrangements. Resolutions proposing the reappointment of KPMG LLP as auditors of the Company and giving authority to the Audit Committee to determine their remuneration will be submitted at the 2019 AGM.
As far as each Director is aware, there is no relevant audit information that KPMG LLP is not aware of as at the date this report was approved.
Should the full 4.93% be sold through the OFS and at the floor price, it is estimated that the Group would receive a total consideration net of taxes and expenses of approximately Rs.35.3bn (c£380m). Assuming full subscription in the OFS at the floor price, the gain on sale is estimated to be approximately £325m after tax.
Richard Mully Chairman, Remuneration Committee 5.1 Remuneration Committee Chairman’s statement This report sets out what the Directors of Standard Life Aberdeen plc were paid in 2018 and how we will pay them in 2019, together with an explanation of what the Remuneration Committee considered in reaching its recommendations. Where tables and charts in this report have been audited by KPMG LLP we have marked them as ‘audited’ for clarity.
 The annual remuneration report, which sets out in detail how the remuneration policy was implemented in 2018
We have continued to set and execute our long term strategic agenda with the sale of our UK and European insurance business to Phoenix in August 2018 marking a significant milestone in our transformation to a fee based, capital-light investment company. There has been substantial progress made on transformational and operational integration projects as a result of the merger. We remain on track to deliver the targeted annual efficiency savings of over £350m by 2020. While the strategy remains well supported by shareholders and the execution of the strategy has been good, it is clear that the challenges associated with the prevailing economic and geopolitical environment have impacted our financial performance, as a result of which our share price has not been what we would want over the past year.
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Vesting of the 2016 Executive LTIP and Standard Life Investments Long Term Incentive Plan (‘SLI LTIP’) Keith Skeoch participated in the 2016 Executive LTIP, the outcome of which was dependent on the achievement of stretching performance conditions by reference to adjusted profit and net flows targets. On assessment of performance against these conditions, it was determined that the award did not meet the required thresholds against either of these measures and the award lapsed in full.
Rod Paris participated in the 2016 SLI LTIP which was dependant on the achievement of adjusted profit targets and subject to underpins relating to investment performance. After the performance conditions were assessed, it was determined that 6.35% of the target award vested (3.175% of maximum).
Alignment of remuneration across our workforce As a result of the merger, a diverse range of terms and conditions are currently in operation across the Group. In 2018, work started on a project to harmonise terms and conditions for all UK based colleagues, with other activities underway or planned to achieve similar harmonisation objectives in our other locations. The harmonisation programme includes alignment of pension contributions, variable pay structures and other benefits. This provides an opportunity to improve alignment of remuneration with the Group’s culture and to further enhance our ‘one company’ vision. Proposals have been communicated to staff and are now subject to employee consultation. Implementation is expected to be in the second half of 2019.
The Committee has approved the proposed changes and is monitoring progress in line with its duty to periodically review trends in the wider remuneration landscape and to oversee relevant changes for our employees. Where appropriate, and where this is in line with the approved Directors’ Remuneration Policy, the new set of terms and conditions will be extended to executive Directors.
Another recommendation of the review was that executive Director pension arrangements should be aligned with those operating across the wider workforce. At the current time there is not a single set of terms and conditions in operation across the Group, although pension arrangements will be aligned as part of the terms and conditions harmonisation programme set out above. However, pension arrangements for existing executive Directors were aligned to colleagues within the legacy Aberdeen Asset Management heritage (which is a significant proportion of employees) as part of Directors’ Remuneration Policy. It is not intended at this stage to make any further changes for current executive Directors in this regard. However, once the harmonisation programme has been implemented, pension arrangements for any executive Directors appointed after that date will be aligned with those operating across the wider workforce.
Restatement of in-flight performance targets As a result of the sale of our UK and European insurance business to Phoenix in August 2018, and other corporate events, the Remuneration Committee carefully assessed the impact on in-flight performance targets. In relation to executive Directors, this impacted EIP targets and in-flight LTIP arrangements. Where targets have been restated this has been done on a formulaic basis, taking into account the direct impact of the transaction on the relevant targets. The Committee approved these adjustments on the fundamental principle that targets should be no more or less difficult to achieve than the original targets. Restated targets are set out on page 88 for the EIP and page 93 for the LTIP.
Board succession A number of changes to the Board were announced on 13 March 2019. A summary of these changes, and the implications for associated remuneration arrangements, are set out below.
With effect from 13 March 2019, Keith Skeoch will become the sole CEO of Standard Life Aberdeen and Martin Gilbert becomes Vice Chairman of Standard Life Aberdeen and Chairman of Aberdeen Standard Investments from that date. Martin will continue to be an executive Director of the Board and both he and Keith will continue to report into the Chairman. In this role, Martin will be able to focus solely on our strategic relationships with key clients, winning new business and realising the potential from our global network and product capabilities.
Stephanie Bruce will succeed Bill Rattray as CFO (subject to shareholder approval) on 1 June 2019.
I hope you find this report a clear account of how the Committee has implemented our policy during 2018 and are able to support the decisions we have made. I welcome comments from shareholders and look forward to hearing your feedback at the AGM.
5. Directors’ remuneration report continued 5.2 Summary What are the principles that underpin our remuneration framework? The Remuneration Committee developed three key principles designed to support our strategy, culture and values which guided the design of the remuneration framework going forward, as follows: Underlying principles How this is achieved with the proposed framework 1 The approach to remuneration within the Group should be simple and transparent
 Our remuneration framework and the basis for awards is simple, transparent and fair for both participants and shareholders alike 2 The approach should encourage a long-term focus on strategy and culture
 The remuneration framework rewards the achievement of long-term sustained business results which support our strategy, culture and values
 Conduct and how performance has been achieved will form a key part of how remuneration levels are determined
 The remuneration design encourages significant long-term share ownership to ensure wealth and not just income is at risk
 An appropriate level of fixed remuneration is provided to balance risk and reward
Our primary focus is delivering for our customers and clients – this means working to understand and meet their needs while building lasting partnerships
 Cost/income ratio is included in performance measures for reward outcomes and also forms part of underpin measures post-award for a further three years
Investing in leading edge capabilities, helping us attract clients and customers, enhance relationships and develop smarter ways of working over the long term
Optimising the breadth and depth of our investment management, platform and advice ecosystem, along with our geographical reach enables us to meet the savings needs of clients and customers around the world
 Investment performance and flows are included in performance measures for reward outcomes, with performance measured over an extended time period
Overview of the policy and how it will be implemented in 2019 Element Overview of remuneration policy Implementation in 2019
With effect from 1 January 2019 base salaries are as follows Salary
Co-Chief Executive officers1 (Co-CEOs) £600k 0% Chief Investment Officer (CIO) £450k 0% Chief Financial Officer (CFO) £450k 0% Chief Financial Officer (designate) £525k n/a 1 Martin Gilbert’s salary will remain at £600k when he takes up his new role from 13 March 2019.
Single incentive plan designed to reward the delivery of the Group’s business plan in a range of financial and non-financial areas.
Performance assessed against a range of key financial, nonfinancial and personal performance measures.
Deferred awards are subject to underpin conditions which are measured over the three financial years from award.
The performance metrics used to determine awards are set out in the following section.
Martin Gilbert’s maximum bonus opportunity will reduce to 350% of base salary with effect from 13 March 2019 when he takes up his new role.
Executive Directors are required to build up interests in the Group as follows:  Co-CEOs: 500% of salary  CIO and CFO: 300% of salary Martin Gilbert’s shareholding requirement will remain at 500% of salary until 13 March 2020 and will then revert to 300% of salary, in line with other executive Directors.
Fees for non-executive Directors are made up of a base fee and additional fees to reflect additional responsibilities (e.g. the Senior Independent Director / members / Chair of a Board Committee). The Chairman receives an all-inclusive fee. Additional fees or benefits may be provided at the discretion of the Remuneration Committee.
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Long-term financial Adjusted diluted earnings per share1 2018 and 2019 20% Due to commercial sensitivity this measure will only be disclosed at the end of the performance period Gross new business flows (all channels)1, 2 2018 and 2019 10% £137.7bn £153.0bn £168.2bn Net new business flows (excl. Strategic Insurance Partners)1, 2, 3
Subject to performance underpins 33% vests (2 year hold) 33% vests (1 year hold)
How our executives were remunerated in 2018 What was earned during 2018 The remuneration outcomes for executive Directors have been determined by the Remuneration Committee as illustrated below: Our performance EIP scorecard outcomes for 2018 The table below shows the outcome of the executive Directors’ participation in the EIP plan for the period 1 January 2018 to 31 December 2018. Adjustments made to the performance targets as a result of the sale of Standard Life Aberdeen’s UK and European insurance business together with further details on how outcomes have been determined can be found on pages 88-91.
1 After application of the discretionary reduction of 50% to the EIP scorecard outcome, which was applied to the co-CEOs. No discretionary adjustment was applied to the CIO or the CFO.
Cumulative Group adjusted profit before tax £2,395m £2,600m £2,910m £2,305m 0% Cumulative Group net flows £30.8bn £38.9bn £51.0bn (£53.7bn) 0%
4 For prior years this figure shows the annual deferred bonus awarded in respect of the year 5 The values reported for 2018 are the market values of the Executive LTIP awards and the Standard Life Investments LTIP awards granted in 2016 that will vest based on the three-year performance measurement period ending on 31 December 2018 – Executive LTIP (0%); and Standard Life Investments LTIP (3.175% of maximum). As the share price at the date of vesting is not known at the date of publication of this report the number of Standard Life Aberdeen plc shares that will vest (including additional Standard Life Aberdeen plc shares received in respect of accrued dividends from grant through to 31 December 2018) has been multiplied by the average share price over the quarter ending 31 December 2018 (264.15pence). This amount will be restated in the following Annual report and accounts once the share price at vesting is known.
6 The values reported for 2017 have been restated to reflect the value of the shares vesting in respect of the three-year performance measurement period ending on 31 December 2017. Where the awards vested in 2018 the price has been restated using the share price on the vesting date (355.80p). For the Executive LTIP awards which are subject to a further two year holding period until 2020, the restatement is based on the share price on the first trading day following the third anniversary of grant (355.80p).
8 Martin Gilbert, Rod Paris and Bill Rattray were appointed to the Board on 14 August 2017. All reported figures for 2017 are in respect of the period 14 August 2017 to 31 December 2017.
Executive Incentive Plan The following section sets out performance against each of the elements of the EIP for 2018.
Performance target adjustments As set out in the Chairman’s statement, following the sale of Standard Life Aberdeen’s UK and European insurance business to Phoenix and other corporate transactions, the following adjustments were made to the EIP performance targets:  Following its sale to Phoenix, removal of targets related to Standard Life Aberdeen’s UK and European insurance business from 31 August 2018
The underlying principle to the adjustments made was that the adjusted targets should not be easier / more challenging than the original targets set when the award was made.
Long-term financial Adjusted profit before tax (excluding spread/risk margin)1 original target £874m £941m £1,010m adjusted target 20% £815m £877m £942m £801m 0% Gross new business flows (all channels)2 original target £76.8bn £85.3bn £93.8bn adjusted target 10% £72.2bn £80.2bn £88.2bn £70.5bn 0% Net new business flows (excl. Strategic Insurance Partners)2,3 original target £1bn £3.3bn £6.0bn adjusted target 10% £0.0bn £0.8bn £1.8bn (£33.9bn) 0% Investment performance original target 50.0% 60.0% 70.0% (no adjustment) 20% 50.0% 60.0% 70.0% 55.9% 5.90% Short-term financial Cost/income ratio (excluding spread/risk margin) original target 68.0% 66.0% 64.0% (no adjustment) 20% 68.0% 66.0% 64.0% 67.3% 3.50% 1 Impacted by all adjustments except flow adjustments. 2 Impacted by adjustments for the removal of targets related to Standard Life Aberdeen’s UK and European insurance business following its sale on 31 August 2018 and the removal of flows relating to India & China and HDFC AMC. Flows exclude cash and liquidity flows. 3 Definition is aligned to the previous terminology of ‘growth’ flows. Vesting outcomes of (£33.9bn) = net flows (see page 31) of (£40.9bn) excluding strategic insurance partners outflows of (£5.5bn) and excluding cash and liquidity outflows of (£1.3bn), plus discontinued inflows to end August 2018 of £0.2bn.
Strategic 2.5%  Strong progress being made to becoming a world-class investment company with the execution of the sale of the UK and European insurance business to Phoenix
Customer and client 2.5%  Sustained customer benchmark rating over 2018 however, slight fall in respondents rating SLA good or excellent over the year
 Underlying customer confidence remains strong in ASI franchise but is below expected levels  Stable client perceptions across key markets: UK, Germany and USA
Risk, compliance, conduct 2.5%  Global Code of Conduct refreshed in the year with a 99.5% attestation rate across all employees  Enterprise Risk Management Framework established in 2018  Enterprise Risk Management Framework rated as strong in four out of five components following annual credit rating reviews from external bodies  Group impact risk events were in line with expectations  Regular engagement sessions with Executives on risk matters  Roll out of single compliance system for ASI colleagues
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Martin Gilbert 10%  Strategic review for Asia and Americas with significant restructuring and centralisation as part of transformation programme. Ensured strong focus on responsibilities and cost control.
 Client retention strategies implemented and plans rolled out for all clients and improvements in the global sales process
 Distribution and marketing agenda on target, with 26 product campaigns and over 10m social media engagements. Refocused sponsorship activity post-merger in line with plan.
Rod Paris 10%  Integration of the investment teams and the creation of a unified leadership group, bringing together investment capabilities and their associated processes
Before approving the level of performance in 2018, the Remuneration Committee sought the views of the Group Audit Committee on material accounting issues that it considered during the year and the Group Chief Risk Officer and the Risk and Capital Committee on the management of risk within the business. The Remuneration Committee determined there should be no adjustments made to the EIP scores as a result of the feedback from the Group Audit Committee, and the Group Risk and Capital Committee.
As set out in the Chairman’s letter, to consider whether the awards generated by the scorecard were fair in the broader performance context the Committee considered the following factors:  The outcome from the perspective of overall company performance  The shareholder experience during 2018  The context of the incentive funding position across our workforce
Taking everything into account, the Committee decided to apply discretion to the EIP outcome for the co-CEO’s to reduce the awards to 50% of the calculated outcome. In addition, the Committee decided that this amount would be deferred in full, with vesting determined by performance against underpins which links the award to future performance. In the Committee’s view, this outcome best balances disappointing financial results and shareholder outcomes with appropriate recognition for the contribution made by the executive Directors to manage the Company’s performance in a challenging marketplace and to continue to move forward on the Company’s strategic agenda as articulated to, and strongly supported by, our shareholders. The overall outcome of the scorecard and the discretionary adjustment is set out on page 91.
As a result of the approved ratings, the EIP outcome for 2018 is as set out in the table below: Formulaic outcome
 Gross new business flows underpin2 (12.5%) approved target of £251.5bn is based on 2019 budget for the three year period 2019 – 2021 reduced by the % midpoint of the range between Threshold and Target applied in the 2019 EIP.
 The underpin requires return on adjusted equity, calculated as the average rate over the three-year underpin period (2019-2021), to be 17% or higher
1 Flows exclude investments in cash and liquidity funds. 2 All channels excluding Lloyds. 3 Excluding strategic insurance partners.
Keith Skeoch received an award in March 2016 of 400% of salary with the performance period ending in 2018. Rod Paris does not have an award under the Standard Life Executive LTIP with performance ending in 2018 as he was not an executive Director at the time of grant in March 2016.
The following adjustments were made to the performance targets for the 2016 awards:  Following its sale to Phoenix, removal of targets linked to the Standard Life Aberdeen’s UK and European insurance business from 31 August 2018
The table below shows the original and adjusted performance targets together with actual outcomes for the 2016 LTIP award: Threshold Target Maximum Actual performance Level of vesting
Cumulative Group adjusted profit before tax1 for Standard Life Aberdeen Group for the three years ended 31 December 2018 Original performance conditions1 £2,490m £2,705m £3,030m Adjusted performance conditions £2,395m £2,600m £2,910m £2,305m Vesting outcome (70% weighting) 0% Cumulative Group net flows for the Standard Life Aberdeen Group for three years ended 31 December 2018 Original performance condition1 £30.8bn £38.9bn £51.0bn Adjusted performance condition £30.8bn £38.9bn £51.0bn (£53.7bn) Vesting outcome (30% weighting) 0% 1 These performance conditions were adjusted in 2017 in light of the merger, full details can be found in the Annual report and accounts 2017. No change was made to the net flows condition from those originally set in 2016.
Before an award can vest, the Risk and Capital Committee is required to verify to the Remuneration Committee that the level of vesting was not as a result of behaviour that has exposed the Group to undue risk. The Remuneration Committee took the view of the Risk and Capital Committee into account when determining the level of vesting.
As performance was above the lower quartile of the money-weighted average of all assets under management (both captive and third party assets) compared to other asset managers, and having considered the risk underpin, the Remuneration Committee determined that 6.35% of the target award (3.175% of the maximum award) granted in 2016 would vest in 2019.
Executive LTIP1 Keith Skeoch Nil-cost option 400% of salary £2,800,000 761,531 0% See below Rod Paris Nil-cost option 400% of salary £1,800,000 489,556 0% See below
Life Aberdeen plc shares. This resulted in the above awards being granted on 28 March 2018 based on the average share price for December 2017 as per plan rules of 423.41p.
Performance conditions for Executive LTIP awards granted 2018 and 2017 The awards granted in 2018 under the Executive LTIP have two performance conditions. The outcome is based 80% on cumulative Group adjusted profit before tax and 20% on cumulative Group net flows. In addition to business performance criteria, all of the awards are subject to an additional personal performance underpin whereby, if an executive Director performs at an unsatisfactory level in any year during the three-year performance period, their original award would be reduced by one-third, unless the Co-Chief Executive Officers, or the Remuneration Committee in the case of Keith Skeoch, recommends otherwise. Keith Skeoch and Rod Paris were granted awards under the Executive LTIP in 2018 and 2017.
As set out in the Remuneration Committee Chairman’s statement, the performance targets for the 2018 and 2017 awards under the Executive LTIP Plan have been adjusted as follows:  Following its sale to Phoenix, removal of targets linked to the Standard Life Aberdeen’s UK and European insurance business from 31 August 2018
 Addition of Phoenix profit share post 31 August 2018  Removal of targets as a result of the change in share of HDFC AMC following the IPO and inclusion of interest on the sales proceeds
The table below sets out the adjusted performance targets for Executive LTIP awards granted in 2017: Performance condition
No adjustment £27.7bn £45.9bn 1 These are the performance targets after the adjustments in 2017 in light of the merger, full details can be found in the Annual report and accounts 2017. No change was made to the net flows condition in 2017 from those originally set at grant.
G o ver n an c e 93Standard Life Aberdeen 2018
The following table shows the total number of Standard Life Aberdeen plc shares held by the executive Directors and their connected persons: Total number of shares owned at
The following table shows the number of qualifying awards included in assessing achievement towards the shareholding requirement, as at 31 December 2018: Qualifying awards
Total of the value of shares (from table above) and 50% of the value of qualifying awards at 31 December 2018 as a % of salary 1 The closing price at 31 December 2018 used to determine value was 256.75 pence.
Executive Directors will be required to retain shares held in respect of the post cessation requirement (500% of salary for the co-CEOs and 300% of salary for other executive Directors) for a period of one year following their departure from the Group.
All former Directors held or continue to hold the shares required under their post-employment holding requirement. Luke Savage is required to hold 15,940 shares until 28 February 2019 and met this requirement. Paul Matthews met his requirement to hold 157,934 shares until 1 March 2018. Colin Clark retained in excess of his requirement at the point of the share consolidation on 22 October 2018. As no subsequent disposal of shares has been made he therefore has retained the necessary holding at 31 December 2018.
This table shows, in relation to each executive Director, the total number of share options with and without performance conditions held at 31 December 2018: Unvested options with performance measures1
It does not include shares to be awarded in lieu of dividend equivalents. Also included are options granted under the Standard Life Sharesave Plan. 3 This comprises awards made under the Aberdeen Variable Pay plans which are now exercisable. 4 This comprises, for both Keith Skeoch and Rod Paris, awards made under the 2015 Standard Life Investments LTIPs. Additionally it includes for Keith Skeoch the deferred share award granted in 2016 in respect of the 2015 Group bonus plan, and for Rod Paris a Restricted Stock Plan award granted in 2015, before he became a Director. It includes shares awarded in lieu of dividend equivalents.
The closing market price of Standard Life Aberdeen plc shares at 31 December 2018 was 256.75 pence and the range for the year was 224.85 pence to 442.60 pence.
Martin Gilbert Non-executive Director Glencore plc $157,000 Non-executive Director Sky plc1 £117,508 Chairman of the Practitioner Panel – Prudential Regulation Authority £nil
Keith Skeoch Non-executive Director of the Financial Reporting Council £nil Bill Rattray Non-executive Director – Curtis Banks Group PLC £50,000 1 Stepped down from this position with effect 10 October 2018.
Payments to past Directors/Loss of office payments (audited) No payments were made to former Directors that have not been previously reported elsewhere. Payments made to former Directors that have not been previously reported elsewhere will be reported if they are in excess of £20,000.
Sir Gerry Grimstone is entitled to a six month notice period under the terms of his letter of appointment and will receive fees of £190,000 and an allowance of £10,000 in the period to 30 June 2019 (being the pro-rated value of his annual fee and allowances respectively). Sir Gerry will remain in an advisory position with the Company for this period. During this time, he will be available to advise the new Chairman and the CoChief Executives and serve as the Company's representative on the boards of Heng An Standard Life Insurance Company Limited and HDFC Life Insurance Company Limited.
UK-based employees 3% (45%) 23% 1 The change in benefits figure is based on the change in medical premium paid by the Group on behalf of employees. It does not reflect a change to the benefit received by individuals.
G o ver n an c e 95Standard Life Aberdeen 2018
Pay Ratio The table below sets out the ratio of both CEO’s pay to the median, 25th and 75th percentile total remuneration of full-time equivalent UK employees in accordance with the legislation published by the Government in 2018. We have identified the relevant employees for comparison using our gender pay gap data set and updated the figures for remuneration received in respect of the 2018 performance year (methodology B). While the requirement to disclose the ratio under this methodology does not come into effect until next year, the Remuneration Committee welcomes the opportunity to illustrate its approach to remuneration across the Group.
Pay compared to performance The graph shows the difference in the total shareholder return at 31 December 2018 if, on 1 January 2009 £100 had been invested in Standard Life Aberdeen plc and in the FTSE 100 respectively. It is assumed dividends are reinvested in both. The FTSE 100 has been chosen as Standard Life Aberdeen plc is a member of this FTSE grouping.
The following table shows the single figure of total remuneration for the Directors in the role of Chief Executive Officer for the same ten financial years as shown in the graph above. Also shown are the annual incentive awards and LTIP awards which vested based on performance in those years: Year ended 31 December Chief Executive Officer
Adjusted profit before tax (£m)1 860 1% 854 1 Shown on a Reported basis and includes discontinued operations. The 2017 figure includes remuneration paid to Aberdeen employees from 14 August 2017 and adjusted profit includes Aberdeen from 14 August 2017.
5.4 Annual remuneration report – non-executive Directors Single total figure of remuneration – non-executive Directors (audited) The following table sets out the single total figure of remuneration for each of the non-executive Directors who served as a Director at any time during the financial year ending 31 December 2018. Non-executive Directors do not participate in bonus or long-term incentive plans and do not receive pension funding: Non–executive Directors Fees for year ended 31 December £000s
Sir Douglas Flint2 2018 14 – 14 2017 – – –
2 Appointed to the Board with effect from 1 November 2018. Appointed Chairman with effect from 1 January 2019. 3 Stepped down from the Board with effect from 29 May 2018. 4 Appointed to the Board with effect from 1 August 2018. 5 No fee is paid to a non-executive Director who represents a corporate shareholder.
The non-executive Directors, including the Chairman, have letters of appointment that set out their duties and responsibilities. The key terms are set out in the Remuneration Policy, which can be found in the Annual report and accounts 2017.
G o ver n an c e 97Standard Life Aberdeen 2018
Details of the date of appointment to the Board and date of election by shareholders are set out below: Chairman/Non executive Director Initial appointment to the Board1 Initial election by shareholders
Richard Mully 14 August 2017 AGM 2018 Martin Pike 27 September 2013 AGM 2014
With regards to the Chairman’s fee, as set out on page 59, Sir Douglas was appointed following an extensive international search led by the CoChairs of the Appointment Committee (Simon Troughton and Melanie Gee). Sir Douglas has joined the Company in a period of significant organisational change, following the merger of Standard Life and Aberdeen Asset Management and the sale of Standard Life Aberdeen’s UK and European Insurance business. In addition, the wider asset management sector is going through a period of consolidation and market conditions remain challenging as macroeconomic and political uncertainties continue to affect investor sentiment.
Given the calibre of the candidate and taking into account market data on Chairman fees for other large international financial services companies, the Remuneration Committee approved an all-inclusive fee of £475k per annum for Sir Douglas. Whilst the Remuneration Committee acknowledges the fee represents an increase on the base fee for the current incumbent, it was considered appropriate to ensure that the right candidate was appointed to lead the Company through a period of significant change.
3 The Committee has agreed to provide life insurance benefits to the Chairman with effect from April 2019 to reflect his personal circumstances and business travel requirements.
Total number of shares owned at or date of appointment if later
Akira Suzuki2 – – – 1 Appointed to the Board with effect from 1 November 2018. 2 Stepped down from the Board with effect from 29 May 2018. 3 Stepped down from the Board with effect from 31 December 2018. 4 Appointed to the Board with effect from 1 August 2018.
G o ver n an c e 99Standard Life Aberdeen 2018
The terms of reference are published within the Board Charter on our website at www.standardlifeaberdeen.com/annualreport
 Going forward, the Chair should continue to update the Board on the key matters debated during the Committee’s discussions
Fees paid to Deloitte LLP during 2018 for professional advice to the Committee were £181,550. Additional fees of £220,450 were paid to Deloitte LLP in respect of professional advice in relation to regulatory disclosures under relevant regulations, the administration of the Discretionary Share Plan and remuneration matters related to the sale of Standard Life Aberdeen’s UK and European insurance business to Phoenix.
Where appropriate, the Committee receives input from the Chairman, Co-Chief Executive Officers, Chief Financial Officer, Chief People Officer, Group Director of Reward, Group Chief Risk Officer, and the Head of Stewardship and ESG Investments. This input never relates to their own remuneration. The Committee also receives input from the Risk and Capital Committee and Audit Committee.
The Committee’s work in 2018 An indicative breakdown as to how the Committee spent its time is shown below:  2017 Directors’ Remuneration Report  2017 bonus payments and 2015 LTIP outcomes  Set 2018 EIP scorecard targets  Finalise Directors’ Remuneration Policy
 Material Risk Takers and related 2018 disclosures  Group Remuneration Policy review  Executive Committee remuneration  Harmonisation of Terms and Conditions across the Group  Impact of the sale of Standard Life Aberdeen’s UK and European insurance business on remuneration matters
Promoting all-employee share ownership The Group believes that share ownership by employees helps them to understand the interests of the Company’s shareholders. The Group promotes employee share ownership with a range of initiatives:  The Standard Life (Employee) Share Plan which allows eligible employees to buy Standard Life Aberdeen plc shares directly from their earnings. A similar tax-approved plan is used in Ireland. At 31 December 2018, 1,954 employees in the UK and Ireland were making a monthly average contribution of £65. On 31 December 2018, 2,555 of our employees were Standard Life Aberdeen plc shareholders through participation in the Standard Life (Employee) Share Plan.
 The Sharesave Plan, offered in 2018 to eligible employees in the UK. This plan allows UK tax resident employees to save towards the exercise of options over Standard Life Aberdeen plc shares with the option price set at the beginning of the savings period at a discount of up to 20% of the market price. At 31 December 2018, 2,534 employees in the UK were saving to buy Standard Life Aberdeen plc shares.
 The Sharesave Plan in Ireland launched in August 2012, with invitations made annually thereafter. As at 31 December 2018, 5 employees were saving towards one or more of the Sharesave Ireland offers.
2017 remuneration outcomes and 2018 remuneration planning Activities in relation to the 2018 General Meeting External regulation Finalising 2018 remuneration policy Other
G o ver n an c e 101Standard Life Aberdeen 2018
Share dilution limits All share plans operated by the Company which permit awards to be satisfied by issuing new shares contain dilution limits that comply with the guidelines produced by The Investment Association (IA). On 31 December 2018, therefore, the Company’s standing against these dilution limits was:  1.56% where the guideline is no more than 5% in any ten years under all discretionary share plans in which the executive Directors participate  1.97% where the guideline is no more than 10% in any ten years under all share plans
The Directors’ remuneration report was subject to a vote at the 2018 AGM on 29 May 2018 and the following table sets out the outcome.
Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and applicable law and have elected to prepare the parent company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors’ report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations.
We consider the Annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.
G o ver n an c e 103Standard Life Aberdeen 2018
The Group’s significant accounting policies are included at the beginning of the relevant notes to the Group financial statements with this background colour. Critical judgements in applying accounting policies are summarised in the Presentation of consolidated financial statements section which follows the primary financial statements. Accounting policies that are relevant to the financial statements as a whole are also set out in that section.
7. Independent auditors’ report 106 8. Group financial statements 117 9. Company financial statements 225 10. Supplementary information 237
In our opinion: • The financial statements give a true and fair view of the state of the
Group's and of the parent Company's affairs as at 31 December 2018 and of the Group's profit for the year then ended
Coverage 78% (2017:72%) of profits and losses that made up Group profit before tax
The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit
Refer to page 42 to 47 (principal risks), page 39 (viability statement) and page 63 Audit Committee Report),
Unprecedented level of uncertainty: All audits assess and challenge the reasonableness of estimates, in particular as described in the recoverability of group goodwill and the parent’s investment in subsidiaries, the valuation of the defined benefit pension scheme obligation and the carrying value of the investment in Phoenix below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the group’s future prospects and performance.
Sensitivity analysis – When addressing recoverability of group goodwill, the parent’s investment in subsidiaries and the valuation of the defined benefit pension scheme obligation and other areas that depend on forecasts, we compared the directors’ analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty.
(Group Goodwill: £2,532m; 2017: £3,427m; Goodwill impairment losses recognised: £891m (2017: £5m)
Subjective estimate: Goodwill in the group and the carrying amount of certain of the parent company’s investments in subsidiaries are significant and at risk of irrecoverability due to reductions in assets under management. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. In the current year, goodwill in the group was impaired by £891m and the parent company’s investments in subsidiaries was impaired by £589m.
The effect of these matters is that, as part of our risk assessment, we determined that the value in use of goodwill and the recoverable amount of certain investments in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole.
Our procedures included: Our valuation and sector expertise: We used our own valuation specialists to assist us in assessing the appropriateness the Group's valuation model. This included comparing the Group discount rate assumptions with our own estimate of a range of reasonable discount rates, based on comparable company information. We also used our sector experience to evaluate the appropriateness of assumptions applied in key inputs such as revenue from customers, operating costs and discount rates.
Refer to page 63 (Audit Committee Report), page 152 (accounting policy) and pages 130 and 153 (financial disclosures).
As SLA's investment in Phoenix is 19.98%, there is judgement as to whether Phoenix should be accounted for as an associate given significant influence is only presumed to exist per IAS 28 when 20% of equity is held. The risk is that the investment in Phoenix has been inappropriately accounted for as an associate, rather than as an equity investment.
The effect of these matters is that, as part of our risk assessment, we determined that the accounting for the investment in Phoenix has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (Note 16) disclose the key judgements estimated by the Group.
Control design and operation: We tested the design of key controls including over management’s process for modelling insurance contract liabilities, for setting and updating actuarial assumptions and in respect of the valuation of complex and illiquid financial investments.
The risk Our response Accounting for the obligations arising out of the disposal of SLAL and investment in Phoenix (continued)
Refer to page 63 (Audit Committee Report), page 126 (accounting policy) and page 138 (financial disclosures).
A number of indemnities were included in the SPA with Phoenix. The fair value of these have been estimated by management and recognised as contingent consideration. A number of these involved significant judgement as they relate to uncertain future events. The most significant of which relates to a potential future outflow relating to any loss suffered by SLAL above that already provided for in respect of the ongoing review of nonadvised annuity sales. This is an area that involves significant judgement over the redress payable to customers.
Our actuarial and tax experience: We used our own actuarial and tax specialists to review and challenge the approach taken to estimate certain indemnities.
Assessing transparency: We considered whether the Group’s disclosures in relation to the assumptions used in the calculation of the contingent consideration appropriately represent the sensitivity of the provision to the use of alternative assumptions.
Our Results We found the carrying amount of the contingent consideration for indemnities to be acceptable.
Test of details: We sampled costs included in the Separation Plan and obtained evidence and explanations to validate whether they were appropriately provided for.
Our Results We found the estimate of the separation cost provision to be acceptable.
Refer to page 63 (Audit Committee Report), page 152 (accounting policy) and page 153 (financial disclosures).
At 31 December 2018, the market value of the investment in Phoenix was significantly below the carrying value. We consider this to be objective evidence of impairment per IAS 28. An impairment review was performed by management using a value in use approach. The key judgement was in selecting the appropriate approach for estimating the recoverable amount of the investment in Phoenix. After consideration of alternatives, management determined that the market value of Phoenix represented the best estimate of future dividends and therefore was used to calculate the value in use. An impairment charge of £228m was recognised.
Our procedures included: Assessing principles: We critically assessed management’s approach to estimating the recoverable amount against other estimation methods permitted by IAS 28 and 36.
Comparing valuations: We assessed reasons for the differences in value under use under the different methods.
Our Results We found the valuation of the investment in Phoenix to be acceptable.
Refer to page 63 (Audit Committee Report), page 146 (accounting policy) and page 147 (financial disclosures).
The Group’s intangible assets include customer relationships and investment management contracts. There is a risk of impairment to the carrying value of these intangible assets.
Customer relationship and investment management contracts acquired through business combinations comprise £633 million of the intangible asset balance.
Our procedures included: Our valuation expertise: We evaluated whether there are indicators of impairment that would trigger an impairment review. This included a critical assessment of the business performance, such as outflows of assets under management relating to each intangible asset.
Where indicators were identified, we used our own valuation specialists to assist us in assessing the appropriateness the Group's valuation model. This included comparing the Group discount rate assumptions with our own estimate of a range of reasonable discount rates, based on comparable company information.
Sensitivity analysis: Where there is an indicator of impairment, we performed our own sensitivity analysis which included assessing the effect of reasonably possible reductions in growth rates and forecast cash flows to evaluate the impact on current headroom.
Our results We found the valuation of intangible assets to be acceptable (2017: acceptable).
Refer to page 63 (Audit Committee Report), page 178 (accounting policy) and page 180 (financial disclosures).
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the pension scheme obligation has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (Note 35) disclose the range estimated by the Group.
Assessing transparency: We considered whether the Group’s disclosures in relation to the assumptions used in the calculation of present value of the funded obligation appropriately represent the sensitivities of the obligation to the use of alternative assumptions.
In respect of level 3 financial instruments we note that the disposal of the group’s UK and Europe insurance business has led to a significant reduction of £1.1bn in the Group’s investment portfolio. The risk of material misstatement within the financial statements in respect of valuation of the remaining assets (£62m) is reduced. £311m of the internally generated software assets were within SLAL and following the disposal, the remaining assets balance is not considered to create the same risk of material misstatement.
7. Independent auditors’ report to the members of Standard Life Aberdeen plc continued 3. Our application of materiality and an overview of the scope of our audit Materiality for the group financial statements as a whole was set at £32m (2017: £38m), determined with reference to a benchmark of group profit before tax normalised to exclude impairment, to exclude restructuring costs, to exclude the profit on disposal of associates and the profit on disposal of the UK and Europe insurance business as disclosed in Note 14, Note 8, Note 16, and Note 10 respectively. Materiality represents 4.8% of normalised profit before tax.
Materiality for the parent company financial statements as a whole was set at £19m (2017:£17m), determined with reference to a benchmark of normalised profit before tax, of which it represents 3.6% (2017:4.9%).
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £2.0m to £20.8m, having regard to the mix of size and risk profile of the Group across the components.
Total profits and losses that made up group profit before tax
Based on this work, we are required to report to you if: • We have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least 12 months from the date of approval of the financial statements
• The related statement under the Listing Rules set out on page 49 is materially inconsistent with our audit knowledge
Based solely on that work we have not identified material misstatements in the other information.
• We have not identified material misstatements in the strategic report and the directors’ report
• In our opinion the information given in those reports for the financial year is consistent with the financial statements
• The Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated
• The directors’ explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions
• The section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee
• The parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns
• Certain disclosures of directors' remuneration specified by law are not made
• We have not received all the information and explanations we require for our audit
7. Respective responsibilities Directors' responsibilities As explained more fully in their statement set out on page 103, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
A fuller description of our responsibilities is provided on the FRC's website at: www.frc.org.uk/auditorsresponsibilities
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further rem oved noncompliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Restructuring and corporate transaction expenses 8 231 162 Impairment of goodwill – Aberdeen Standard Investments 14 880 – Other administrative expenses 5 1,746 1,295
Total administrative expenses 2,857 1,457 Change in liability for third party interest in consolidated funds (5) 6 Finance costs 45 34 Total expenses from continuing operations 2,820 1,772
Share of profit from associates and joint ventures 16 130 45 Loss on impairment of interest in associates 16 (228) –
Equity holders of Standard Life Aberdeen plc 830 699 Non-controlling interests
Profit for the year 868 732 Less: profit from discontinued operations (1,698) (322) (Loss)/profit from continuing operations (830) 410 Items that will not be reclassified subsequently to profit or loss: Remeasurement losses on defined benefit pension plans 35 (29) (18) Share of other comprehensive income of associates and joint ventures 28 (15) – Equity holder tax effect of items that will not be reclassified subsequently to profit or loss 9 – (10) Total items that will not be reclassified subsequently to profit or loss (44) (28)
Items that may be reclassified subsequently to profit or loss: Fair value gains/(losses) on cash flow hedges 29 54 (33) Fair value losses on available-for-sale financial assets 29 (9) – Exchange differences on translating foreign operations 29 14 (31) Share of other comprehensive income of associates and joint ventures 28 – 4 Items transferred to the consolidated income statement
Fair value (gains)/losses on cash flow hedges 21 (41) 13 Realised foreign exchange gains 1 (2) (2)
Equity holder tax effect of items that may be reclassified subsequently to profit or loss 9 (1) 3 Total items that may be reclassified subsequently to profit or loss 15 (46) Other comprehensive income for the year from continuing operations (29) (74) Total comprehensive income for the year from continuing operations (859) 336
1 Comparatives for 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer Note 1.
Restructuring and corporate transaction expenses 8 (239) (264) (503) (162) (11) (173) Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts 2 (1,155) – (1,155) (138) – (138) Provision for annuity sales practices 38 – – – – (100) (100) Profit on disposal of subsidiaries 1 – 1,780 1,780 – – – Profit on disposal of interests in associates 1 185 – 185 319 – 319 Impairment of associates 16 (228) – (228) – – – Investment return variances and economic assumption changes 12 54 (41) 13 – 67 67
(Loss)/profit for the year (830) 1,698 868 410 322 732 1 Comparatives for 2017 have been restated to reflect changes in the reportable segments. Refer Note 2. 2 The Other adjusting item in 2018 relating to discontinued operations is a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of £44m. Following the classification of the UK and European insurance business as held for sale, no amortisation or depreciation was recognised in accordance with applicable financial reporting standards.
Assets held for sale 24 762 1,038 Cash and cash equivalents 19 1,140 10,226 Total assets 12,517 198,111 Equity Share capital 26 353 364 Shares held by trusts 27 (115) (61) Share premium reserve 26 640 639
Preference shares and perpetual debt instruments Total equity 2018 Notes £m £m £m £m £m £m £m £m £m
Other movements in non-controlling interests in the year – – – – – – (292) – (292) Reserves credit for employee share-
Transfer to retained earnings for vested employee share-based payments 28, 29 – – – 68 (68) – – – – Transfer between reserves on disposal of subsidiaries 1 – – – 99 (99) – – – – Transfer between reserves on impairment of subsidiaries – – – 570 (570) – – – – Shares acquired by employee trusts – (100) – – – (100) – – (100) Shares distributed by employee and other trusts and related dividend equivalents 28 – 29 – (33) – (4) – – (4) Aggregate tax effect of items recognised directly in equity 9 – – – – – – – 6 6
Total equity 2017 Notes £m £m £m £m £m £m £m £m £m
Dividends paid on ordinary shares 13 – – – (469) – (469) – – (469) Coupons paid on perpetual notes – – – – – – – (13) (13) Non-controlling interests acquired through business combinations – – – – – – – 501 501 Reclassification of perpetual notes to liability 30 – – – 19 – 19 – (399) (380) Other movements in non-controlling interests in the year – – – – – – (33) – (33) Reserves credit for employee share-
Transfer to retained earnings for vested employee share-based payments 28, 29 – – – 86 (54) 32 – – 32 Shares acquired by employee trusts – (61) – – – (61) – – (61) Shares distributed by employee and other trusts and related dividend equivalents 28 – 5 – (8) – (3) – – (3) Sale of shares held by trusts – – – 4 – 4 – – 4 Aggregate tax effect of items recognised directly in equity 9 – – – – 1 1 – 2 3
Cash flows from operating activities (Loss)/profit before tax from continuing operations (787) 438 Profit before tax from discontinued operations 10 1,780 526
Cash flows from investing activities Purchase of property, plant and equipment 18 (28) (37) Proceeds from sale of property, plant and equipment 1 – (Acquisition)/ disposal of seeding investments (4) 19 Acquisition of subsidiaries and unincorporated businesses net of cash acquired (33) 495 Disposal of subsidiaries net of cash disposed of 42 (5,501) – Acquisition of investments in associates and joint ventures 16 (72) – Disposal of investments in associates and joint ventures 1 180 359 Purchase of intangible assets (128) (69) Net cash flows from investing activities (5,585) 767 Cash flows from financing activities Repayment of other borrowings (2) (1) Proceeds from issue of subordinated liabilities – 565 Repayment of subordinated liabilities and perpetual notes (1,377) – Capital flows to third party interest in consolidated funds and non-controlling interests – ordinary shares (507) (1,011) Distributions paid to third party interest in consolidated funds and non-controlling interests – ordinary shares (69) (109) Shares acquired by trusts (100) (61) Sale of shares held by trusts – 4 Proceeds from issue of shares 26 1 5 Interest paid (117) (97) Return of cash to shareholders under B share scheme 26 (983) – Shares bought back on-market and cancelled 26 (238) – Preference dividends paid (5) – Ordinary dividends paid 13 (634) (469) Net cash flows from financing activities (4,031) (1,174) Net (decrease)/increase in cash and cash equivalents (8,790) 1,787 Cash and cash equivalents at the beginning of the year 9,715 7,900 Effects of exchange rate changes on cash and cash equivalents 32 28 Cash and cash equivalents at the end of the year 25 957 9,715 Supplemental disclosures on cash flows from operating activities Interest paid 6 4 Interest received 1,118 1,710 Dividends received 1,545 2,086 Rental income received on investment property 329 503
(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 2018: IFRS 15 Revenue from Contracts with Customers IFRS 15 replaces IAS 18 Revenue and provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. The Group’s revenue generated from the following contracts is exempt from this standard:  Lease contracts within the scope of IAS 17 Leases  Insurance contracts within the scope of IFRS 4 Insurance Contracts  Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments The adoption of this standard has had no significant impact on the timing of revenue recognition of the Group and therefore no restatement of prior periods was required. The Group did not use any of the practical expedients permitted under IFRS 15.
Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
Therefore the Group was eligible to defer the implementation of IFRS 9. Following the merger with Aberdeen Asset Management PLC, the predominance of insurances activities was reassessed as at 31 December 2017. The Group remained eligible to defer and has opted to defer implementation of IFRS 9 in these consolidated financial statements. Further disclosures required as a result of this deferral are set out in Note 16 and Note 19.
As a result of IFRS 16, assets leased by the Group will be brought onto the statement of financial position at inception of a lease. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability recognised in the income statement. The present value of the lease liability takes into account prepayments and incentives and will be measured using the incremental borrowing rate.
The main impact on the Group of the standard will be for property that the Group leases for use as office space which is currently classified as operating leases. The Group estimates that for this property portfolio it will recognise additional right of use assets of approximately £194m and additional lease liabilities of approximately £223m as at 1 January 2019. The cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. No significant profit impact is expected.
Additionally IFRS 9 amends the current requirements for assessing hedge effectiveness in IAS 39 and also amends what qualifies as a hedged item and some of the restrictions on what qualifies as a hedging instrument. The accounting and presentation requirements for designated hedging relationships remain largely unchanged. IFRS 9 contains an election to continue to apply the hedge accounting requirements of IAS 39.
At 31 December 2018, the Group has available-for-sale debt securities with a fair value of £862m with a corresponding available-for-sale financial assets reserve balance of £7m and deferred tax liability of £1m. On adoption of IFRS 9, these debt securities will be recognised at 1 January 2019 at their amortised cost (less expected credit losses) of £854m. The available-for-sale financial assets reserve balance and the related deferred tax liability will no longer be recognised. The expected credit losses at 1 January 2019 are less than £1m.