The key judgement for derivative valuations is whether there are any changes required to the methodology of these models as a result of market practice, accounting or regulatory updates.
Commercial mortgage valuations require the use of judgement over the discount rates applied to the future contractual cash flows, particularly in respect of the credit risk of the borrowers.
Investment property valuations are complex as they require the selection of assumptions, such as future rental income to determine expected yields. Management engage independent property experts to assist in selecting these assumptions.
Refer to page 69 (Audit Committee report), page 122 (Critical accounting estimates and judgements), pages 148, 150 to 153 (Accounting policies and notes)
Our audit work in respect of the valuation of derivative assets and liabilities included:  Evaluating the design and testing the operational effectiveness of key controls over derivative valuations, such as controls to reperform valuations calculated by outsourced operations using independent source data
Our audit work in respect of the valuation of commercial mortgages included:  Evaluating the assumptions over the credit risk of the borrowers used in formulating the discount rate for the future cash flows against our own expectations for similar borrowers
Our audit work in respect of the valuation of investment property included:  Evaluating the assumptions used in a sample of investment property valuations by comparing a sample of the property yields used by management’s property experts against published market benchmarks in order to identify any assumptions or valuations which fell outside our expected range
 Meeting with management’s property experts to establish whether the valuation approach was in accordance with our expectations based on our own experience of the investment property industry
Valuation of identifiable intangible assets arising from the acquisition of Ignis The Directors’ valuation of intangible assets arising from business combinations involves complex judgements about forecast fund flows, discount rates and operating margins, changes to which can have a material impact on the valuations adopted in the financial statements.
The Directors’ also apply judgement when assessing whether there are any indicators of impairment to the remaining institutional, life and retail intangibles.
Refer to page 69 (Audit Committee report), page 122 (Critical accounting estimates and judgements), pages 143 to 144 (Accounting policies and notes)
 Evaluating the forecast operating margins used against those experienced in the cash generating unit and comparing to our own expectation of the range of experience in the industry
 Performing stress testing and reverse stress testing on key assumptions in the valuation model to challenge the appropriateness of management’s assumptions
Our audit work in respect of the measurement of the provision for annuity sales practices included:  Evaluating the regulatory communications, legal support and the Directors' intention to put things right for any disadvantaged customers to establish whether there is sufficient evidence to recognise a provision.
 Understanding and assessing the model and methodology used to value and calculate the provision against the scope of the review required by the FCA in their Thematic Review of Annuity Sales Practices report dated October 2016
We are satisfied that there is sufficient evidence to recognise a provision in respect of annuity sales practices in the period since July 2008 as at 31 December 2016. We are satisfied that the model and assumptions used are appropriate for a best-estimate provision for year-end reporting within a reasonable range, given current evidence available to Standard Life at this time.
We are satisfied that Standard Life has not yet obtained sufficient evidence to be virtually certain that the asset will be received and accordingly that there should not be recognition of an asset as at 31 December 2016.
The Group consists of four segments: Standard Life Investments, Pensions and Savings, India and China, and Other. These segments are disaggregated into reporting units. The financial statements are a consolidation of these reporting units.
In addition, specific audit procedures on certain account balances and transactions were performed at a further 15 reporting units within the Group across all segments (‘limited scope’ reporting units).
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work performed at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the financial statements. As a result, the Group engagement team attended management’s oversight and governance meetings within Standard Life Investments as the largest of the Group’s components, and visited operations in Hong Kong which is the wholly owned business within the India and China segment.
Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality
How we determined it Represents approximately 5% of operating profit before tax.
In determining our materiality, we have considered financial metrics which we believe to be relevant and concluded that operating profit before tax was a relevant benchmark as it is the key performance measure reported by management and used by other stakeholders to help give a fuller understanding of the performance of the business in both its internal and external reporting to stakeholders, including shareholders and analysts. We have also referenced IFRS profit before tax.
For each component in our audit scope, we allocated a materiality that is less than our overall Group materiality. To allocate materiality to full scope reporting units, we considered the specific risks and balances within the reporting units, as well as considering the level of materiality that would impact the individual entity’s statutory financial statements as this is a focus for management when preparing their financial information. This resulted in materiality being allocated between £9m and £28m to each of the full scope reporting units. Having considered the coverage from the full scope reporting units, we assessed the risk of material misstatement within the limited scope reporting units and allocated materiality across in scope account balances and transactions. This resulted in allocation of materiality in a similar range. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2.0m (2015: £2.0m) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern Under the Listing Rules we are required to review the Statement of Directors’ responsibilities, set out on page 103, in relation to going concern. We have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.
As noted in the Basis of preparation, set out on page 47, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
Companies Act 2006 reporting In our opinion, based on the work undertaken in the course of the audit:  The information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements
In addition, in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic report and the Directors’ report. We have nothing to report in this respect.
ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:  Information in the Annual Report is: – Materially inconsistent with the information in the audited financial statements – Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit – Otherwise misleading
 The statement given by the Directors on page 47, in accordance with provision C.1.1 of the UK Corporate Governance Code (the ‘Code’), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:  The Directors’ confirmation on page 36 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity
 The Directors’ explanation on pages 36 and 37 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions
Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to 10 further provisions of the Code. We have nothing to report having performed our review.
What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:  Whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed  The reasonableness of significant accounting estimates made by the Directors  The overall presentation of the financial statements
8. Group financial statements Consolidated income statement For the year ended 31 December 2016
Revenue Gross earned premium 2,139 2,276 Premium ceded to reinsurers (47) (48) Net earned premium 2,092 2,228
Restructuring and corporate transaction expenses 10 62 88 Other administrative expenses 7 1,494 1,540
Profit before tax expense attributable to equity holders’ profits 487 415
Total tax expense 11 370 211 Less: Tax attributable to policyholders’ returns (302) (134) Tax expense attributable to equity holders’ profits 11 68 77 Profit for the year from continuing operations 419 338 Profit for the year from discontinued operations 12 - 1,147 Profit for the year 419 1,485
Equity holders of Standard Life plc 368 1,423 Non-controlling interests 32 51 62
Earnings per share from continuing operations Basic (pence per share) 13 18.7 13.5 Diluted (pence per share) 13 18.6 13.4
Profit for the year 419 1,485 Less: Profit for the year from discontinued operations 12 - (1,147) Profit for the year from continuing operations 419 338 Items that will not be reclassified subsequently to profit or loss: Remeasurement gains on defined benefit pension plans 37 162 167 Revaluation of owner occupied property 20 5 4 Equity movements transferred to unallocated divisible surplus 31 (5) (4) Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 11 2 Total items that will not be reclassified subsequently to profit or loss 164 167
The Notes on pages 120 to 219 are an integral part of these consolidated financial statements.
Assets Intangible assets 16 572 566 Deferred acquisition costs 17 651 646 Investments in associates and joint ventures 18 7,948 5,719
Property, plant and equipment 20 89 91 Pension and other post-retirement benefit assets 37 1,093 897 Deferred tax assets 11 42 35
Other comprehensive income for the year - - - 154 125 279 - 279 Total comprehensive income for the year 30, 31 - - - 522 125 647 51 698 Dividends paid on ordinary shares 15 - - - (370) - (370) - (370)
Reserves credit for employee share-based payment schemes 31 - - - - 30 30 - 30 Transfer to retained earnings for vested employee share-based payment schemes 30, 31 - - - 23 (23) - - Shares acquired by employee trusts - (3) - - - (3) - (3) Shares distributed by employee and other trusts 30 - 7 - (7) - - - Expiry of unclaimed asset trust claim period 30 - - - 41 - 41 - 41 Cancellation of capital redemption reserve 28 - - - 488 (488) - - Other movements in non-controlling interests in the period - - - - - - (101) (101) Aggregate tax effect of items recognised directly in equity 11 - - - (4) (3) (7) - (7)
interests Total equity 2015 Notes £m £m £m £m £m £m £m £m
Dividends due on unclaimed shares not held in the Unclaimed Asset Trust - - - (2) - (2) - (2) Reserves credit for employee share-based payment schemes 31 - - - - 34 34 - 34 Transfer to retained earnings for vested employee share-based payment schemes 30, 31 - - - 32 (32) - - Transfer between reserves on disposal of subsidiaries - - - 827 (827) - - Shares acquired by employee trusts - (9) - - - (9) - (9) Shares distributed or sold by employee and other trusts 30 - 2 - (2) - - - Other movements in non-controlling interests in the year - - - - - - 7 7 Aggregate tax effect of items recognised directly in equity 11 - - - 5 (1) 4 - 4
Change in operating assets 44 (12,995) (6,607) Change in operating liabilities 44 12,926 4,042 Adjustment for non-cash movements in investment income 174 (20) Change in unallocated divisible surplus 33 53 (117) Other non-cash and non-operating items 44 122 (1,017) Taxation paid (333) (261) Net cash flows from operating activities 736 (2,264)
Cash flows from investing activities Purchase of property, plant and equipment (10) (8) Proceeds from sale of property, plant and equipment 22 98 Acquisition of subsidiaries and unincorporated businesses net of cash acquired (5) (6) Disposal of subsidiaries net of cash disposed of 44 - 1,600 Proceeds from settlement of hedging derivatives contracts - 100 Acquisition of investments in associates and joint ventures 1 (179) (9) Purchase of intangible assets not acquired through business combinations (61) (61) Net cash flows from investing activities (233) 1,714 Cash flows from financing activities Repayment of other borrowings (2) (3) Repayment of subordinated liabilities - (282) Capital flows (to)/from third party interest in consolidated funds and non-controlling interests (1,845) 1,575 Distributions paid to third party interest in consolidated funds and non-controlling interests (109) (110) Shares acquired by trusts (3) (9) Proceeds from issue of shares 6 Interest paid (83) (89) Return of cash to shareholders under ‘B/C’ share scheme 15 - (1,749) Ordinary dividends paid 15 (370) (343) Net cash flows from financing activities (2,406) (1,010) Net decrease in cash and cash equivalents (1,903) (1,560) Cash and cash equivalents at the beginning of the year 9,591 11,243 Effects of exchange rate changes on cash and cash equivalents 212 (92) Cash and cash equivalents at the end of the year 27 7,900 9,591 Supplemental disclosures on cash flows from operating activities Interest paid 3 7 Interest received 1,929 1,979 Dividends received 2,023 1,923 Rental income received on investment property 564 490
Presentation of consolidated financial statements The Group’s significant accounting policies are included at the beginning of the relevant notes to the consolidated financial statements. This section sets out the basis of preparation, a summary of the Group’s critical accounting estimates and judgements in applying accounting policies, and other significant accounting policies which have been applied to the financial statements as a whole.
Amendments to IAS 1 Presentation of Financial Statements: Disclosure Initiative 1 January 2016 These amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies.
Annual improvements 2012 – 2014 cycle 1 January 2016 This annual improvements cycle makes five minor amendments to existing standards.
The Group’s revenue generated from the following contracts is exempt from this standard:  Lease contracts within the scope of IAS 17 Leases  Insurance contracts within scope of IFRS 4 Insurance Contracts  Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments, IFRS 10
Consolidated Financial Statements and IFRS 11 Joint Arrangements  Investments in associates and joint ventures within scope of IAS 28 Investments in Associates and Joint Ventures
instrument is designated as a hedging instrument in a cash flow hedge. IFRS 9 also introduces a new impairment model, an expected credit loss model which will replace the current incurred loss model in IAS 39. An impairment loss may now be recognised prior to a loss event occurring. Accounting for financial liabilities remains the same as under IAS 39 except that for financial liabilities designated as at FVTPL, changes in the fair value due to changes in the liability’s credit risk are recognised in OCI.
The Group leases property for use as office space which is currently classified as operating leases. As a result of the new standard the property leased by the Group will be brought onto the statement of financial position. The right of use asset will be measured at the amount of the lease liability, adjusted for items such as lease prepayments and lease incentives received. The lease liability will be measured using the interest rate implicit in the lease. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability will be recognised separately. The standard has not yet been endorsed by the EU. The Group will commence its full impact assessment of the standard during 2017.
(a)(iii) Critical accounting estimates and judgements in applying accounting policies The preparation of financial statements requires management to exercise judgements in applying the accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses arising during the year. Judgements and sources of estimation uncertainty are continually evaluated and based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. The areas where judgements, estimates and assumptions have the most significant effect on the amounts recognised in the consolidated financial statements are as follows: Financial statement area Critical judgements in applying accounting policies Related note
Determination of the valuation interest rates Determination of longevity and mortality assumptions Determination of expense assumptions
Defined benefit pension plans Determination of UK pension plan assumptions for mortality, discount rate and inflation
Intangible assets Identification and valuation of intangible assets arising from business combinations Determination of useful lives Determination of amounts to be recognised as internally developed software Determination of the recoverable amount in relation to impairment assessments
The income statements and cash flows, and statements of financial position of Group entities that have a different functional currency from the Group’s presentation currency have been translated using the following principal exchange rates: Income statement and cash flows (average rate) Statement of financial position (closing rate)
Where the Group is considered to control an investment vehicle, such as an open-ended investment company, a unit trust or a limited partnership, and it is therefore consolidated, the interests of parties other than the Group are assessed to determine whether they should be classified as liabilities or as non-controlling interests. The liabilities are recognised in the third party interest in consolidated funds line in the consolidated statement of financial position and any movements are recognised in the consolidated income statement. The financial liability is designated at fair value through profit or loss (FVTPL) as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets. The interests of parties other than the Group in all other types of entities are recorded as noncontrolling interests.
Additionally during the year, the Group’s UK-wide financial advice business, 1825, entered into sale and purchase agreements to purchase the entire share capital of The Munro Partnership Ltd. (Munro), Baigrie Davies Holdings Limited (Baigrie Davies) and Jones Sheridan Holdings Limited (Jones Sheridan) with combined assets under advice of £1.5bn. The acquisitions of Munro, Baigrie Davies and Jones Sheridan completed on 1 July 2016, 1 August 2016, and 1 November 2016 respectively and are not material to the Group individually or in aggregate.
At the acquisition date the consideration, net assets acquired and resulting bargain purchase gain from the Elevate acquisition was as follows: Purchase consideration (all cash) 31 Fair value of net assets acquired: Customer-related intangible assets 6 Cash and cash equivalents 33 Other assets 6 Deferred tax liability (1) Other liabilities (8) Bargain purchase gain 5
The bargain purchase gain recognised as a result of the Elevate acquisition has arisen primarily due to the requirement to fund near-term losses in the acquired business. The gain is included in other income in the consolidated income statement.
(b)(ii) Associates In August 2015, the Group entered into a sale and purchase agreement to purchase an additional 9% of the issued share capital of HDFC Standard Life Insurance Company Limited, an associate of the Group. The transaction completed in April 2016, after satisfactory regulatory approvals were obtained, for a consideration of Rs 1,706 crore (£179m), increasing the Group’s interest to 35%.
India and China The businesses included in India and China offer a range of insurance and savings products and comprise our life insurance associate in India, our life insurance joint venture in China, and wholly owned operations in Hong Kong.
Singapore The business in Singapore provided a range of savings and insurance products. The closure of this business was announced in June 2015. This business was previously included in the Asia and Emerging Markets segment (now renamed India and China). The results of this business were included as discontinued operations for segmental reporting purposes as this was reflective of the presentation of information provided to the Chief Operating Decision Maker. Under IFRS 5, Singapore did not constitute a discontinued operation and was included under continuing operations in the consolidated income statement. Therefore the segmental analysis disclosures for the year ended 31 December 2015 include the reclassification of Singapore results between discontinued and continuing operations.
India and China Other Eliminations Total 31 December 2016 Notes £m £m £m £m £m £m
Provision for annuity sales practices 40 - (175) - - - (175)
Each operating segment reports total operating income as its measure of revenue in its analysis of operating profit. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes.
Short-term fluctuations in investment return and economic assumption changes 14 - (54) - (9) - (63) 63 Restructuring and corporate transaction expenses 10 (23) (75) - (17) - (115) (10) (125)
Gain on sale of Canadian business - - - - - - 1,102 1,102
Tax on non-operating items 11 16 5 5 - 37 (20) 17 Singapore included in discontinued operations segment1 - - (42) - - (42) 42 Profit /(loss) for the year attributable to equity holders of Standard Life plc 225 188 (59) (78) - 276 1,147 1,423 Profit attributable to non-controlling interests 62 - 62 Profit for the year 338 1,147 1,485 1 Under IFRS 5, Singapore did not constitute a discontinued operation and was included under continuing operations in the consolidated income statement. Therefore the analysis of Group operating profit by segment above includes the reclassification of Singapore results between discontinued and continuing operations. 2 Share of associates’ and joint ventures’ profit before tax comprises the Group’s share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company
Total operating income or operating expenses from continuing operations as presented in the analysis of Group operating profit by segment 1,785 (1,159) 1,724 (1,124) Net insurance benefits and claims 4,309 (4,309) 4,029 (4,029) Change in reinsurance assets and liabilities 140 (140) 520 (520) Change in insurance and participating contract liabilities 2,115 (2,115) (1,693) 1,693 Change in unallocated divisible surplus 53 (53) (117) 117 Change in non-participating investment contract liabilities 8,768 (8,768) 3,363 (3,363) Expenses under arrangements with reinsurers 509 (509) 42 (42) Change in liability for third party interest in consolidated funds 296 (296) 531 (531)
3. Business written in the Group’s insurance entities (a) How the business is held in the Group’s insurance entities
(a)(i) Pensions and Savings Standard Life Assurance Limited The main entity in the Pensions and Savings reportable segment that issues insurance and investment contracts is Standard Life Assurance Limited (SLAL). SLAL operates a fund structure which was established on the demutualisation of The Standard Life Assurance Company on 10 July 2006, under which its recognised assets and liabilities are allocated to one of the following funds:  Shareholder Fund (SHF)  Proprietary Business Fund (PBF) – includes UK, Germany and Ireland branches  Heritage With Profits Fund (HWPF) – includes UK, Germany and Ireland branches  German With Profits Fund (GWPF)  German Smoothed Managed With Profits Fund (GSMWPF)  UK Smoothed Managed With Profits Fund (UKSMWPF)
SLAL – Insurance and investment contracts issued since demutualisation The liabilities and associated supporting assets for contracts issued since demutualisation are held in the PBF except for the element of any contract where the customer has chosen to invest in a with profits (i.e. participating) fund. The assets and associated liabilities, including liabilities for financial guarantees, for such with profits investment elements are held in the GWPF, GSMWPF or UKSMWPF. The PBF is sub-divided into internal linked funds (unit linked funds) and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and corresponding liabilities for such unit linked investment elements are held in the unit linked funds. Asset management charges are transferred from the unit linked funds to the non-unit linked sub-fund of the PBF as they arise. Any liabilities for insurance features or financial guarantees contained within a contract that has a unit linked investment element are held in the non-unit linked sub-fund of the PBF. Any liabilities for insurance features contained within a contract that has a with profits element are held in the non-unit linked sub-fund of the PBF. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element or a with profits investment element are held in the non-unit linked sub-fund of the PBF.
For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2016 is £432m (2015: £348m) and this represents approximately 10% (2015: 9%) of the total liability for UK annuity in payment contracts held in the PBF. If the market moves in line with the adverse market conditions as shown in the market risk sensitivity analysis, the impact on shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.
UK and Ireland unit linked pension contracts (fee business) This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts.
UK unit linked investment bonds (fee business) Unit linked investment bonds issued by SLAL (e.g. Capital Investment Bond) are single premium whole of life contracts under which a percentage of the premium is used to allocate units in one or more unit linked funds. These contracts do not provide significant death benefits in excess of the accumulated value of investment fund. They are classified as non-participating investment contracts. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.
Germany unitised with profits deferred annuity contracts (fee business) Germany unitised with profits deferred annuity contracts were written in the PBF with the participating investment elements being transferred to the GWPF and, to a significantly lesser extent, to the GSMWPF. These contracts were closed to new business in 2015. The death benefit under all of the deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the nominal fund, and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.
The maturity value of contracts invested in the GWPF is subject to guaranteed minimum amounts. In addition, certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors and certain unit prices in the GWPF are guaranteed not to decrease.
exposed to the full cost if the assets of the HWPF are insufficient to meet policyholder obligations, the assumption changes given are not severe enough for such an event to occur.
When calculating asset shares, the Group may, at its discretion, make fair deductions to reflect its assessment of the cost of guarantees. The Group takes an allowance for the assessed costs of guarantees when determining final bonuses payable on claims, calculating policy switch values and calculating surrender and transfer values. These allowances vary between types of policies, reflecting the nature of the guarantees provided. These allowances are kept under review. A deduction is also taken from participating asset shares determined on an expense basis of 0.5% pa as a contribution to the capital of the HWPF.
 Certain Trustee Investment Plan contracts where, subject to specified conditions and limits, it is guaranteed that there will be no unit price adjustment (UPA) when units are encashed
The significant options and guarantees under these contracts are the following:  Contracts where, subject to specified conditions, it is guaranteed on death and maturity either that the unit price will rise at an annual rate of at least 3% a year or that the unit price will not fall, and, that there will be no UPA at maturity
 For bonds it is guaranteed that no UPA will apply on regular withdrawals up to certain specified limits
 Term extension option on then current premium rates under which the term of the contract may be extended by a whole number of years if the lender agrees to extend the term of the loan
Germany unitised with profits contracts (fee business via German additional expenses basis) Unitised with profits Germany contracts held in the HWPF mainly consist of endowment assurances and deferred annuities, under which a percentage of each premium is applied to purchase units on a participating basis. The death benefit under endowment assurances is the greater of the sum assured on death or 105% of the current surrender value. The death benefit under deferred annuities is the greater of the sum assured on death, 100% of the current surrender value, the nominal fund and, for regular premium paying contracts and certain single premium contracts, a refund of premiums. These contracts are classified as participating insurance contracts.
UK and Ireland unit linked pension contracts (fee business via RCF) This class of business comprises single or regular premium contracts under which a percentage of the premium is used to allocate units in one or more unit linked funds held in the PBF. Such contracts include hybrid contracts (see Note 33) resulting in the unit linked investment elements being classified as non-participating investment contracts. The major unit linked pension contracts include Individual Personal Pension Plans, Group Personal Pension Plans, Executive Pensions, Stakeholder and Trustee Investment Plans.
UK and Ireland unit linked life contracts (fee business via RCF) This class of business comprises principally unit linked investment bonds (e.g. Capital Investment Bonds), classified as non-participating investment contracts and the unit linked investment element of Homeplan contracts, classified as non-participating insurance contracts. No significant guarantees, other than the guaranteed death benefit on Homeplan contracts, are provided under these contracts.
SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF. In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 41(c) on credit exposure and Note 6 for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer. The reinsurance asset recognised in relation to this arrangement is £5,190m (2015: £5,258m).
For those annuities in payment which increase at a predefined rate the total liability at 31 December 2016 is £2,951m (2015: £2,869m) and this represents approximately 32% (2015: 33%) of the total liability for UK annuity in payments contracts held within the HWPF.
Dividend income 1,999 1,902 Gains/(losses) on financial instruments at fair value through profit or loss
Associates (other than dividend income) 19 204 Equity securities (other than dividend income) 9,769 1,131 Debt securities 7,169 (27) Derivative financial instruments (3,857) 1,179
Foreign exchange (losses)/gains on instruments other than those at fair value through profit or loss (80) 19 Income from investment property
Fee income from investment contracts and fund platforms 649 622 Fee income from third party funds under management 466 438 Fee income deferred during the year 38 (15) (25) Amortisation of deferred income 38 61 63 Other fee income 25 22 Total fee income from continuing operations 1,186 1,120 6. Expenses under arrangements with reinsurers Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised on an accruals basis in the consolidated income statement as expenses under arrangements with reinsurers.
Interest expense 5 12 Commission expenses 153 170 Staff costs and other employee-related costs 8 596 635 Operating lease rentals 34 21
Depreciation of property, plant and equipment 20 14 16 Impairment losses on property, plant and equipment 20 1 4 Impairment losses reversed on property, plant and equipment 20 - (5) Amortisation of intangible assets 16 64 51 Impairment losses on intangible assets 16 20 9
The aggregate remuneration payable in respect of employees: Wages and salaries 489 491 12 503
Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated financial statements 0.3 0.3 Fees payable to the Company’s auditors for other services
The audit of the Company’s consolidated subsidiaries pursuant to legislation 3.8 3.4 The audit of funds not consolidated in the Group’s financial statements 0.8 0.7 Audit related assurance services 0.8 1.6
Total audit related assurance fees 5.7 6.0 Other assurance services 0.5 0.5 Tax compliance services 0.4 0.4 Tax advisory services 0.2 0.1 Other non-audit fee services 0.3 0.3 Total non-audit fees 1.4 1.3 Total auditors’ remuneration 7.1 7.3
10. Restructuring and corporate transaction expenses Total restructuring and corporate transaction expenses incurred from continuing operations during the year were £62m (2015: £88m). The expenses relate mainly to Ignis integration and Pensions and Savings restructuring programmes and corporate transactions. Deal costs relating to acquisitions included in restructuring and corporate transaction expenses for the year ended 31 December 2016 were £3m (2015: £nil).
In December 2014 the Group announced that the UK staff defined benefit pension plan would be closed to future accrual. On 16 April 2016 all employees in the closing plan were transferred to the UK defined contribution plan for future service and employer contributions into the defined contribution plan were amended. Following this restructuring of the pension plans, operating profit from continuing operations for the year ended 31 December 2016 has been increased by £5m (2015: £35m) so that operating profit reflects the expected long-term pension expense for the year and is therefore more indicative of the long-term operating performance of the Group. As a result £5m (2015: £35m) of pension costs that are included in staff costs in the consolidated income statement for the year ended 31 December 2016, are included in restructuring and corporate
Restructuring and corporate transaction expenses for the year ended 31 December 2015 of £10m were used to determine operating profit before tax from discontinued operations. These expenses related to the sale of the Canadian business and the closure of the Singapore business.
Deferred tax is recognised on temporary differences arising from investments in subsidiaries and associates only when it is expected that the temporary difference will reverse in the foreseeable future and the timing of the reversal is not in our control.
The Group provides additional disclosure in relation to the total tax expense. Certain products are subject to tax on policyholders’ investment returns. This tax, ‘policyholder tax’, is accounted for as an element of income tax. To make the tax expense disclosure more meaningful, we disclose policyholder tax and tax payable on equity holders’ profits separately. The policyholder tax expense is the amount payable in the year plus the movement of amounts expected to be payable in future years by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders’ profit.
Adjustment to tax expense in respect of prior years (3) 12 Total current tax attributable to continuing operations 333 222
Deferred tax: Deferred tax expense/(credit) arising from the current year 37 (11) Total deferred tax attributable to continuing operations 37 (11) Total tax expense attributable to continuing operations 370 211
Attributable to policyholders’ investment return 302 134 Attributable to equity holders’ profits 68 77 Total tax expense attributable to continuing operations 370 211
The share of associates’ and joint ventures’ tax expense from continuing operations is £13m (2015: £13m) and is included in profit before tax in the consolidated income statement in ‘Share of profit from associates and joint ventures’.
Policyholder tax (net of tax at UK standard rate) 241 107 Permanent differences 2 9 Tax effect of accounting for non-controlling interests (10) (13) Tax effect of accounting for share of profit from associates and joint ventures (13) (9) Different tax rates (5) (19) Adjustment to current tax expense in respect of prior years (3) 12 Recognition of previously unrecognised tax credit (9) (2) Deferred tax not recognised - 18 Adjustment to deferred tax expense in respect of prior years (2) (4) Write-down of deferred tax asset 11 5
Total tax expense from continuing operations for the year 370 211
 Share of profit from associates and joint ventures is presented net of tax in the consolidated income statement and therefore also gives rise to a reconciling item
Details of other significant reconciling items are as follows:  Different tax rates will vary according to the level of profit subject to tax at rates different from the UK standard rate (e.g. overseas profit and profit arising in consolidated investment funds)
The occurrence of other reconciling items is dependent upon the underlying tax results of the Group.
Tax relating to defined benefit pension plan deficit (2) Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss (2) Current tax on net change in financial assets designated as available-for-sale 3 (2) Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss 3 (2) Tax relating to other comprehensive income from continuing operations 1 (2)
(c) Tax relating to items taken directly to equity 2016 2015 £m £m
Acquired through business combinations (2) Amounts (charged)/credited to the consolidated income statement (37) 11 Amounts credited directly to equity in respect of employee share-based payment schemes - 4 Transfer to current tax for vested employee share-based payment schemes (3) (5) Foreign exchange adjustment (4) 1
Gross deferred tax assets 111 127 Less: Offset against deferred tax liabilities (69) (92) Deferred tax assets 42 35 Deferred tax liabilities comprise: Insurance related items 5 6 Unrealised gains on investments 187 148 Intangible assets acquired through business combinations 25 25 Deferred acquisition costs 104 111 Temporary timing differences 1 3
Gross deferred tax liabilities 328 297 Less: Offset against deferred tax assets (69) (92) Deferred tax liabilities 259 205 Net deferred tax liability at 31 December (217) (170)
A deferred tax asset of £12m (2015: £9m) for the Group has been recognised in respect of losses of various subsidiaries and unrealised losses on investments. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against the reversal of deferred tax liabilities and anticipated taxable profits and gains based on business plans. The losses do not have an expiry date.
The consolidated income statement, other comprehensive income and cash flows from discontinued operations are shown below.
Revenue Gross earned premium 138 Premium ceded to reinsurers (43) Net earned premium 95 Investment return 1,166 Fee income 11 Gain on sale of subsidiaries 1,102 Other income 1 Total revenue from discontinued operations 2,375
Expenses Claims and benefits paid 123 Claim recoveries from reinsurers (63) Net insurance benefits and claims 60 Change in reinsurance assets and liabilities 45 Change in insurance and participating contract liabilities 507 Change in non-participating investment contract liabilities 525 Administrative expenses
Attributable to: Equity holders of Standard Life plc 1,147 Non-controlling interests -
Net cash flows from operating activities (132) Net cash flows from financing activities (7) Net cash flows from investing activities (500) Total net cash flows (639)
Alternative earnings per share is calculated on operating profit after tax.
Basic earnings per share was 18.7p (2015: 69.4p) and diluted earnings per share was 18.6p (2015: 69.1p) for the year ended 31 December 2016. The following table shows details of basic, diluted and alternative earnings per share.
Weighted average number of ordinary shares outstanding 1,972 2,051 2,051 Dilutive effect of share options and awards 6 9 9 Weighted average number of diluted ordinary shares outstanding 1,978 2,060 2,060
As discussed in Note 28 the Company undertook a share consolidation in 2015 followed by a return of value to shareholders. In accordance with IAS 33, earnings per share were not restated following the share consolidation as there was an overall corresponding change in resources. As a result of the share consolidation, earnings per share from continuing operations for the year ended 31 December 2016 are not directly comparable with the prior year.
14. Operating profit and non-operating items Operating profit is the Group’s key alternative performance measure. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
Operating profit also excludes the impact of the following items:  Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.  Impairment of intangible assets acquired in business combinations  Profit or loss arising on the disposal of a subsidiary, joint venture or associate  Amortisation of intangibles acquired in business combinations and fair value movements in contingent consideration  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group
(a) Short�term fluctuations in investment return and economic assumptions changes The components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movement in equity holder liabilities, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from operating profit. Investments backing equity holder funds include investments backing annuities and subordinated debt, investments from surplus capital in insurance companies, and investments held by holding companies and other non-insurance entities.
The expected rates of return for debt securities and equity securities are determined separately. The expected rates of return for equity securities are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium of 3% (2015: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also use an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium of 3%.
In respect of debt securities at fair value through profit or loss, the expected rate of return is determined based on the average prospective yields for the debt securities actually held. For debt securities classified as available-for-sale that support liabilities measured at amortised cost, the expected rate of return is the effective interest rate adjusted for an allowance, established at initial recognition, for expected defaults. If debt securities classified as available-for-sale are sold, any gain or loss is amortised within the expected return over the period to the earlier of the maturity date of the sold debt security, or the redemption date of the supported liability.
The expected rates of return used for both the assets backing subordinated liabilities and the subordinated liabilities themselves include a discount for expected credit defaults. This means that the interest expense included in operating profit for subordinated liabilities is after deducting a margin for own credit risk. Additionally, the effect of the accounting mismatch, where subordinated liabilities are measured at amortised cost and certain assets backing the liabilities are measured at fair value, is also excluded from operating profit.
Other non-operating items from continuing operations for the year ended 31 December 2016 includes £19m (2015: £20m) in relation to amortisation of intangible assets acquired through business combinations. For the year ended 31 December 2015, other non-operating items from continuing operations also included £46m relating to a review of expense and reserving assumptions in Hong Kong following regulatory change. This Hong Kong non-operating restructuring loss primarily related to an impairment of deferred acquisition costs.
15. Dividends and return of value Dividends are distributions of profit to holders of Standard Life plc’s share capital and as a result are recognised as a deduction in equity. Final dividends are announced with the Annual report and accounts and are recognised when they have been approved by shareholders. Interim dividends are announced with the Half year results and are recognised when they are paid.
The key estimates and assumptions in relation to intangible assets are:  Identification and valuation of intangible assets arising from business combinations  Determination of useful life  Determination of amounts to be recognised as internally developed software  Determination of the recoverable amount in relation to impairment assessments
The determination of useful life requires judgement in respect of the length of time that the Group expects to derive benefits from the asset and considers for example expected duration of contractual relationships for investment management contracts acquired in business combinations and when technology is expected to become obsolete for technology based assets. The amortisation period for each of the Group’s intangible asset categories is as follows:  Investment management contracts acquired through business combinations – between 10 and 17 years  Customer contracts acquired through business combinations – between 5 and 7 years  Technology acquired through business combinations – 6 years  Internally developed software – generally between 2 and 6 years, but can be up to 10 years. Amortisation commences once the asset is available for use.  Purchased software – between 2 and 6 years
Intangible assets including goodwill are assessed for impairment at each reporting date. If the carrying value of an intangible asset exceeds its recoverable amount then the carrying value is written down to the recoverable amount. The recoverable amount for intangible assets excluding goodwill is currently its value in use. In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.
In relation to investment management contracts acquired in business combinations, the most significant judgements relate to assumptions for the institutional and life client contracts cash-generating units. The key assumptions for these cash-generating units are future changes in assets under management due to net flows and market movements, forecasted operating profit margins and the discount rate. Future changes to assets under management due to net flows and market movements are based on forecasted information for the next five years and thereafter assume no further net flows. The remaining economic life of these intangible assets is between 8 and 13 years and therefore the projected cash flows used to determine value in use cover a period of longer than five years. The operating profit margins are based on current experience and the discount rates reflect the level of risk for the relevant contracts.
The investment management and customer contracts impairment charge of £9m in 2016 (2015: £5m) relates to the institutional client contracts cash generating unit and primarily reflects lower than forecast net inflows for the Absolute Return Government Bond Fund. Following the impairment the remaining carrying value of the institutional client contracts at 31 December 2016 is £25m (2015: £36m). The recoverable amount at 31 December 2016 was calculated using a discount rate of 14% (2015: 14%) and an operating margin of 50% (2015: 40%). Increasing the discount rate by 2% or decreasing the operating margin by 5% would result in an additional impairment loss of £2m or £3m respectively. The current carrying value assumes no future inflows into the Absolute Return Government Bond Fund.
The carrying value of the life client contracts at 31 December 2016 is £58m (2015: £66m). Increasing the discount rate by 2% or decreasing the operating margin by 5% would not result in an impairment loss and therefore would have no impact on profit after tax. The remaining amortisation period of the life contracts is 8 years.
17. Deferred acquisition costs The Group incurs costs to obtain and process new business. These are accounted for as follows: Pensions and Savings – insurance and participating investment contracts Acquisition costs incurred in issuing insurance or participating investment contracts are not deferred where such costs are borne by a with profits fund that was subject to the Prudential Regulation Authority (PRA) realistic capital regime. For other participating investment contracts, incremental costs directly attributable to the issue of the contracts are deferred. For other insurance contracts both incremental acquisition costs and other indirect costs of acquiring and processing new business are deferred.
India and China – insurance contracts The Group’s policy for acquisition costs incurred on insurance contracts issued by overseas subsidiaries is to apply the policy used in the issuing entity’s local statutory or regulatory reporting or, where local reporting did not explicitly or implicitly defer acquisition costs at the time the overseas subsidiary was first consolidated, to adjust those policies to apply a policy similar to that described above for non-participating insurance contracts.
The amount of deferred acquisition costs expected to be recovered after more than 12 months is £566m (2015: £558m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £389m (2015: £411m).
Our judgement is that the Group also has significant influence over investment vehicles where, through its role as investment manager, it has power over the investment decisions of the vehicle. As a result the Group classifies all Group managed investment vehicles which are not subsidiaries and in which the Group holds an investment as associates even though it may hold less than 20% of the voting rights of the investment vehicle. Where the Group has an investment in an associate, a portion of which is held by, or is held indirectly through, a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at fair value through profit or loss.
(a) Investments in associates The following are particulars of the Group’s principal associates, which are both unlisted: HDFC Standard Life Insurance Company Limited
Country of incorporation and registration India India £m £m £m £m
In April 2016 the Group acquired an additional 9% of the issued share capital of HDFC Standard Life Insurance Company Limited (HDFC Life). Refer to Note 1 for further details.
Completion of the proposed transaction would result in the Group’s current holding of 35% in HDFC Life becoming 24.1% of the enlarged HDFC Life entity at completion (based on current shareholdings). As a result, if the transaction is completed, the Group expects to recognise a dilution gain in the consolidated income statement, with a corresponding increase in the carrying value of its investment in HDFC Life. The amount of the dilution gain will be dependent on a number of factors including the share price of Max FS at completion, foreign exchange rates and the profit or loss reported by HDFC Life until completion of the transaction. The Group will remain the second largest shareholder in the enlarged HDFC Life entity. The dilution gain is not expected to give rise to a tax charge.
The Group’s interest in HDFC Life has been built up over time to its current level of 35% (2015: 26%). The difference between the carrying value of this associate and the Group’s current share of net assets is due to additional investments being made at fair value rather than book value.
The year end date for HDFC Asset Management Company Limited and HDFC Life is 31 March which is different from the Group’s year end date of 31 December. For the purposes of the preparation of the Group’s consolidated financial statements, financial information as at and for the 12 months ended 30 September and 31 December is used for HDFC Asset Management Company Limited and HDFC Life respectively.
The Group also has investments in associates measured at FVTPL of £7,376m (2015: £5,425m), none of which are considered individually material to the Group as the investments are primarily held by unit linked funds. These associates have no significant contingent liabilities to which the Group is exposed and there are no restrictions that would prevent the transfer of funds to the Group (2015: none).
(b) Investments in joint ventures The following are particulars of the Group’s principal joint venture which is unlisted: Heng An Standard Life Insurance Company Country of incorporation and registration China £m £m
Reclassified as held for sale during the year (191) (87) Additions – acquisitions1 1,624 595 Additions – subsequent expenditure 131 267 Net fair value (losses)/gains 4 (302) 452
The fair value of investment property can be analysed as: Freehold 7,271 7,137 Long leasehold 2,658 2,788 Short leasehold - 66 1 Additions – acquisitions includes £1,289m (2015: £nil) relating to the merger of property investment vehicles.
Valuations are provided by independent qualified professional valuers at 31 December or as at a date that is not more than three months before 31 December. Where valuations have been undertaken at dates prior to the end of the reporting period, adjustments are made where appropriate to reflect the impact of changes in market conditions between the date of these valuations and the end of the reporting period.
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: £m £m
Management determines the classification of financial investments at initial recognition. Financial investments which are not derivatives and are not designated at fair value through profit or loss (FVTPL) are classified as either available-for-sale (AFS) or loans and receivables. The classification of derivatives is set out in Note 23.
Investments in associates and joint ventures 18 7,376 - - 3 7,379
Equity securities and interests in pooled investment funds 41 83,307 - - - 83,307
Determination of the fair value of private equity investments and those debt securities categorised as level 3 in the fair value hierarchy is a key estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 43.
Loans secured by mortgages 43(e) 73 87 Loans and advances to banks with greater than three months to maturity from acquisition date 220 721 Loans secured on policies 2 3
Where a derivative qualifies as a cash flow or net investment hedge, hedge accounting is applied. The effective part of any gain or loss resulting from the change in fair value is recognised in other comprehensive income, and in the cash flow or net investment hedge reserve in equity, while any ineffective part is recognised immediately in the consolidated income statement. If a derivative ceases to meet the relevant hedging criteria, hedge accounting is discontinued.
Derivative assets of £2,460m (2015: £2,098m) are expected to be recovered after more than 12 months. Derivative liabilities of £215m (2015: £475m) are expected to be settled after more than 12 months.
(b) Net investment hedges Forward foreign exchange contracts with a notional principal amount of £6m (2015: £5m) and a net fair value liability position of less than £1m (2015: less than £1m) were designated as net investment hedges and gave rise to losses for the year of less than £1m (2015: less than £1m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2016, the losses recognised in the consolidated income statement were less than £1m (2015: less than £1m). During 2015 £110m was transferred to retained earnings through the consolidated income statement due to the disposal of the Canadian business on 30 January 2015.
Other derivatives: Inflation rate swaps 2,032 27 41 1,108 5 26
Derivative financial instruments held for trading 119,926 3,534 965 153,277 2,444 1,254
Cash outflows Derivative financial assets (22,175) (2) (4) (16) (11) - (22,208)
Net derivative financial instruments cash inflows 383 411 328 142 179 597 2,040 152 Standard Life 2016
The amount of receivables and other financial assets expected to be recovered after more than 12 months is £77m (2015: £69m).
Operations held for sale relate to newly established investment vehicles which the Group has seeded but is actively seeking to divest from. For these investment funds, which do not have significant liabilities or non-financial assets, financial assets continue to be measured based on the accounting policies that applied before they were classified as held for sale.
Total cash and cash equivalents for consolidated statement of cash flows 7,900 9,591
Cash at bank, money at call and short notice and deposits are subject to variable interest rates.
Shares issued in respect of share incentive plans 460,194 - 169,283 194,329 Shares issued in respect of share options 8,486,868 1 642,089 10,046,128 2 New shares issued immediately prior to share consolidation - - 6 - -
Shares held by trusts relates to shares in Standard Life plc that are held by the Employee Share Trust (EST) and the Unclaimed Asset Trust (UAT).
The number of shares held in trust at 31 December 2016 was as follows: Number of shares held in trust Employee Share Trust 1,287,431 1,637,419 Unclaimed Asset Trust 12,999,801 14,709,934
On expiry of the claim period on 9 July 2016, the entitlement to the unclaimed shares remaining in the UAT transferred to the Company. Unclaimed shares, and unclaimed cash referred to in Note 30, will be used to fund the charitable activities of the Standard Life Foundation.
30. Retained earnings The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.
Recognised in comprehensive income Recognised in profit for the year attributable to equity holders 368 1,423 Recognised in other comprehensive income
Recognised directly in equity Dividends paid on ordinary shares (370) (343) Redemption of ‘B’ shares 28 - (488) Dividends paid on ‘C’ shares 28 - (1,261) Dividends due on unclaimed shares not held in the Unclaimed Asset Trust - (2) Transfer from equity compensation reserve for vested employee share-based payments 31 23 32 Transfer from other reserves on disposal of a subsidiary - 827 Cancellation of capital redemption reserve 31 488 Shares distributed by employee and other trusts (7) (2) Expiry of unclaimed asset trust claim period 41 Aggregate tax items recognised in equity (4) 5 Total items recognised directly in equity 171 (1,232)
In addition to unclaimed shares, which are referred to in Note 29, the UAT holds cash in relation to unclaimed cash entitlements arising from both cash entitlements which were allocated to eligible members of the mutual company at the date of demutualisation and dividends received on shares held in the UAT. On expiry of the UAT claim period on 9 July 2016, the entitlement to the unclaimed assets remaining in the UAT transferred to the Group. The expiry resulted in the derecognition of a liability of £41m to eligible members in relation to their cash entitlements, which was recognised directly in retained earnings in equity.
Special reserve: Immediately following demutualisation and the related initial public offering, the Company reduced its share premium reserve by court order giving rise to the special reserve. Dividends can be paid out of this reserve.
Recognised in other comprehensive income Fair value gains on available-for-sale financial assets - - 17 - - - - - 17 Revaluation of owner occupied property 20 5 - - - - - - - 5 Exchange differences on translating foreign operations - 173 - - - - - - 173 With profits funds: Associated UDS movement recognised in other comprehensive income 33 (5) (62) - - - - - - (67) Aggregate tax effect of items recognised in other comprehensive income - - (3) - - - - - (3) Total items recognised in other comprehensive income - 111 14 - - - - - 125 Recognised directly in equity Reserves credit for employee share-
Capital redemption reserve Total 2015 £m £m £m £m £m £m £m £m £m £m £m
Revaluation of owner occupied property 4 - - - - - - - - - 4 Exchange differences on translating foreign operations - - (68) - - - - - - - (68) With profits funds: Associated UDS movement recognised in other comprehensive income (4) - 1 - - - - - - - (3) Aggregate tax effect of items recognised in other comprehensive income - - - - (2) - - - - - (2) Items transferred to profit or loss on disposal of subsidiaries - (60) (50) (110) (17) - - - - - (237) Total items recognised in other comprehensive income - (3) (117) (54) (12) - - - - - (186) Recognised directly in equity Redemption of ‘B’ shares - - - - - - - - - 488 488 Reserves credit for employee share-based payment schemes - - - - - - 34 - - - 34 Transfer to retained earnings for vested employee share-
Transfer to UDS on sale of owner occupied property (14) - - - - - - - - - (14) With profits funds: Associated UDS movement recognised in equity 14 - - - - - - - - - 14 Transfer between reserves on disposal of subsidiaries (20) - - - - (1,028) - - 221 - (827) Aggregate tax effect of items recognised directly in equity - - - - - - (1) - - - (1) Total items recognised directly within equity (20) - - - - (1,028) 1 - 221 488 (338)
Profit in the year attributable to non-controlling interests 51 62 Net contributions (66) 44
Summarised financial information for SLEPET prior to intercompany eliminations is provided in the following table. The summarised financial information is for the years ended 30 September 2016 and 2015 which is SLEPET’s financial reporting date and is considered indicative of the interest that non-controlling interests of SLEPET have in the Group’s activities and cash flows. The financial statements of SLEPET for the years ended 30 September 2016 and 2015 have been adjusted for market movements and any other significant events or transactions for the three months to 31 December for the purposes of consolidation into the Group’s consolidated financial statements for the years ended 31 December 2016 and 2015 respectively.
Change in liability for third party interest in consolidated funds 296 531 Net contributions and movements between classifications of investments (559) 1,166
8. Group financial statements continued 33. Insurance contracts, investment contracts and reinsurance contracts (i) Classification of insurance and investment contracts The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts.
Insurance contracts A contract is classified as an insurance contract only if it transfers significant insurance risk. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred, excluding scenarios that lack commercial substance. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.
Investment contracts Life and pensions business contracts that are not classified as insurance contracts are classified as investment contracts.
Participating contracts The Group has written insurance and investment contracts which contain discretionary participating features (e.g. with profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These additional benefits are based on the performance of with profits funds and their amount and timing is at the discretion of the Group. These contracts are referred to as participating insurance contracts if they contain a feature that transfers significant insurance risk and otherwise as participating investment contracts.
The following table summarises the classification of the Group’s significant types of life and pensions business contracts as described in Note 3.
Details of the accounting policies for non-participating investment contracts are given in Note 34.
(ii) Income statement presentation – insurance and participating investment contracts For insurance contracts and participating investment contracts, IFRS 4 Insurance Contracts permits the continued application, for income statement presentation purposes, of accounting policies that were being used at the date of transition to IFRS, except where a change is deemed to make the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable, and no less relevant to those needs. Therefore the Group applies accounting policies determined in accordance with the Association of British Insurers Statement of Recommended Practice issued in 2005 (ABI SORP) as described below.
When a policyholder exercises an option within an investment contract to utilise withdrawal proceeds from the investment contract to secure future benefits which contain significant insurance risk, the related investment contract liability is derecognised and an insurance contract liability is recognised. The withdrawal proceeds which are used to secure the insurance contract are recognised as premium income.
The change in insurance and participating investment contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the consolidated income statement. This also includes the movement in unallocated divisible surplus (UDS) in the period. However, where movements in assets and liabilities which are attributable to participating policyholders are recognised in other comprehensive income, the change in UDS arising from these movements is not recognised in the consolidated income statement as it is also recognised in other comprehensive income.
Participating insurance and investment contract liabilities Participating contract liabilities arising under contracts issued by with profits funds which were within the scope of the Prudential Regulation Authority (PRA) realistic capital regime prior to the introduction of Solvency II are measured on the PRA realistic basis that was used in the PRA realistic capital regime. Under this approach, the value of participating insurance and participating investment contract liabilities in each with profits fund is calculated as:  With profits benefits reserves (WPBR) for the fund as determined under the PRA realistic basis, plus  Future policy related liabilities (FPRL) for the fund as determined under the PRA realistic basis, less  Any amounts due to equity holders included in FPRL, less  The portion of future profits on non-participating contracts included in FPRL not due to equity holders, where this portion can be separately identified
Present value of future profits (PVFP) on non-participating contracts held in a with profits fund This applies only to the HWPF as no other with profits funds hold non-participating contracts. An amount is recognised for the PVFP on nonparticipating contracts since the determination of the realistic value of liabilities for with profits contracts in the HWPF takes account of this value. The amount is recognised as a deduction from liabilities. As this amount can be apportioned between an amount recognised in the realistic value of with profits contract liabilities and an amount recognised in UDS, the apportioned amounts are reflected in the measurement of participating contract liabilities and UDS respectively.
In relation to the HWPF, amounts are considered to be allocated to equity holders when they emerge as recourse cash flows within the HWPF.
 The recourse cash flows are recognised as they emerge as an addition to equity holders’ profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the Germany branch business, they are recognised as an addition to equity holders’ profits.
India and China The Group’s policy for measuring liabilities for non-participating insurance contracts issued by overseas subsidiaries is to apply the valuation technique used in the issuing entity’s local statutory or regulatory reporting.
Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for and disclosed in a manner consistent with financial instruments.
(a) Insurance contracts and participating investment contracts 2016 2015 £m £m
Non-participating insurance contract liabilities 23,422 21,206 Participating contract liabilities: Participating insurance contract liabilities 15,151 14,283 Participating investment contract liabilities 15,537 14,716 Unallocated divisible surplus 585 655 Participating contract liabilities 31,273 29,654
(b) Change in liabilities and reinsurance contracts The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during the year was as follows: Participating insurance contract liabilities
Total change in contract liabilities (587) 1,985 717 2,115 140 2,255
Due to changes in economic and non-economic factors, certain assumptions used in estimating insurance and investment contract liabilities have been revised. Therefore, the change in liabilities reflects actual performance over the year, changes in assumptions and, to a limited extent, improvements in modelling techniques.
Economic assumptions reflects changes in fixed income yields, leading to lower valuation interest rates for non-participating business, and other market movements. Economic assumptions also include the effect of a change in the discount rate used to measure the liability for non-participating insurance contract liabilities resulting from a change in the way assets are hypothecated between participating and non-participating business in the HWPF. This change has resulted in an increase in non-participating insurance contract liabilities, fully offset by a decrease in participating liabilities.
Total change in contract liabilities (643) (612) (438) (1,693) 520 (1,173)
The determination of the valuation interest rates, longevity and mortality assumptions, and expense assumptions are all key accounting estimates.
Pensions and Savings For non-participating insurance contracts, the assumptions used to determine the liabilities are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. These assumptions are determined as appropriate estimates at the date of valuation. The basis is considered prudent in each aspect. In particular, options and guarantees have been provided for on prudent bases.
2. Business held within the HWPF Annuities: Individual and group Non-linked
Pensions: reinsured externally 1.55% 2.35% Pensions: not reinsured externally 1.15% 2.80% Deferred annuities 1.15% 2.80%
Reinsured externally (1.85%) (0.60%) Not reinsured externally (2.10%) (0.45%) Deferred annuities (2.10%) (1.00%)
Annuities Individual and group in deferment Males: 64.7% AMC00 Males: 67.0% AMC00 Females: 65.7% AFC00 Females: 65.2% AFC00 Individual after vesting (business written after 10 July 2006) Males: 91.2% RMC00 Males: 92.6% RMC00 Females: 99.9% RFC00 Females: 100.3% RFC00 Individual after vesting (business written prior to 10 July 2006) Males: 95.7% RMC00 Males: 97.1% RMC00 Females: 104.7% RFC00 Females: 104.0% RFC00 Group after vesting (business written after 10 July 2006) Males: 109.8% RMV00 Males: 112.1% RMV00 Females: 118.3% WA00 Females: 119.9% WA00 Group after vesting (business written prior to 10 July 2006) Males: 109.3% RMV00 Males: 111.6% RMV00 Females: 120.1% WA00 Females: 120.8% WA00
In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. For 2016, this is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2014 model with long-term improvement rates of 1.8% for males and 1.5% for females. The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2014 is a model that was published towards the end of 2014.
At 2015, this was based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.8% for males and 1.5% for females. CMI_2013 is a model that was published towards the end of 2013.
The SLAL parameterisation of the CMI_2013 and CMI_2014 models make the following changes relative to the ‘core’ model:  Blends period improvements between ages 60 to 80 to the long-term improvement rate over a 15 year period (compared with a 20 year period in the core CMI model)
 Assumes that cohort improvements dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model)
Expenses The assumptions for future policy expense levels are determined from the Group’s recent expense analyses. No allowance has been made for potential expense improvement and the costs of projects to improve expense efficiency have been ignored. The assumed future expense levels incorporate an annual inflation rate allowance of 3.79% (2015: 3.12%) for UK business derived from the expected RPI implied by current investment yields and an additional allowance for earnings inflation.
In calculating the liabilities for unitised regular premium non-participating insurance contracts, the administration expenses are assumed to be identical to the expense charges made against each policy. Similar assumptions are made, where applicable, in respect of mortality, morbidity and the risk benefit charges made to meet such costs.
Withdrawals For non-participating insurance business appropriate allowances are made for withdrawals on certain term assurance contracts.
Refer to Note 41 for sensitivity analysis for the shareholder business.
Account balances paid on surrender and other terminations in the year (10,737) (10,564) Change in non-participating investment contract liabilities recognised in the consolidated income statement 8,768 3,363 Recurring management charges (473) (450) Foreign exchange adjustment 835 (223)
Financial liabilities measured at amortised cost Total 2016 Notes £m £m £m £m
Third party interest in consolidated funds 41 16,835 - - 16,835
Financial liabilities measured at amortised cost Total 2015 Notes £m £m £m £m
Principal amount Carrying value Principal amount Carrying value Notes £m £m £m £m
The difference between the fair value and carrying value of the subordinated liabilities is presented in Note 43.
The principal amount of all subordinated liabilities is expected to be settled after more than 12 months and accrued interest of £37m (2015: £37m) is expected to be settled within 12 months.
Amounts due under the perpetual subordinated guaranteed bonds and Mutual Assurance Capital Securities (MACS) are classified as liabilities. This classification is determined by the interaction of these arrangements with a £100 internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company on 10 July 2006. There is no fixed redemption date for the internal loan note, but interest payments cannot be deferred and must be paid on the date they become due and payable. Under the terms for the subordinated guaranteed bonds and MACS any interest deferred on these instruments becomes immediately due and payable on the date of an interest payment in respect of the internal loan note. The existence of the internal loan note therefore removes the discretionary nature of the interest payments on the subordinated guaranteed bonds and MACS, and results in their classification as liabilities. Under IAS 32 Financial Instruments: Presentation, if the Group were to cancel the internal loan note then this would result in the reclassification of these perpetual instruments from liabilities to equity instruments at that point.
A description of the key features of the Group’s subordinated liabilities is as follows: 5.5% Sterling fixed rate 6.75% Sterling fixed rate 6.546% Sterling fixed rate
Issue date 4 December 2012 12 July 2002 4 November 2004 Maturity date 4 December 2042 Perpetual Perpetual
If not called by the Company interest will reset to 4.85% over the five year gilt rate (and at each fifth anniversary)
2.85% over the gross redemption yield on the appropriate 5 year benchmark gilt rate 2.7% over the gross redemption yield on the appropriate 1 year benchmark gilt rate Solvency II own funds treatment Tier 2 Tier 1 Tier 1
8. Group financial statements continued 37. Pension and other post-retirement benefit provisions The Group operates two types of pension plans:  �Defined benefit plans which provide pension payments upon retirement to members as defined by the plan rules  �Defined contribution plans where the Group makes contributions to a member’s pension plan but has no further payment obligations once the contributions have been paid
The statement of financial position reflects a net asset or net liability for each defined benefit pension plan. The liability recognised is the present value of the defined benefit obligation (estimated future cash flows are discounted using the yields on high quality corporate bonds) less the fair value of plan assets, if any. If the fair value of the plan assets exceeds the defined benefit obligation, a pension surplus is only recognised if the Group considers that it has an unconditional right to a refund. The amount of surplus recognised will be limited by tax and expenses. Our judgement is that, in the UK, an authorised surplus tax charge is not an income tax. Consequently, the surplus is recognised net of this tax charge rather than the tax charge being included within deferred taxation.
The IASB are expected to publish an amendment to pension accounting (IFRIC 14) during 2017. This amendment, once effective in future accounting periods, may impact the recognition of the UK pension fund surplus. Management will consider the implications of the amendment once it has been published.
In their last formal valuation, as at 31 December 2013, the trustees measured the ratio of plan assets to technical provisions to be 112%. The valuation as at 31 December 2016 is currently being completed.
Expected contributions to the defined benefit plans in 2017 are £4m.
During 2015 the terms of a plan amendment to the UK defined benefit plan were agreed which resulted in closure to future accrual from April 2016. This plan amendment did not generate a past service cost. Eligible members of the defined benefit plan received an additional contribution of 6% of pensionable salary into the defined contribution plan in April 2015 and April 2016. These contributions were accrued over the vesting period and are included in current service cost and in the cost of defined contribution plans in Note 8.
UK Other Total UK Other Total £m £m £m £m £m £m
Present value of funded obligation (3,207) (117) (3,324) (2,525) (85) (2,610) Present value of unfunded obligation - (10) (10) - (8) (8) Fair value of plan assets 4,927 72 4,999 3,936 60 3,996 Effect of limit on plan surplus (627) - (627) (514) - (514)
Effect of limit on plan surpluses Total 2016 £m £m £m £m £m
Total (expense)/income recognised in consolidated income statement (112) 144 32 (18) 14 Remeasurements
Remeasurement (losses)/gains recognised in other comprehensive income (779) 1,036 257 (95) 162
Change in effect of limit on plan surplus - - - (100) (100)
Assets measured at fair value based on level 1 inputs Derivatives 16 7 - - 16 7 Equity securities and interests in pooled investment funds 982 850 54 48 1,036 898
Total assets measured at fair value based on level 1 inputs 4,355 2,886 54 48 4,409 2,934 Assets measured at fair value based on level 2 or 3 inputs Derivatives 324 (9) - (3) 324 (12) Equity securities and interests in pooled investment funds 163 185 - - 163 185
Liability in respect of collateral held (292) - - - (292) -
(e) Estimates and assumptions Determination of the valuation of plan liabilities is a key estimate as a result of the assumptions made relating to both economic and noneconomic factors. The principal economic assumptions for the UK plan which are based in part on current market conditions are shown below: Discount rate 2.70 3.70 Rates of inflation
The most significant non-economic assumption is post-retirement longevity which is inherently uncertain. The assumptions (along with sample expectations of life) are illustrated below: Expectation of life from NRA Male age today Female age today 2016 Table Improvements Normal Retirement
(g) Risk (g)(i) Risks and mitigating actions The Group’s consolidated statement of financial position is exposed to movements in the defined benefit plans’ net asset. In particular, the consolidated statement of financial position could be materially sensitive to reasonably likely movements in the principal assumptions for the UK plan. By offering post-retirement defined benefit pension plans the Group is exposed to a number of risks. An explanation of the key risks and mitigating actions in place for the UK plan is given below.
The UK plan uses both bonds and derivatives to hedge out yield risks on the plan’s funding basis, rather than the IAS 19 basis, which is expected to minimise the plan’s need to rely on support from the Group.
(g)(ii) Sensitivity to principal assumptions The sensitivity of the UK defined benefit plan’s net assets to the principal assumptions is disclosed below.
Property related liabilities 246 223 Contingent consideration liabilities 43 15 -
The amount of other financial liabilities expected to be settled after more than 12 months is £211m (2015: £79m).
8. Group financial statements continued 40. Provisions and other liabilities Provisions are obligations of the Group which are of uncertain timing or amount. They are recognised when the Group has a present obligation as a result of a past event, it is probable that a loss will be incurred in settling the obligation and a reliable estimate of the amount can be made.
The movement in provisions during the year is as follows: Provision for annuity sales practices Legal provisions Other provisions Total provisions 2016 £m £m £m £m
The amount of provisions expected to be settled after more than 12 months is £106m (2015: £35m).
Provision for annuity sales practices relating to enhanced annuities The Group has established a provision of £175m (2015: £nil) for annuity sales practices relating to enhanced annuities.
At the request of the FCA, Standard Life will conduct a review of non-advised annuity sales (with a purchase price above a minimum threshold) to customers eligible to receive an enhanced annuity from 1 July 2008 until such date as Standard Life can demonstrate its compliance with the applicable regulatory standards. The purpose of this review is to identify whether these customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and, where appropriate, provide redress to customers who have suffered loss as a result of not having received sufficient information. Standard Life has been working with the FCA regarding the process for conducting this past business review.
The Group expects the majority of the outflows associated with this provision, including outflows relating to establishing any reserves for future annuity payments, to have occurred by the end of 2018.
The FCA thematic review noted that, for the industry as a whole, between 39% and 48% of customers who bought a standard annuity may potentially have been eligible for an enhanced annuity, and the provision assumes 43.5% of customers were eligible for an enhanced annuity.
The costs of conducting the review relate to administrative expenses per case and wider project costs. The costs are based on our high level planning.
8. Group financial statements continued 41. Risk management (a) Overview (a)(i) Application of the risk management framework The consistent application of effective and pre-emptive risk management across the business protects the value of Standard Life in the short term while encouraging the development of long-term value. The Group ensures that:  Well informed risk-reward decisions are taken in pursuit of the business plan objectives  Capital is delivered to areas where most value can be created from the risks taken
Credit The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner.
The risk that expense levels are higher than planned or revenue falls below that necessary to cover actual expenses. This can arise from an increase in the unit costs of the company or an increase in expense inflation, either company specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can reflect an increase in liabilities or a reduction in expected future profits.
The risk that through our behaviours, strategies, decisions and actions the Group, or individuals within the Group, do not do the right thing and/or do not behave in a manner which:  Pays due regard to treating our customers and clients fairly  Is consistent with our disclosures and setting of customer and client expectations  Supports the integrity of financial markets
Unit linked funds Unit linked funds refers to the assets and liabilities of the unit linked funds of the life operations of the Group. It does not include the cash flows (such as asset management charges or investment expenses) arising from the unit linked fund contracts or the liabilities for insurance features or financial guarantees contained within the unit linked fund contracts. Such cash flows and liabilities are included in shareholder business or participating business.
The shareholder is exposed to longevity and mortality risk on annuity contracts held by Pensions and Savings, and mortality risk on contracts held in non-participating funds by Pensions and Savings, and India and China including those containing insurance features that are invested in unit linked funds or in the GWPF or GSMWPF. The shareholder is also exposed to expenses and persistency being different from expectation on these contracts.
Unit linked funds are normally expected to meet their obligations through liquidating the underlying assets in which they are invested. If a unit linked fund cannot meet its obligations in this way, the shareholder may be required to meet the obligations to the policyholder.
The shareholder is exposed to operational, conduct and strategic risks arising across the four risk segments and any losses incurred are typically borne by the shareholder.
Shareholder business Participating business Unit linked funds TPICF & NCI1 Total 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 £m £m £m £m £m £m £m £m £m £m
Investments in associates and joint ventures 602 313 847 531 5,605 4,561 894 314 7,948 5,719
Receivables and other financial assets 515 495 97 99 533 644 110 209 1,255 1,447
Liabilities of operations held for sale - - - 37 - - - 46 - 83
(b) Market risk As described in the table on page 178, the shareholder is exposed to market risk from the shareholder and participating businesses and as a result the following quantitative market risk disclosures are provided in respect of the financial assets of the shareholder and participating businesses.
(b)(i) Elements of market risk The main elements of market risk to which the Group is exposed are equity risk, property risk, interest rate risk and foreign currency risk, which are discussed on the following pages.
In addition to the equity securities analysed above, the shareholder business has interests in pooled investment funds of £nil (2015: £nil) and investments in associates at FVTPL of £30m (2015: £19m). The participating business has interests in pooled investment funds of £123m (2015: £72m) and investments in associates at FVTPL of £847m (2015: £531m).
 The indirect impact from changes in the value of property held in funds from which management charges are taken
The shareholder business is not exposed to significant property price risk.
Office Industrial Retail Other Total £m £m £m £m £m £m £m £m £m £m
The tables below summarise the shareholder and participating businesses’ exposure to foreign currency risks in Sterling. The tables exclude intersegment assets and liabilities.
Other currencies include assets of £9m (2015: £3m) and liabilities of £7m (2015: £7m) in relation to the fair value of derivatives used to manage currency risk.
Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
There are no net investment hedges or cash flow hedges in the participating business. Other currencies include assets of £49m (2015: £3m) and liabilities of £11m (2015: £27m) in relation to the fair value of derivatives used to manage currency risk exposures.
Participating business For the participating business, in particular the HWPF and the GWPF, the risk to shareholders is that the assets of the fund are insufficient to meet the obligations to policyholders. Given the nature of the Group’s participating business, changes in equity security and property prices and/or fluctuations in interest rates will generally affect participating liabilities and the associated assets by the same amount. Therefore the change in participating contract liabilities and the corresponding asset movement has not been presented. However under certain economic scenarios guarantees in participating contracts could require the shareholder to provide support to the participating business. This is presented as follows: HWPF For the HWPF, whilst shareholders are only entitled to the recourse cash flows in respect of this business, there can be potential exposure to the full impact of any shortfall if the assets of the fund are insufficient to meet policyholder obligations. The recourse cash flows have been determined in accordance with the Scheme and consider the extent to which shareholders participate in the investment return and surplus of the HWPF. The Scheme, and in particular the Capital Support Mechanism, requires the financial state of the HWPF to be considered before recourse cash flows are transferred to the Shareholder Fund and, under certain circumstances, the payment of recourse cash flows can be withheld to support the financial strength of the HWPF. Therefore, the HWPF has been treated as a whole for the purpose of this sensitivity analysis and only the impact on the recourse cash flows of the sensitivity tests is presented. When assessing the impact of the sensitivity tests on the recourse cash flows, and in particular the risk that the assets of the HWPF may be insufficient to meet the obligations to policyholders, dynamic management actions have been assumed in a manner consistent with the relevant Principles and Practices of Financial Management (PPFM). The sensitivities presented are not sufficiently severe to have restricted recourse cash flows in 2016 and 2015.
Limitations The sensitivity of the Group’s profit after tax from continuing operations and equity is non-linear and larger or smaller impacts should not be derived from these results.
Profit after tax of continuing operations sensitivity to market risk Equity markets Property markets Interest rates
Shareholder business Pensions and Savings: Deferred acquisition costs - - - - - - - - - Assets backing non-participating liabilities - - - - - - - - (696) 833 Non-participating insurance contract liabilities - - - - - - - - 673 (790) Non-participating investment contract liabilities - - - - - - - - - -
The Company within other shareholder business classifies certain debt securities as available-for-sale (AFS). The Group’s sensitivity of profit after tax from continuing operations to changes in interest rates does not include the impact of changes in interest rates for these AFS assets.
Equity sensitivity to market risk on assets and liabilities other than those classified as held for sale The shareholder business in the other reportable segment classifies certain debt securities as AFS. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the consolidated income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result, the sensitivity of the Group's equity to variations in interest rate risk exposures differs from the sensitivity of the Group's profit after tax from continuing operations to variations in interest rate risk exposures.
The shareholder is also not exposed to the credit risk from the assets held by third party interest in consolidated funds and non-controlling interests and therefore these have been excluded from the following quantitative disclosures.
Cash and cash equivalents Maximum counterparty exposure limits are set with reference to internal credit assessments. Derivative financial instruments Maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. Refer to (c)(iii) for further details on collateral.
Other financial instruments Appropriate limits are set for other financial instruments to which the Group may have exposure at certain times, for example commission terms paid to intermediaries.
The objective evidence that is taken into account in determining whether any impairment of debt securities has occurred includes:  A default against the terms of the instrument has occurred  The issuer is subject to bankruptcy proceedings or is seeking protection from creditors through bankruptcy, individual voluntary arrangements or similar process
At 31 December 2016, receivables and other financial assets of £7m (2015: £19m) were past due by less than three months and £1m (2015: £1m) were past due by three to six months.
Participating business An analysis of financial assets by credit rating is as follows: Reinsurance assets Loans Derivative financial assets Debt securities
At 31 December 2016, receivables and other financial assets of £6m (2015: £15m) were past due by less than three months.
Where there is an event of default under the terms of the agreements, any collateral balances will be included in the close-out calculation of net counterparty exposure. At 31 December 2016, the Group had pledged £30m (2015: £448m) of cash and £187m (2015: £36m) of securities as collateral for derivative financial liabilities. At 31 December 2016, the Group had accepted £2,016m (2015: £1,166m) of cash and £808m (2015: £10m) of securities as collateral for derivatives financial assets and reverse repurchase agreements. None of the securities were sold or repledged at the year end.
The Group does not hold any other financial instruments which are subject to master netting agreements or similar arrangements.
The following table presents the effect of master netting agreements and similar arrangements.
As at 31 December 2015 £m £m £m £m 1 Only OTC derivatives subject to master netting agreements have been included above.
(d)(i) Elements of demographic and expense risk The main elements of demographic and expense risk that give rise to the exposure are discussed below.
Experience can vary as a result of statistical uncertainty or as a consequence of systemic (and previously unexpected) changes in the life expectancy of the insured portfolio. The profitability of such business will reduce should policyholders live longer than the Group’s expectations and reported profits will be impacted as and when such variances are recognised in liabilities.
Mortality The Group defines mortality risk as the risk that death claims are at a higher rate or are more volatile than assumed. This risk will exist on any contracts where the payment on death is greater than the reserve held. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected, for example due to non-disclosure.
Profit is directly exposed to the risk of expenses being higher than otherwise expected. It can be further affected if it is considered necessary, or prudent, to increase provisions to reflect increased expectations of future costs of policy administration.
(d)(ii) Sensitivity to demographic and expenses risk analysis Recognition of profit after tax and the measurement of equity are dependent on the methodology and key assumptions used to determine the Group’s insurance and investment contract liabilities, as described in Note 33.
The tables that follow illustrate the sensitivity of profit after tax from continuing operations and equity to variations in the key assumptions made in relation to the Group’s most significant demographic and expense risk exposures, including exposure to persistency risk. The values have, in all cases, been determined by varying the relevant assumption as at the reporting date and considering the consequential impacts assuming other assumptions remain unchanged.
Shareholder business Pensions and Savings: Reinsurance assets - - - - - - 1 (1) Non-participating insurance contract liabilities (136) 128 (8) 8 1 (1) - India and China Deferred acquisition costs - - (4) - - - - Non -participating insurance contract liabilities - - - - - - - Non -participating investment contract liabilities - - - - - - - -
Participating business Pensions and Savings: Recourse cash flows (16) 15 (1) 1 - - (2) 2
Longevity Expenses Persistency Morbidity/mortality 2015 £m £m £m £m £m £m £m £m
(e) Liquidity risk As described in the table on page 178, the shareholder is exposed to liquidity risk from shareholder business, participating business and unit linked funds and, as a result, the following quantitative liquidity risk disclosures are provided in respect of the financial liabilities of these categories.
Where it is necessary to sell less liquid assets within the relevant portfolios, then any incurred losses are generally passed onto policyholders in accordance with policyholders’ reasonable expectations. Such losses are managed and mitigated through actively anticipating net disinvestment based on policyholder behaviour and seeking to execute sales of underlying assets in such a way that the cost to policyholders is minimised.
All business units are required to monitor, assess, manage and control liquidity risk in accordance with the relevant principles within the Group’s policy framework. Oversight is provided both at a Group level and within the business unit. In addition, all business units benefit from membership of a larger Group to the extent that, centrally, the Group:  Coordinates strategic planning and funding requirements  Monitors, assesses and oversees the investment of assets within the Group  Monitors and manages risk, capital requirements and available capital on a group-wide basis  Maintains a portfolio of committed bank facilities
Participating business Non-participating insurance contract liabilities 618 2,263 2,324 1,685 1,105 1,801 - 9,796
Unit linked funds Non-participating insurance contract liabilities 6,126 669 368 123 69 79 - 7,434 Non-participating investment contract liabilities 9,951 31,696 26,705 16,024 9,118 8,565 - 102,059 year years years years
Greater than 20 years No defined maturity Total 2015 £m £m £m £m £m £m £m £m
Unit linked funds Non-participating insurance contract liabilities 5,267 630 362 96 46 52 - 6,453 Non-participating investment contract liabilities 9,155 29,418 24,351 14,357 8,083 7,526 - 92,890
Greater than 20 years Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Participating business Other financial liabilities 2,179 1,317 27 7 6 12 6 6 5 6 85 97 2,308 1,445
The Group also has interests in structured entities through asset management fees and other fees received from these entities.
Shareholder business Participating business Unit linked funds TPICF & NCI1 Total 2016 £m £m £m £m £m £m £m £m £m £m
Equity securities and interests in pooled investment funds - - 122 72 21,421 17,406 2,078 1,425 23,621 18,903 1 Third party interest in consolidated funds and non-controlling interests.
The Group’s maximum exposure to loss in respect of its investments in unconsolidated structured entities is the carrying value of the Group’s investment. As noted in Note 41, the shareholder is not exposed to market or credit risk in respect of investments held in the unit linked funds, and third party interest in consolidated funds and non-controlling interests risk segments.
Total assets under management of structured entities in which the Group has no direct investments but has other interests in are £12,634m at 31 December 2016 (2015: £11,599m). The fees received in respect of these assets under management during the year to 31 December 2016 were £61m (2015: £48m).
43. Fair value of assets and liabilities The Group uses fair value to measure the majority of its assets and liabilities. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction.
Determination of the fair value of private equity investments, debt securities categorised as level 3 in the fair value hierarchy, over-the-counter derivatives and investment property are key estimates. Further details on the methods and assumptions used to value these investments are set out in section (d) below. Disclosures regarding sensitivity of level 3 instruments measured at fair value on the statement of financial position to changes in key assumptions are set out in (d)(iv) below.
(a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used:  Level 1 – Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
 Level 3 – Fair values measured using inputs that are not based on observable market data (unobservable inputs)
(b) Financial investments and financial liabilities An analysis of the Group’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes 21 and 35 and includes those financial assets and liabilities held at fair value.
(c) Non�financial investments An analysis of the Group’s investment property and owner occupied property within property, plant and equipment in accordance with IAS 40 Investment property and IAS 16 Property, plant and equipment is presented in Notes 19 and 20 respectively and includes those assets held at fair value.
As income capitalisation and market comparison valuations generally include significant unobservable inputs including unobservable adjustments to recent market transactions, these assets are categorised as level 3 within the fair value hierarchy.
Derivative financial assets and derivative financial liabilities The majority of the Group’s derivatives are over-the-counter derivatives which are measured at fair value using a range of valuation models including discounting future cash flows and option valuation techniques. The inputs are observable market data and over-the-counter derivatives are therefore categorised as level 2 in the fair value hierarchy.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2016 and 31 December 2015 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.
Debt securities For debt securities, the Group has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Group has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows:  Government, including provincial and municipal, and supranational institution bonds These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are categorised as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.
 Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit These instruments are valued using models. For unquoted bonds the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The categorisation of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.
Classified as held for sale Total Level 1 Level 2 Level 3 £m £m £m £m £m £m £m £m £m £m £m £m
Investments in associates at FVTPL 7,376 5,425 - 33 7,376 5,458 7,211 5,370 2 2 163 86
Equity securities and interests in pooled investment vehicles 83,307 71,679 27 17 83,334 71,696 82,539 70,877 - - 795 819
There were transfers of debt securities of £98m from level 1 to level 2 during the year (2015: no transfers). Refer to 43(d)(iii) for details of movements in level 3.
Shareholder business Investments in associates at FVTPL 30 19 - 33 30 52 10 36 2 2 18 14
Unit linked funds Investments in associates at FVTPL 5,605 4,561 - - 5,605 4,561 5,605 4,561 - - - -
Equity securities and interests in pooled investment vehicles 67,452 56,307 - - 67,452 56,307 67,252 56,117 - - 200 190
TPICF and NCI1 Investments in associates at FVTPL 894 314 - - 894 314 894 314 - - - -
Shareholder business Derivative financial liabilities 12 16 1 1 11 15 - -
Unit linked funds Non-participating investment contract liabilities 102,059 92,890 - - 102,059 92,890 - -
TPICF and NCI1 Liabilities in respect of third party interest in consolidated funds 16,835 17,196 - - 15,607 15,889 1,228 1,307 1 Third party interest in consolidated funds and non-controlling interests.
Reclassified to held for sale - - (191) (87) (8) - - - - - - Total gains/(losses) recognised in the consolidated income statement 10 1 (302) 452 (1) 5 80 135 34 - 19 (47)
Total gains recognised on revaluation of owner occupied property within other comprehensive income - - - - 5 4 - - - - - 1 Purchases of investment property for the year ended 31 December 2016 includes £1,289m (2015: £nil) relating to the merger of property investment vehicles. 2 Transfers are deemed to have occurred at the end of the calendar quarter in which they arose.
In addition to the above, the Group had a contingent consideration asset with a fair value of £10m at 31 December 2016 (2015: £15m) and contingent consideration liabilities with a fair value of £15m (2015: £nil). There were no settlements during the year. Movements in the fair value of contingent consideration assets and liabilities are recognised in other income in the consolidated income statement.
As at 31 December 2016, £119m of total losses from continuing operations (2015: £418m gains) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £137m losses (2015: £460m gains) were recognised in investment return, £1m losses (2015: £5m gains) were recognised in other administrative expenses and £19m gains (2015: £47m losses) were recognised in change in liability for third party interest in consolidated funds.
 Private equity fund valuations are provided by the respective managers of the underlying funds and are assessed on an individual investment basis, with an adjustment made for significant movements between the date of the valuation and the end of the reporting period. Sensitivities are determined by comparison to the private equity market.
 Commercial mortgage valuations are obtained from internal models on an individual instrument basis. Sensitivities are determined by adjusting the spread added to the current base rate.
The table below presents quantitative information about the significant unobservable inputs for level 3 instruments: Fair value 2016 £m Valuation technique Unobservable input Range (weighted average)
Fair value 2015 £m Valuation technique Unobservable input Range (weighted average)
Investment property and owner occupied property 9,496 Income capitalisation Equivalent yield
Investment property and owner occupied property 122 Market comparison Estimated value per square metre
As recognised in the consolidated statement of financial position line item Fair value Level 1 Level 2 Level 3
Notes £m £m £m £m £m £m £m £m £m £m
It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in Note 33. The carrying value of participating investment contract liabilities at 31 December 2016 was £15,537m (2015: £14,716m). The carrying value of all other financial assets and liabilities measured at amortised cost approximates their fair value.
44. Statement of cash flows The tables below provide further analysis of the balances in the statement of cash flows.
Investment property (116) (1,061) Equity securities and interests in pooled investment funds (11,131) (889) Debt securities 63 (2,506) Derivative financial instruments (1,331) 1,063 Reinsurance assets 140 518 Investments in associates and joint ventures (1,305) (1,042) Receivables and other financial assets and other assets 118 (281) Deferred acquisition costs 45 114
Other financial liabilities, provisions and other liabilities 1,209 (820) Deposits received from reinsurers (41) (507) Pension and other post-retirement benefit provisions (19) 21 Deferred income (46) (38) Insurance contract liabilities 1,393 (630) Investment contract liabilities 9,051 4,945 Change in liability for third party interest in consolidated funds 1,379 285 Liabilities held for sale - 786 Change in operating liabilities 12,926 4,042
Gain on sale of subsidiaries excluding transaction costs and provision recognised on disposal - (1,136) Gain on disposal of property, plant and equipment 1 (6) Depreciation of property, plant and equipment 14 16 Amortisation of intangible assets 64 51 Impairment losses on intangible assets 20 11 Impairment losses on property, plant and equipment 1 4 Impairment losses reversed on property, plant and equipment - (5) Other interest cost 3 7 Finance costs 82 84 Share of profit from associates and joint ventures (63) (43) Other non-cash and non-operating items 122 (1,017)
Items transferred to profit or loss on disposal of subsidiaries 12 (237) Gain on sale 12 1,102 Transaction costs 21 Provision recognised on disposal of subsidiaries 13 Total cash consideration 1 2,100
(a) Annuity sales practices relating to enhanced annuities As discussed in Note 40, at the request of the Financial Conduct Authority (FCA), Standard Life is conducting a past business review of non-advised annuity sales. The purpose of the review is to identify whether relevant customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and where appropriate provide redress to customers who have suffered loss as a result of not having received sufficient information. In relation to this review, the FCA is carrying out an investigation and it is possible that the FCA may impose a financial penalty on Standard Life. At this stage it is not possible to determine an estimate of the financial effect, if any, of this contingent liability. The Group is also considering whether the FCA’s enhanced annuities review could have implications for other past annuity sales practices.
Note 40 also provides disclosure of potential insurance recoveries relating to redress payable to customers, the costs of conducting the review and other related expenses. Any FCA levied financial penalties cannot be covered by such liability insurance.
(b) Unrecognised financial instruments The Group has committed £453m (2015: £343m) in respect of unrecognised financial instruments to customers and third parties. Of this amount £363m (2015: £291m) is committed by consolidated private equity funds. These commitments will be funded through contractually agreed additional investments both by the Group, through its controlling interests, and the funds’ non-controlling interests. The level of funding provided by each will not necessarily be in line with the current ownership profile of the funds.
The future aggregate minimum lease payments under non-cancellable operating leases from continuing operations are as follows: Not later than one year 32 30 Later than one year and no later than five years 70 69 Later than five years 102 111 Total operating lease commitments 204 210 47. Employee share-based payments The Group operates share incentive plans for its employees. These generally take the form of an award of options or shares in Standard Life plc (equity-settled share based payments) but can also take the form of a cash award based on the share price of Standard Life plc (cash-settled share based payments). All the Group’s incentive plans have conditions attached before the employee becomes entitled to the award. These can be performance and/or service conditions (vesting conditions) or the requirement of employees to save in the save-as-you-earn scheme (nonvesting condition). The period over which all vesting conditions are satisfied is the vesting period and the awards vest at the end of this period.
Long-term incentive plan Executives and senior management Service and performance conditions as set out in the Directors’ remuneration report
Restricted stock plan (RSP) Executives (other than executive Directors) and senior management
Share awards (i) Share incentive plan The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,800. The Group offers to match the number of shares bought up to a value of £50 each month (up to a value of £25 until May 2016). The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.
The following table shows the weighted average assumptions that were considered in determining the fair value of options granted during the year and the share price at exercise of options exercised during the year.
Grant date 24 March 2016 Throughout 24 March 2016 7 October 2016 Share price at grant date 349p 340p 349p 355p Fair value at grant date 349p 340p 349p 56p Exercise price Nil Nil Nil 280p-283p
Options exercised during the year Share price at time of exercise 349p 350p 357p 341p
The following table shows the range of exercise prices of options outstanding at 31 December 2016. All options are exercisable for a period of six months after the vesting date.
Long-term incentive plans £nil 43,561,955 31,022,946 Short-term incentive plan £nil 553,038 537,726 Sharesave Less than 200p 206,770 2,727,416
(c) Employee share�based payment expense The amounts recognised as an expense in Note 8 for equity-settled share-based payment transactions with employees are as follows: £m £m
Additionally, the Group incurred an expense for cash-settled share-based payment schemes from continuing operations of £2m in 2016 (2015: £2m). The liability for cash-settled share-based payments outstanding at 31 December 2016 is £4m (2015: £3m).
Sales to and purchases from associates primarily relate to transactions with Group managed investment vehicles which are classified as associates measured at FVTPL.
Due from related parties Associates 16 24 Joint ventures 3 2
In addition to the amounts shown above, the Group’s defined benefit pension plans have assets of £1,028m (2015: £579m) invested in investment vehicles managed by the Group.
During the year to 31 December 2016, key management personnel and their close family members contributed £1m (2015: £6m) to products sold by the Group. At 31 December 2016 the total value of key management personnel’s investments in Group products was £21m (2015: £19m).
The capital requirements of each business unit are forecast on a periodic basis and the requirements are assessed against the forecast available capital resources. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment. The capital planning process is the responsibility of the Chief Financial Officer. Capital plans are ultimately subject to approval by the Board.
Restriction on SLAL own funds recognised at Group (1.1) - (1.1)
1 2016 based on draft regulatory returns which are not audited. 2015 based on the position on adoption of the SII regulatory regime at 1 January 2016.
(b)(iii) Reconciliation of regulatory capital own funds to IFRS equity A reconciliation of the Group own funds to the equity attributable to equity holders of Standard Life plc on an IFRS basis is as follows: £bn £bn
50. Related undertakings The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings which is set out in this note. Related undertakings are subsidiaries, joint ventures, associates and other significant holdings. In this context significant means either a shareholding greater than or equal to 20% of the nominal value of any class of shares, or a book value greater than 20% of the Group’s assets.
(a) Direct subsidiaries Name of related undertaking Share class1 % interest held 30 STMA 1 Limited3 Ordinary Shares 100% 30 STMA 2 Limited3 Ordinary Shares 100% 30 STMA 3 Limited3 Ordinary Shares 100% 30 STMA 4 Limited3 Ordinary Shares 100% Elevate Portfolio Services Limited3 Ordinary Shares 100% Focus Solutions Group Limited4 Ordinary Shares 100% Standard Life (Asia Pacific Holdings) Private Limited5 Ordinary Shares 100% Standard Life Assurance Limited2 Ordinary Shares
ESP CPPIB European Mid Market Fund Limited Partnership 1% ESP General Partner Limited Partnership Limited Partnership 50% ESP Golden Bear Europe Fund Limited Partnership 3% ESP II Conduit LP Limited Partnership 46% ESP II General Partner Limited Partnership Limited Partnership 46% ESP Tidal Reach LP Limited Partnership 1% European Strategic Partners Limited Partnership 73% European Strategic Partners 2006 'B' Limited Partnership 9% European Strategic Partners 2008 'B' Limited Partnership 4% European Strategic Partners II 'A' Limited Partnership 1% European Strategic Partners II 'B' Limited Partnership 1% European Strategic Partners II 'C' Limited Partnership 69% European Strategic Partners II 'D' Limited Partnership 1% European Strategic Partners II 'E' Limited Partnership 1% Extraverde Property BV14 Ordinary Shares 60% Ezraya Sp z.o.o.15 Ordinary Shares 60% Falcon II Pavlova s.r.o.16 Ordinary Shares 60% Focus Business Solutions Limited4 Ordinary Shares 100% Focus Holdings Limited4 Ordinary Shares 100% Focus Software Limited4 Ordinary Shares 100% Focus Solutions EBT Trustee Limited4 Ordinary Shares 100% G Park Management Company Limited11 Preference shares 100% Gallions Reach Shopping Park (Nominee) Limited11 Ordinary Shares 100% Gallions Reach Shopping Park Limited Partnership11 Limited Partnership 100% Gallions Reach Shopping Park Unit Trust13 Unit Trust 100% GREF Almeda Park SL8 Ordinary Shares 60% GREF Jersey Esplanade Limited17 Ordinary Shares 60% GREF Jersey Holding Limited17 Ordinary Shares 60% GREF Jersey Ireland Holding Limited17 Ordinary Shares 60% GREF Jersey Ireland Property Limited17 Ordinary Shares 60% HDFC Asset Management Company Limited18 Ordinary Shares 40% HDFC International Life and Re Company Limited19 Ordinary shares 35% HDFC Pension Management Company Limited20 Equity Shares 35% HDFC Standard Life Insurance Company Limited21 Equity Shares 35% Heng An Standard Life Insurance Company Limited22 Equity Shares 50% High Street Nominee No. 1 Limited13 Ordinary Shares 100% High Street Nominee No. 2 Limited13 Ordinary Shares 100% Hundred S.à r.l.9 Ordinary Shares 100% Ibis (748) Limited11 Ordinary Shares 100% Ibis (749) Limited11 Ordinary Shares 100% Iceni Nominees (No.2) Limited11 Ordinary Shares 100% Iceni Nominees (No.2A) Limited11 Ordinary Shares 100% Ignis Asset Management Limited Ordinary Shares 100% Ignis Carry Partner Limited24 Ordinary Shares 100% Ignis Cayman GP2 Limited24 Ordinary Shares 60% Ignis Cayman GP3 Limited24 Ordinary Shares 60% Ignis Fund Managers Limited Ordinary Shares 100% Ignis Investment Management Limited Ordinary Shares 100% Ignis Investment Services Limited Ordinary Shares 100% Ignis Nominees Limited Ordinary Shares 100% Inesia S.A.9 Ordinary Shares 100% Inhoco 3107 Limited11 Ordinary Shares 100% Invest Park 3 Sp. z.o.o.25 Ordinary Shares 60% Jones Sheridan Financial Consulting Limited26 Ordinary Shares 100% Jones Sheridan Holdings Limited26 Ordinary Shares 100% Lake Meadows Management Company Limited11 Ordinary Shares 100%
Lincoln St Marks (One) Limited11 Ordinary Shares 100% Lincoln St Marks (Two) Limited11 Ordinary Shares 100% Lothian Development III (Nederland) BV14 Ordinary Shares 100% Lothian Development III SA27 Ordinary Shares 100% Mallard Investments LLP Limited Liability Partnership 35% Mastscreen Limited28 Ordinary Shares 100% NASP 2006 General Partner Limited Partnership Limited Partnership 62% Nordic Hydro AS29 Ordinary Shares 35% Nordic Hydro Holding AS29 Ordinary Shares 35% Nordic Power AS29 Ordinary Shares 35% Nordic Power Torsnes AS29 Ordinary Shares 35% North American Strategic Partners (Feeder) 2006 Limited Partnership 70% North American Strategic Partners (Feeder) 2008 Limited Partnership Limited Partnership 100% North American Strategic Partners 2006 L.P.30 Limited Partnership 55% North American Strategic Partners 2008 L.P. 30 Limited Partnership 100% North American Strategic Partners GP, LP30 Limited Partnership 80% North American Strategic Partners, LP30 Limited Partnership 41% North East Trustees Limited31 Ordinary A Shares
Pace Financial Solutions Limited3 Ordinary A Shares Ordinary B Shares Ordinary C Shares
Standard Life (Asia) Limited37 Ordinary Shares 100% Standard Life Assurance (HWPF) Luxembourg S.à r.l.9 Ordinary Shares 100% Standard Life Charity Fund2 N/A 100% Standard Life Client Management Limited2 Ordinary Shares 100% Standard Life Equity Income Trust PLC28 Ordinary Shares 1% Standard Life European Private Equity Trust plc Ordinary Shares 56% Standard Life European Trust Unit Trust 98% Standard Life European Trust II Unit Trust 100% Standard Life Global Equity Trust II Unit Trust 100% Standard Life International Designated Activity Company38 Ordinary Shares 100% Standard Life International Trust Unit Trust 100% Standard Life Investment Company
AAA Income Fund OEIC 3% American Equity Income Fund OEIC 100% American Equity Unconstrained Fund OEIC 56% Asian Pacific Growth Fund OEIC 38% Corporate Bond Fund OEIC 45% Emerging Market Debt Fund OEIC 78% European Equity Growth Fund OEIC 44% European Equity Income Fund OEIC 19% Europe ex-UK Smaller Companies Fund OEIC 23% Global Emerging Markets Equity Fund OEIC 97% Global Emerging Markets Equity Income Fund OEIC 95% Global Equity Income Fund OEIC 19% Global Equity Unconstrained Fund OEIC 41% Global Smaller Companies Fund OEIC 9% Higher Income Fund OEIC 38% Investment Grade Corporate Bond Fund OEIC 55% Japanese Equity Growth Fund OEIC 95% Short Duration Credit Fund OEIC 71% UK Equity Growth Fund OEIC 45% UK Equity High Alpha Fund OEIC 44% UK Equity High Income Fund OEIC 44% UK Equity Recovery Fund OEIC 18% UK Ethical Fund OEIC 11% UK Gilt Fund OEIC 8% UK Opportunities Fund OEIC 70% UK Smaller Companies Fund OEIC 34%
MyFolio Managed Income III Fund OEIC 49% MyFolio Managed Income IV Fund OEIC 48% MyFolio Managed Income V Fund OEIC 57% MyFolio Market I Fund OEIC 46% MyFolio Market II Fund OEIC 43% MyFolio Market III Fund OEIC 63% MyFolio Market IV Fund OEIC 62% MyFolio Market V Fund OEIC 69% MyFolio Multi-Manager I Fund OEIC 52% MyFolio Multi-Manager II Fund OEIC 52% MyFolio Multi-Manager III Fund OEIC 59% MyFolio Multi-Manager IV Fund OEIC 53% MyFolio Multi-Manager V Fund OEIC 51% MyFolio Multi-Manager Income I Fund OEIC 46% MyFolio Multi-Manager Income II Fund OEIC 43% MyFolio Multi-Manager Income III Fund OEIC 51% MyFolio Multi-Manager Income IV Fund OEIC 40% MyFolio Multi-Manager Income V Fund OEIC 56%
Standard Life Investment Funds Limited2 Ordinary Shares 100% Standard Life Investments Brent Cross General Partner Limited Ordinary Shares 100% Standard Life Investments Brent Cross LP Limited Partnership 100% Standard Life Investments (Corporate Funds) Limited Ordinary Shares 100% Standard Life Investments Dynamic Distribution Fund Unit Trust 46% Standard Life Investments European Property Growth Fund L.P.28 Limited Partnership 7% Standard Life Investments European Real Estate Club LP28 Limited Partnership 2% Standard Life Investments European Real Estate Club II LP28 Limited Partnership 1% Standard Life Investments European Real Estate Club III LP28 Limited Partnership 2% Standard Life Investments (France) SAS39 Ordinary Shares 100% Standard Life Investments (General Partner CRED) Limited11 Ordinary Shares 100% Standard Life Investments (General Partner EPGF) Limited Ordinary Shares 100% Standard Life Investments (General Partner European Real Estate Club) Limited28 Ordinary Shares 100% Standard Life Investments (General Partner European Real Estate Club II) Limited28 Ordinary Shares 100% Standard Life Investments (General Partner European Real Estate Club III) Limited28 Ordinary Shares 100% Standard Life Investments (General Partner GARS) Limited Ordinary Shares 100% Standard Life Investments (General Partner GFS) Limited Ordinary Shares 100% Standard Life Investments (General Partner MAC) Limited Ordinary Shares 100% Standard Life Investments (General Partner PDFI) Limited Ordinary Shares 100% Standard Life Investments (General Partner UK PDF) Limited Ordinary Shares 100% Standard Life Investments (General Partner UK Shopping Centre Feeder Fund LP) Limited11 Ordinary Shares 100% Standard Life Investments Global Absolute Return Strategies Fund Unit Trust 78% Standard Life Investments Global Real Estate Fund Unit Trust 60% Standard Life Investments Global SICAV
Absolute Return Global Bond Strategies Fund40 SICAV 80% American Equity Unconstrained Fund40 SICAV <0.01% Asian Equities Fund40 SICAV 10% China Equities Fund40 SICAV 65% Continental European Equity Income Fund40 SICAV 5% Emerging Market Corporate Bond Fund40 SICAV 89% Emerging Market Debt Fund40 SICAV 0.1% Emerging Market Debt Unconstrained Fund40 SICAV 9% Emerging Markets Local Currency Debt Fund 40 SICAV 97% Enhanced Diversification Global Emerging Markets Equities Fund40 SICAV 99% Euro Government All Stocks Fund40 SICAV 100% European Corporate Bond Fund40 SICAV 33% European Corporate Bond Sustainable and Responsible Investment Fund40 SICAV <0.01%
Standard Life Investments Global SICAV II Enhanced-Diversification Multi Asset Fund40 SICAV 99% MyFolio Multi-Manager I Fund40 SICAV 100% MyFolio Multi-Manager II Fund40 SICAV 100% MyFolio Multi-Manager III Fund40 SICAV 100% MyFolio Multi-Manager IV Fund40 SICAV 100% MyFolio Multi-Manager V Fund40 SICAV 100%
Global Real Estate Feeder Fund33 OEIC 0.3% Standard Life Investments - India Advantage Fund6 Ordinary Shares 100% Standard Life Investments (Japan) Limited42 Ordinary Shares 100% Standard Life Investments (Jersey) Limited13 Ordinary Shares 100% Standard Life Investments Liability solutions ICAV
Standard Life Investments Limited Ordinary Shares 100% Standard Life Investments Liquidity Fund plc
Standard Life Investments Multi Asset Class Company24 Ordinary Shares 100% Standard Life Investments (Mutual Funds) Limited Ordinary Shares 100% Standard Life Investments No. 2 (Hong Kong) Limited41 Ordinary Shares 100% Standard Life Investments (PDF No. 1) Limited13 Ordinary Shares 50% Standard Life Investments (Private Capital) Limited Ordinary Shares 100% Standard Life Investments Property Income Trust Limited44 Ordinary Shares 4% Standard Life Investments (Schweiz) AG45 Ordinary Shares 100% Standard Life Investments Securities LLC30 Ordinary Shares 100% Standard Life Investments (Singapore) Pte. Ltd46 Ordinary Shares 100% Standard Life Investments Strategic Bond Fund Unit Trust 67% Standard Life Investments (Trustee No. 1 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 2 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 3 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 4 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 5 UK PDF) Limited Ordinary Shares 100% Standard Life Investments (Trustee No. 6 UK PDF) Limited Ordinary Shares 100%
Standard Life Investments UK Real Estate Accumulation Feeder Fund Unit Trust 50% Standard Life Investments UK Real Estate Income Feeder Fund Unit Trust 1%
Touchstone Insurance Company Limited23 Ordinary Shares 100% Vebnet Limited2 Ordinary Shares 100% Welbrent Property Investment Company Limited11 Ordinary Shares 100% Whiteleys of Bayswater Limited Ordinary Shares 100% 1 OEIC = Open-ended investment company
Mumbai- 400 020, India 19 Unit OT 17-30, Level 17, Central Park, Dubai International Financial Centre, Dubai, 114603, United Arab Emirates 20 Lodha Excelus, 14th Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalaxmi,
Mumbai - 400011, Maharashtra, India 22 18F, Tower II, The Exchange, 189 Nanjing Road, Heping District, Tianjin, People’s
Republic of China, 300051 23 PO Box 33, Maison Trinity, Trinity Square, St Peter Port, Guernsey, GY1 4AT 24 C/O Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman,
KY1-1104 25 ul. Emilii Plater 53, 00-113, Warszawa, Poland 26 Datum House, Electra Way, Crewe, Cheshire, CW1 6ZF 27 Avenue Louise 326, bte 33, 1050 Brussels, Belgium 28 31st Floor, 30 St Mary Axe, London, EC3A 8BF 29 Dokkveien 1, P.O.Box 1400 Vika, NO-0115 Oslo, Norway 30 C/O Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington,
Street, St. Julian’s, STJ 3155, Malta 35 C/O Citco (Mauritius) Limited, 4th Floor, Tower A, 1 CyberCity, Ebene, Mauritius (Fax number 00 230 404 2601) 36 Springpark House, Basing View, Basingstoke, RG21 4HG 37 40th Floor, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong 38 90 St. Stephen's Green, Dublin D2, Republic of Ireland 39 100 Avenue des Champs Elysees, 1 Rue de Berri, F- 75008, Paris, France 40 2-4, Rue Eugène Ruppert, L-2453 Luxembourg 41 30th Floor, Jardine House, One Connaught Place, Hong Kong 42 Tokyo Bankers Club Building 15F, 1-3-1 Marunouchi, Chiyoda-ku, Tokyo, Japan 43 25/28 North Wall Quay, Dublin, Republic of Ireland 44 PO Box 255, Trafalgar Court, Les Banques, St. Peter Port,Guernsey, GY1 3QL 45 Bahnhofstrasse 100, 8001 Zurich, Switzerland 46 8 Marina Boulevard #05-02, Marina Bay Financial Centre Tower 1 01 8981, Singapore 47 Elizabeth House, 9 Castle Street, St Helier, Jersey, JE4 2QP 48 Kintyre House, 205 West George Street, Glasgow, G2 2LW 49 Liberte House, 19-23 La Molle Street, St Helier, Jersey, JE4 5RL 50 Citadel House, 6 Citadel Place, Ayr, KA7 1JN 51 5 Lister Hill, Horsforth, Leeds, LS18 5AZ
9. Independent auditors’ report to the members of Standard Life plc Report on the company financial statements Our opinion In our opinion, Standard Life plc’s company financial statements (the ‘financial statements’):  Give a true and fair view of the state of the company’s affairs as at 31 December 2016 and of its cash flows for the year then ended
 Have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006
 Have been prepared in accordance with the requirements of the Companies Act 2006
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law, and as applied in accordance with the provisions of the Companies Act 2006.
Other required reporting Consistency of other information and compliance with applicable requirements Companies Act 2006 reporting In our opinion, based on the work undertaken in the course of the audit:  The information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements
 Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion:  We have not received all the information and explanations we require for our audit
 The financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. With respect to the Strategic report and Directors’ report, we consider whether those reports include the disclosures required by applicable legal requirements.
Other matter We have reported separately on the group financial statements of Standard Life plc for the year ended 31 December 2016.
10. Company financial statements Company statement of financial position As at 31 December 2016
Equity Share capital H 242 241 Shares held by trusts I (2) (6) Share premium reserve H 634 628 Retained earnings
Other reserves Total equity 2016 Notes £m £m £m £m £m £m
Other comprehensive income that may be reclassified subsequently to profit or loss Fair value gains on available-for-sale financial assets - - - - 17 17 Tax effect relating to items that may be reclassified subsequently to profit or loss - - - - (3) (3) Total other comprehensive income for the year that may be reclassified subsequently to profit or loss - - - - 14 14 Total comprehensive income for the year - - - 351 14 365 Dividends paid on ordinary shares - - - (370) - (370)
Expiry of unclaimed asset trust claim period J - - - 36 - 36 Reserves credit for employee share-based payment schemes K - - - - 30 30 Transfer to retained earnings for vested employee share-based payment schemes K - - - 23 (23) Shares acquired by employee trusts - (3) - - (3) Shares distributed or sold by employee trusts - 7 - (7) - Cancellation of capital redemption reserve - - - 488 (488) Aggregate tax effect of items recognised directly in equity - - - (7) - (7)
The Notes on pages 226 to 235 are an integral part of these financial statements.
Reserves credit for employee share-based payment schemes K - - - - 34 34 Transfer to retained earnings for vested employee share-based payment schemes K - - - 32 (32) Transfer between reserves on disposal of subsidiary K - - - 1,028 (1,028) Shares acquired by employee trusts - (9) - - - (9) Shares distributed or sold by employee trusts - 6 - (6) - -
Cash flows from operating activities Profit before tax 334 1,073 Impairment of subsidiary undertakings 49 1,415 Impairment of associate undertaking 3 Gains on financial instruments (4) (1) Dividend income from subsidiaries (458) (2,585) Interest income on loans to subsidiaries (20) (20) Interest income on available-for-sale debt securities (12) (15) Distributions from equity instruments (34) (34) Interest payable on subordinated liabilities 82 82 Movements in operating assets and liabilities 5 49 Taxation paid - Net cash flows used in operating activities (55) (36)
Cash flows from investing activities Loans repaid by subsidiaries - 301 Capital injections into existing subsidiaries A (208) (35) Acquisition of subsidiaries measured at cost A - (12) Interest received on loans to subsidiaries 20 20 Interest received on available-for-sale debt securities 17 6 Distributions from equity instruments 34 34 Dividends received from subsidiaries 457 2,585 Acquisition of subsidiaries at FVTPL (18) (200) Disposal of subsidiaries at FVTPL A - 75 Sale of debt securities and derivatives 147 (235) Disposal of investment in associates and joint ventures 13 Net cash flows generated from investing activities 462 2,539
Cash flows from financing activities Repayment of subordinated liabilities - (294) Dividends paid (370) (343) Interest paid on subordinated liabilities (82) (82) Proceeds from issue of shares 6 1 Shares acquired by trusts (3) (9) Return of cash to shareholders under ‘B/C’ share scheme - (1,749) Expiry of unclaimed asset trust claim period 36 Net cash flows used in financing activities (413) (2,476)
Net (decrease)/increase in cash and cash equivalents (6) 27 Cash and cash equivalents at the beginning of the year G 61 34 Cash and cash equivalents at the end of the year G 55 61
Supplemental disclosures on cash flows from operating activities Interest received - 2
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. This is a change from the treatment adopted in 2015 when an income statement was presented. The Company has no employees.
(a)(i) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Company
Investment into existing subsidiaries measured at cost 220 35 Acquisition of subsidiaries at cost - 12 Disposal of subsidiaries measured at cost (12) Impairment of subsidiaries measured at cost (49) (1,415) Acquisition of subsidiaries at FVTPL 19 200 Gains on subsidiaries at FVTPL - 1 Disposal of subsidiaries at FVTPL - (75)
On 14 December 2016 the Company transferred its 100% holding in Pearson Jones plc to 1825 Financial Planning Limited, the Group’s UK-wide financial advice business. The consideration received was 11,600,000 £1 ordinary shares in Standard Life Assurance Limited.
Included within the impairment charge of £49m in 2016 (2015: £1,415m) is an impairment of £31m (2015: £nil) in the Company’s investment in its subsidiary Focus Solutions Group Limited. The recoverable amount is £18m which is its value in use and has been determined using a discount rate of 12% (2015: 12%). This impairment is as a result of a decrease in projected future revenues of the entity. Additionally, an impairment charge of £18m (2015:£70m) has been recognised in the Company’s investment in its subsidiary Standard Life Oversea Holdings Limited. This was primarily in relation to an impairment of Standard Life Oversea Holdings Limited’s investment in Standard Life (Asia) Limited. In 2015 the impairment was primarily as a result of a review of expense and reserving assumptions following regulatory change.
Investments in subsidiaries at FVTPL are £276m (2015: £257m) which relate to holdings in money market and absolute return investment funds over which the Group has control.
(a) Investments in associates The Company’s investment in associate measured at cost relates to a 25.3% (2015: 25.3%) interest in Tenet Group Limited, a company incorporated in England. The year end date for Tenet Group Limited is 30 September which is different from the Company’s year end date of 31 December. For the purposes of the preparation of the Company’s financial statements, financial information for the year ended 31 December is used.
(b) Investment in joint venture The Company has a 50% (2015: 50%) interest in Heng An Standard Life Insurance Company Limited, a company incorporated in China. Further details on this joint venture are provided in Note 18 of the Group financial statements.
Receivables and other financial assets E - - - 54 54
Loans and receivables Total 2015 Notes £m £m £m £m £m
Investments in subsidiaries at FVTPL 257 - - - 257 Investments in associates at FVTPL 13 - - - 13
Receivables and other financial assets E - - - 48 48
Total 270 - 743 431 1,444 The amount of debt securities expected to be recovered or settled after more than 12 months is £297m (2015: £290m).
D. Derivative financial instruments The Company uses derivative financial instruments in order to reduce the risk from potential movements in foreign exchange rates. These instruments are designated as held for trading in the Company’s financial statements.
The derivative liabilities of £nil (2015: £2m) are expected to be settled within 12 months.
Cash outflows Derivative financial assets 18 - 18 Derivative financial liabilities 24 - 24
Money at call and term deposits with original maturity of less than three months 55 61 Total cash and cash equivalents 55 61
I. Shares held by trusts Shares held by trusts relates to shares in Standard Life plc that are held by the Employee Share Trust (EST) and the Unclaimed Asset Trust (UAT).
The EST purchases shares in the Company for delivery to employees under employee incentive plans. Purchased shares are recognised as a deduction from equity at the price paid for them. Where new shares are issued to the EST the price paid is the nominal value of the shares. When shares are distributed from the trust their corresponding value is released to retained earnings.
In July 2006 Standard Life demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members were yet to claim their shares and the UAT held these on their behalf.
The number of shares held in trust at 31 December 2016 was as follows: Number of shares held in trust Employee Share Trust 1,287,431 1,637,419 Unclaimed Asset Trust 12,999,801 -
J. Retained earnings Included in retained earnings is an amount related to the expiry of the UAT claim period. In addition to unclaimed shares, which are referred to in Note I, the UAT holds cash in relation to unclaimed cash entitlements arising from both cash entitlements which were allocated to eligible members of the mutual company at the date of demutualisation and dividends received on shares held in the UAT. On expiry of the UAT claim period on 9 July 2016, the entitlement to the unclaimed cash remaining in the UAT transferred partly to the Company and partly to the Standard Life Foundation. The transfer of the cash entitlement to the Company resulted in the recognition of a cash asset of £36m, the impact of which was recognised directly in retained earnings in equity.
Available-forsale financial assets Total 2016 £m £m £m £m £m £m
Reserves credit for employee share-based payment schemes - 34 - - 34 Transfer to retained earnings for vested employee share-based payments - (32) - - - (32)
Derivative financial liabilities D 2 - 2 Other financial liabilities O - 52 52
Mutual Assurance Capital Securities: 6.546% Sterling fixed rate perpetual 300 318 300 317 Subordinated liabilities 1,319 1,318
Subordinated liabilities are considered current if the contractual re-pricing or maturity dates are within one year. The principal amount of all the subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on the subordinated liabilities of £37m (2015: £37m) is expected to be settled within 12 months.
The Company has surrendered the benefit of its tax losses to underlying subsidiaries for a consideration of £8m (2015: £19m). The Company has provided for deferred tax amounting to £3m (2015: £1m) in respect of unrealised gains on assets held as available for sale.
Deferred tax liabilities comprise: Unrealised gains on assets held as available-for-sale (3) (1) Net deferred tax liabilities (3) (1)
O. Other financial liabilities The amount of other financial liabilities expected to be settled after more than 12 months is £nil (2015: £nil).
P. Other liabilities The amount of other liabilities expected to be settled after more than 12 months is £nil (2015: £nil).
Q. Risk management (a) Overview The Company is principally involved in the management of its investments in subsidiaries, and is responsible for the raising and allocation of capital to ensure that the operational funding and regulatory capital needs of its subsidiaries are met at all times. The Group’s capital management policies are explained in Note 49 of the Group financial statements.
Through the management of its investment in subsidiaries and capital position the Company holds financial instruments and is principally exposed to market, credit and liquidity risks.
The risk management processes of the Company are aligned with those of the Group as a whole. Details of the Group’s risk management processes are outlined in the ‘Risk Management’ section within the Strategic report and in Note 41 of the Group financial statements.
The market risk exposure to foreign currency assets is matched by liabilities held in the same currency or managed using derivative financial instruments.
(b) Market risk continued (b)(ii) Sensitivity analysis – market risk The table below illustrates the sensitivity of profit after tax to changes in equity security prices and to changes in interest rates as at the reporting date, assuming other assumptions remain unchanged.
Equity security prices Interest rates +20% -20% +10% -10% +1% -1%
£m £m £m £m £m £m £m £m £m £m £m £m
Impact on profit after tax 4 5 (4) (5) 2 2 (2) (2) (2) - 2 -
(c) Credit risk The Company is exposed to credit risk from the risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform these obligations in a timely manner. Exposure also includes the risk of a reduction in the value of assets due to widening of credit spreads. Any loans to subsidiaries require approval from the Group Enterprise Risk Management Committee prior to being transacted.
(c)(i) Credit exposure of financial assets The following table provides an analysis of the quality of financial assets that are neither past due nor impaired at the reporting date and are exposed to credit risk. An explanation of credit ratings is included in Note 41(c) of the Group financial statements.
Investments in subsidiaries at FVTPL of £276m (2015: £257m) includes £201m (2015: £200m) invested in absolute return funds and £75m (2015: £57m) relating to a holding in a money market fund. These funds are managed by a subsidiary company and are not rated. The money market fund invests in a range of counterparties that are externally rated, and uses concentration limits and maturity limits in managing its exposures.
S. Related party transactions (a) Transactions with and balances from/(to) related parties In the normal course of business, the Company enters into transactions with related parties. The year end balances arising from such transactions are as follows: £m £m
The estimated fair values of loans to subsidiaries are determined with reference to quoted market prices determined using observable market inputs. The Company does not consider its loans to subsidiaries to be impaired.
The table below presents the loans to subsidiaries as detailed above measured at fair value by level of the fair value hierarchy.
Operating profit reporting provides further analysis of the results reported under IFRS and the Directors believe it helps to give shareholders a fuller understanding of the performance of the business by identifying and analysing non-operating items. Operating profit is a key performance indicator, and is consistent with the way that financial performance is measured by management and reported to the Board and strategic executive committee.
Fee based revenue 1,651 1,579 Spread/risk margin 134 145 Total operating income 1,785 1,724 Total operating expenses (1,159) (1,124) Capital management 21 9 Share of associates’ and joint ventures’ profit before tax 76 56 Operating profit before tax from continuing operations 723 665 Tax on operating profit (127) (114) Share of associates’ and joint ventures’ tax expense (13) (13) Operating profit after tax from continuing operations 583 538 Singapore included in discontinued operations segment - (42) Total non-operating items (274) (257) Tax on non-operating items 59 37 IFRS profit from continuing operations 368 276 IFRS profit from discontinued operations - 1,147 Total IFRS profit attributable to equity holders of Standard Life plc 368 1,423
Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. Operating profit also excludes restructuring and corporate transaction costs, amortisation and impairment of intangibles acquired in business combinations, and certain one-off items. Further details on operating profit and non-operating items are included in Notes 2(b)(i) and 14 of the Group financial statements section of this report.
As set out in the table above, the key components of operating profit before tax are total operating income (which is broken down into fee based revenue and spread/risk margin), total operating expenses and share of associates’ and joint ventures’ profit before tax. These components provide a meaningful analysis of our operating results. A reconciliation of total operating income and total operating expenses from continuing operations (as presented in the analysis of operating profit above) to total revenue and total expenses respectively (as presented in the Group consolidated income statement) is included in Note 2(b)(ii) of the Group financial statements section of this report.
(a) Associates and Joint Ventures (JVs) adjustment The calculation of underlying cash generation was changed during H1 2016. Underlying cash generation now includes dividends received from associates and joint ventures, previously no contribution was included from these businesses. The revised approach reflects more closely the underlying cash generated given the regular receipt of dividends in recent years from our Indian associates HDFC Life and HDFC Asset Management. Comparatives have been restated.
Exclude share of associates’ and joint ventures’ profit before tax 2 (76) (56) Dividends received from associates and joint ventures 18 16 12 Associates and JVs adjustment (60) (44)
(d) Fixed and intangible assets adjustment The fixed and intangible assets adjustment adds back depreciation and amortisation that is included within underlying performance for the period and deducts additions for the period where the depreciation or amortisation of those additions will be included within underlying performance. The following table reconciles equipment and intangible asset movements in the Group financial statements to the fixed and intangible asset adjustment.
Operating profit after tax (£m) 583 541 Opening IFRS equity attributable to equity holders of Standard Life plc (£m) 4,002 4,672 External final dividend payment - time apportioned (£m) (142) (131) External interim dividend payment - time apportioned (£m) (21) (20) Canada: Sale proceeds less return of value - time apportioned (£m) - 397 Canada: Remove net asset value at point of sale - time apportioned (£m) - (1,106) Adjusted IFRS equity (£m) 3,839 3,812 Operating return on equity (%) 15.2 14.2 238 Standard Life 2016
Cost/income ratio Cost/income ratio is a measure that highlights our efficiency and is calculated as operating expenses divided by operating income on a rolling 12 month basis, and includes the share of associates’ and joint ventures’ profit before tax.
Fee based revenue (£m) 1,651 1,579 1,429 Spread/risk margin (£m) 134 145 183 Share of associates’ and joint ventures’ profit before tax (£m) 76 56 39 Total operating income and share of associates’ and joint ventures’ profit before tax from continuing operations (£m) 1,861 1,780 1,651
11.3 Assets under administration and net flows Assets under administration (AUA) is a measure of the total assets we administer. It includes Standard Life Investments assets under management (AUM), as well as those assets that the Group administers where the customer has made a choice to select an external third party investment manager.
Opening AUA at 1 Jan 2016 Gross flows Redemptions Net flows
Market and other movements Closing AUA at £bn £bn £bn £bn £bn £bn
Associate and joint venture life businesses4 2.3 0.8 (0.4) 0.4 1.3 4.0 1 During 2016 Ignis funds were merged into Standard Life Investments funds and are now reported within Institutional and Wholesale. This has resulted in a transfer of £11.1bn AUM out of Ignis into Institutional (£9.8bn) and Wholesale (£1.3bn) through Market and other movements. 2 Platform AUA (Wrap, Elevate and Fundzone) of £44.2bn (2015: £26.5bn) comprises £41.7bn (2015: £24.4bn) reported within UK Retail and £2.5bn (2015: £2.1bn) relating to Wrap International
Strategic partner life business AUM 128.4 4.3 (11.1) (6.8) 1.1 122.7 1 During 2016 Ignis funds were merged into Standard Life Investments funds, transferring £11.1bn AUM through Market and other movements into the following categories - By geography: UK
11.5 Assets under administration by reporting segment An analysis of AUA by reportable segment is included below.
Assets under administration Fee based 177.1 156.5 0.6 - (18.4) 315.8
India and China Other Eliminations1 Total 31 December 2015 £bn £bn £bn £bn £bn £bn
Reports from the Committees of Standard Life Assurance Limited and the Standard Life Master Trust Co. Ltd.
The committee’s work in 2016 An indicative breakdown as to how the committee spent its time is shown below: During 2016, the committee’s work focused on these key areas: Customer Policy values – the WPC reviewed the algorithm for setting regular bonus rates and confirmed that it remains appropriate. It approved management’s recommendations regarding bonus rates and payout values.
The WPC approved the transfers to shareholder funds, in accordance with the Scheme of Demutualisation, for the year ended 31 December 2015 of some £190m.
The WPC also reviewed the With Profits Actuary’s advice on expense allocation within SLAL and agreed with his conclusion that the methodology had no material bias against policyholders’ interests. Occasionally there are administrative errors that give rise to extra costs and particular care is taken to ensure that the with profits funds do not bear any inappropriate burden from these.
Annuity Rates for Guaranteed Annuity Option/Guaranteed Minimum Pension Buyouts Following the committee’s review and challenge of the rates charged by SLAL to the Heritage With Profits Fund (HWPF) for buying out guaranteed annuity liabilities, SLAL is now offering a discounted rate to the HWPF on the basis that SLAL is not in a position to offer the HWPF the benefit of the open market option that is available to individual customers without taking on additional risk. The committee is satisfied that the arrangement will help to protect the interests of the fund, but will continue to monitor the fairness of this arrangement.
Solvency II The introduction of Solvency II on 1 January 2016 has necessitated a number of technical changes to the Scheme of Demutualisation, to ensure that it continues to operate as intended, all of which were reviewed by the WPC. Some required Court approval, and this was obtained during 2016.
 ��It had continued to challenge management on the exercise of discretion
The committee provides information on its members, composition and how the committee protects the interests of policyholders and makes its views known at the following website www.standardlife.co.uk/c1/funds/with-profits-committee.page
 �The results of a subsequent 2014 report (the legacy audit) by the Independent Project Board (IPB) of the Association of British Insurers which looked at legacy pension schemes at risk of being exposed to charges over an equivalent of one per cent annual management charge
Membership The members are appointed by the SLAL board on the recommendation of the Nomination and Governance Committee. The membership of the IGC remains unchanged since inception.
Member attendance at meetings for the year ending 31 December 2016 was: IGC Member Attendance
The committee’s work in 2016 An indicative breakdown as to how the committee spent its time is shown below: Legacy audit The IGC has focused on the implementation of the changes agreed under the legacy audit which were successfully implemented on 31 October 2016 as per the deadline agreed between the IGC and SLAL.
Value for money In its first annual report the IGC concluded overall that Standard Life’s various workplace personal pension products (both newer and older style) offer policyholders value for money; are of good quality; benefit from well-designed investment solutions, good administration and governance; and, comprehensive member support and communication materials. However, it noted that to achieve a suitable level of income in retirement, adequate contributions are required through the lifetime of pension saving.
Looking ahead to 2017 The IGC is looking more closely at the value for money offered by the wider range of investment options as well as default arrangements that have been designed by employer sponsors and/or scheme advisers. It has commissioned some independent analysis to help with this work.
The IGC recognises the importance of gathering the views of scheme members as customers and has continued to attend retirement roadshows. One of Standard Life’s commitments to the IGC referenced in the 2016 report was to commission member research. Standard Life, along with ten other providers, sponsored and participated in independent research co-ordinated by Sacker & Partners LLP. This approach allowed insight to be gathered from scheme members to build an understanding of what they value and why. The results of this will be shown in the second annual report due to be published in March 2017.
Membership The board of SLMTC consists of five members, all of whom are independent of Standard Life. They meet regularly throughout the year. Pitmans Trustees Limited was appointed as chair of the board of directors of the SLMTC. Richard Butcher is their representative.
Member attendance at meetings for the year ending 31 December 2016 was: Member Attendance
The Head of Pensions Strategy routinely attends these meetings and the Managing Director for Corporate, Retail and Wholesale has had regular interactions with the board.
The board’s work in 2016 An indicative breakdown as to how the board spent its time is shown below: Legacy audit Alongside the IGC, the SLMTC has focused on the implementation of the changes agreed under the legacy audit which were successfully implemented on 31 October 2016 as per the deadline agreed between the SLMTC board and SLAL.
Audit and assurance framework In 2016, the board of SLMTC adopted the framework provided by the Audit and Assurance faculty of the Institute of Chartered Accountants in England and Wales entitled Assurance Reporting on Master Trusts (Master Trust Supplement to ICAEW AAF 02/07). This report provides information and assurance on the design and description of governance and administrative control procedures in relation to the business operations of SLMTC for providing pensions trustee services.
More information on the composition of SLMTC can be found at the following website www.standardlife.co.uk/c1/master-trustcommittee. page
AUA represents the IFRS gross assets of the Group, adjusted to include third party AUA which is not included on the consolidated statement of financial position, and excluding certain assets which do not constitute AUA. The assets excluded are primarily reinsurance assets, deferred acquisition costs and intangible assets.
Assets under management (AUM) A measure of the total assets that Standard Life Investments manages on behalf of individual customers and institutional clients, for which it receives a fee.
Auto enrolment The UK Government introduced auto enrolment to help people save for their retirement. Employers have to automatically enrol eligible employees into a qualifying workplace pension scheme (QWPS). This pension scheme needs to meet the standards set by the Pensions Regulator.
Capital surplus This is a regulatory measure of our financial strength. From 1 January 2016 our capital surplus is measured on a Solvency II basis. Prior to 1 January 2016, our capital surplus was measured in accordance with the Insurance Groups Directive.
Drawdown (flexible income) Drawdown, also known as flexible income, allows the policyholder to withdraw pension income as and when they request it. The remainder of the pension fund remains invested, giving it the potential for growth.
Earnings before interest, tax, depreciation and amortisation (EBITDA) EBITDA is defined as earnings before interest, taxation, depreciation, amortisation, restructuring costs, other non-operating items and non-controlling interests.
EBITDA margin This is an industry measure of performance for investment management companies. It is calculated as EBITDA divided by fee based revenue.
Growth channels We aim to drive the increase in our assets, revenue and profit via our growth channels. This comprises Standard Life Investments Institutional and Wholesale, UK Workplace and Retail, Europe (excluding Germany with profits), Hong Kong, Standard Life Wealth and Ignis.
International Financial Reporting Standards (IFRS) International Financial Reporting Standards are accounting standards issued by the International Accounting Standards Board (IASB). The Group's consolidated financial statements are prepared in accordance with IFRS as endorsed by the EU.
Investor view The investor view of Solvency II adjusts the regulatory position for the impact from unrecognised capital and with profit funds / defined benefit pension plans.
Mature book/business Mature books are expected to provide a stable and consistent contribution to our profit. This includes UK mature Retail, Standard Life Investments Strategic Partner Life books and spread/risk based business. It also includes the with profits business in Germany which closed to new business in April 2015.
Net flows Net flows represent gross inflows less gross outflows or redemptions. Gross inflows are new funds from clients and customers. Gross outflows or redemptions is the money withdrawn by clients or customers during the period, including annuity payments.
Operating expenses Operating expenses is a component of operating profit and relates to the day-to-day expenses of managing our business.
Operating income Operating income is a component of operating profit and consists of fee based revenue and spread/risk margin.
Operating profit Operating profit is the Group’s key alternative performance measure. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
Operating profit also excludes the impact of the following items:  �Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.
Platform An investment platform (eg Wrap or Elevate) which is essentially a trading platform enabling investment funds, pensions, direct equity holdings and some life assurance contracts to be held in the same administrative account rather than as separate holdings.
Recourse cash flows (RCF) Certain cash flows arising in the Heritage With Profits Fund (HWPF) on specified blocks of UK and Ireland business, which are transferred out of the fund annually and accrue to the ultimate benefit of equity holders, as determined by the Scheme of Demutualisation.
Standard Life Investments Institutional Standard Life Investments Institutional sell to institutions (including corporates, pension schemes, local authorities, government agencies and insurance companies) either directly or through intermediaries.
Strategic partner life business A measure of the assets that Standard Life Investments manages on behalf of Standard Life Group companies and under other long-term life book partnership agreements with third party companies such as Phoenix Group.
Underlying cash generation This presents a shareholder view of underlying cash earnings. The IFRS consolidated statement of cash flows includes policyholder cashflows, and does not exclude underlying adjustments and non-operating items.
Underlying cash generation adjusts underlying performance for certain non-cash items. Adjustments are made for deferred acquisition costs/deferred income reserve, fixed/intangible assets and the Asian joint ventures and associates. Depreciation/amortisation that would normally be included in operating profit is replaced with the cash movement in the period. The measure is stated net of current (cash) tax on underlying performance. A reconciliation of underlying performance to underlying cash generation is included in the Strategic report. Reconciliations between underlying performance, operating profit and profitability on an IFRS basis are also included in this report.
Underlying performance Underlying performance is operating profit before tax after excluding the impact of spread/risk operating actuarial assumption changes and specific management actions in the reporting period.
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Please remember that the value of shares can go down as well as up and you may not get back the full amount invested or any income from it. All figures and share price information have been calculated as at 31 December 2016 (unless otherwise indicated). This document has been published by Standard Life plc for information only. It is based on our understanding as at February 2017 and does not provide financial or legal advice. Apple and the Apple logo are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google Inc. Standard Life plc is registered in Scotland (SC286832) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. www.standardlife.com © 2017 Standard Life, images reproduced under licence UKARA16 0317