Total net flows represent our customers’ premiums and deposits less the redemptions that they make. Positive net flows are key to growing AUA. Total net flows almost doubled to a record £9.6bn.
Group operating profit before tax is a measure of our ability to deliver long-term returns for our shareholders and provides an indication of our dividend paying capability. This reduced by 13% to £751m, due to a particularly strong prior year which included significant management actions in Canada and the £96m benefit from the UK professional indemnity insurance claim.
Group underlying performance Operating assumption changes Canada specific management actions Other specific items £526m*
The Chairman shares his views on our performance, and the relevant issues affecting our business and how we operate. Page
Basis of preparation 38 2. Governance information Good governance is part of ensuring we operate responsibly and act in the interests of our shareholders. In this section you can find out more on our Directors’ background and experience, their specific responsibilities in relation to the Annual Report and Accounts, the key parts of our governance framework and how it was implemented during 2013 as well as reports from the various Board committees. You can also find out about our approach to Directors’ remuneration and the results of how our Remuneration Policy was carried out during 2013. Board of Directors 39 Directors’ report 42
Supplementary Information 270 4. Other information Further information for shareholders such as our financial calendar and how to get in touch. Shareholder information 281
The rollout of auto enrolment into workplace pensions is changing the savings landscape in the UK and we are reinforcing our leading position in this market. It is – rightly – a very competitive market and I believe that’s the best way to ensure that charges are fair and give value for money. The value that we offer includes excellent customer service and access to award-winning investment solutions.
In September this year, the Scottish people will be voting in a referendum on Scottish independence. Your Company is strictly apolitical and it would be inappropriate for us to give any views on how people should vote. Equally, as one of the largest companies headquartered and based in Scotland, it is appropriate that we have carefully thought through the potential consequences if Scotland were to become an independent nation. We have reviewed all the information that we have available to us at the current time, and we consider that a number of material issues remain uncertain. David Nish covers these issues in section 1.1 of this report.
We have been based in Scotland for 189 years and we are very proud of our heritage. Scotland has been a good place from which to run our business and to compete around the world. We very much hope that this can continue. But if anything were to threaten this, we will take whatever action we consider necessary – including transferring parts of our operations from Scotland – in order to ensure continuity and to protect the interests of our stakeholders. We will continue to seek further clarity from politicians on both sides of the debate, so that we can reach an informed view on what constitutional change may mean for our customers, our business and our shareholders.
Our balance sheet remains strong. We are generating significant cash flows and have once again increased our dividend.
Standard Life Investments remains focused on delivering excellent investment performance, expanding its investment capabilities and increasing its distribution channels and geographic reach. This is reflected in a robust pipeline of institutional business and continued demand for our wholesale propositions.
We look forward to the future with confidence as we continue to capitalise on the strong distribution capabilities of our long-term savings businesses and our global investment expertise. We are innovating and driving efficiency to deliver the right propositions and value for our customers. These strengths, combined with our strong balance sheet mean we can continue to deliver value for customers and grow returns for our shareholders.
Lowering unit costs 1.1 Chief Executive’s overview continued Objectives and strategy Our strategic objectives and our performance against them are illustrated below. Find out more on how our businesses performed in Section 1.4 – Business segment performance. Our strategic objectives and ultimately our ability to generate value for our shareholders may be subject to financial and non-financial risks. Section 1.5 – Risk management has more information on our principal risks and risk management approach. Find out more about some of the terms used in this report in the glossary.
• Assets managed for John Hancock in the US rose to £2.8bn (2012: £1.0bn)
• Excellent money weighted average investment performance with 99% of third party AUM ahead of benchmark in the year, with 94% ahead over 3 years and 96% over 5 years
• Innovation and client demand driving new fund launches including second local currency Global Emerging Markets Debt fund, US Monthly Income Fund and EnhancedDiversification Growth Fund.
• Ryder Cup sponsorship provides further opportunity to promote the brand globally
• Opportunities for further global growth with strategic partners including Sumitomo Mitsui in Japan and John Hancock in the US.
Our business model Our strategy is underpinned by a simple business model. Find out more about the strategy of our individual businesses and how they apply our business model in Section 1.4 – Business segment performance.
Retail: Focusing on the savings and investments needs of customers in our chosen segments
• Successful start to auto enrolment in the UK with 290 schemes implemented in 2013 and a low opt out rate at under 10% of those enrolled
• UK corporate net inflows increased by 62% to £2.0bn (2012: £1.2bn)
• UK Wrap platform assets increased by 36% to £16.6bn • Standard Life Wealth continues to grow and completed the acquisition of the private client division of Newton Management Limited in September 2013
• Success of MyFolio risk based funds continues with assets increasing by 82% to £4.0bn (2012: £2.2bn)
• Our SIPP proposition continues to grow with a 20% increase in customers and AUA up 18% to £23.2bn (2012: £19.6bn)
• In Canada, retail segregated funds AUA increased by 22% to £2.8bn (2012: £2.3bn).
• Leading provider of corporate benefit solutions in the UK and Canada
• Continued opportunity to benefit from ongoing shift from defined benefit to defined contribution and bundling of pension provision with single provider
• Market-leading range of MyFolio funds meeting the growing demand for simple investment solutions
• Helping to support and guide customers post RDR, including working with bank partners
• HDFC Life has been a market leader in updating its product range to reflect new Indian product guidelines which came into effect on 1 January 2014
Legislation and public policy The phased introduction of auto enrolment continued in 2013. By 2018, all UK employers will need to provide a qualifying workplace pension for their eligible employees. The largest employers have already done this and from April 2014, companies with less than 250 employees will need to comply with the new rules. That means around 1.4 million qualifying workplace pension schemes will need to be created and 8.8 million employees auto-enrolled over the next few years.
In November 2013, the UK Government launched a consultation on pension charges for workers automatically enrolled into workplace pensions including the potential introduction of a charge cap. The level of any cap will be confirmed as part of the outcome of the consultation which we expect to be published in Q1 2014. However, the Government has confirmed that any charge cap will not be implemented before April 2015, in order to give employers at least twelve months’ notice of rules that will apply to them. We believe that we offer competitive pensions which meet our customers’ needs including those joining schemes through auto enrolment. Although charges are an important element of providing a good value pension, contribution levels, investment selection and performance are also critical factors and it is important that a debate on charges does not distract from the important work being done to make the auto enrolment project a success.
The Retail Distribution Review phase 2 brings new regulations mainly affecting platform service providers. Customers will pay for platform services through transparent charges deducted from their investments and platform providers cannot receive payment for these services from fund managers. These regulations are effective from 6 April 2014 for new business and from 6 April 2016 for existing business. As well as implementing changes for the April 2014 date we are also progressing with the 2016 requirements leaving us well placed in the market.
Constitutional change As a large company and employer based in Scotland, we have been following the constitutional debate ahead of the independence referendum on 18 September 2014.
We have a long-standing policy of strict political neutrality and at no time will we advise people on how they should vote. However, we have a duty and a responsibility to understand the implications of independence for our four million UK customers, our shareholders, our people and other stakeholders in our business and take whatever action is necessary to protect their interests.
At the time of publishing this report (February 2014), we believe a number of material issues remain uncertain. These include: • The currency that an independent Scotland would use • Whether agreement and ratification of an independent Scotland’s membership to the European Union would be achieved by the target date (currently 24 March 2016) • The shape and role of the monetary system • The arrangements for financial services regulation and consumer protection in an independent Scotland • The approach to individual taxation, especially around savings and pensions, as a consequence of any constitutional change.
We will continue to seek clarity on these matters, but uncertainty is likely to remain. In view of this, there are steps we will take based on our analysis of the risks. For example, we have started work to establish additional registered companies to operate outside Scotland, into which we could transfer parts of our operations if it was necessary to do so. This is a precautionary measure to ensure continuity of our businesses’ competitive position and to protect the interests of our stakeholders. As Chief Executive, my commitment is whatever happens, we will continue to serve the needs of our customers and maintain our competitive position.
• Group underlying performance increased by 19% to £638m (2012: £534m) and benefited from strong performance in Standard Life Investments and the UK
As a long-term savings and investments business, assets under administration (AUA) and net flows are key drivers of shareholder value. We aim to grow AUA by focusing on our customers and meeting their needs with innovative propositions. • Group AUA increased by 12% to a record £244.2bn, driven by strong net inflows in the UK and Standard Life Investments, and favourable market movements
European Embedded Value (EEV) operating profit measures our ability to manage our existing book of business and to write profitable new business. • EEV operating profit before tax decreased by 16% to £915m • Core EEV operating profit of £687m was broadly consistent with prior year (2012: £697m) • Efficiency and back book management elements, which are more variable than core, reduced by £97m and £61m respectively, reflecting higher investment costs allocated to covered business and lower benefits from management actions.
EEV operating capital and cash generation reflects our ability to generate capital and cash. This enables further investment in the business and the payment of dividends to our shareholders. • EEV operating capital and cash generation decreased by 17% to £582m largely due to £91m lower operating capital and cash generation from back book management and £50m higher new business strain mainly reflecting increased sales volumes
• EEV operating capital and cash generation remains aligned with Group operating profit after tax.
Find out more about these measures in Section 1.3 – Group financial overview and Section 1.9 – Basis of preparation.
Group operating profit before tax1,2 £751m £867m (13%) IFRS profit after tax attributable to equity holders of Standard Life plc2 £466m £665m (30%) Group operating return on equity2 14.7% 19.2% (4.5% points)
Group operating profit before tax fell by 13% to £751m, following significant management actions in Canada in 2012, and the £96m benefit from the UK professional indemnity insurance claim in 2012. Group underlying performance increased by 19% to £638m (2012: £534m) due to a strong performance in the UK and Standard Life Investments. • Fee based revenue increased by 15% to £1,459m driven by higher average asset values and strong demand for our fee based products • Spread/risk margin increased slightly to £513m mainly due to better than expected claims and investment experience and higher returns from existing business in Canada. Specific management actions in Canada generated a benefit of £42m (2012: £81m) from property sales and the renegotiation of an existing reinsurance arrangement. Actuarial reserving changes generated a gain of £68m (2012: gain £84m) and includes a benefit of £40m (2012: benefit £1m) from a reduction in actuarial reserves arising from UK mortality assumption changes.
• Acquisition expenses increased to £325m and expressed as a proportion of sales improved to 145bps (2012: 156bps)
1 Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumptions, restructuring costs (including Solvency 2), impairment of intangible assets, amortisation of intangible assets acquired in business combinations, profit or loss on the disposal of a subsidiary, joint venture or associate, changes in Canada insurance contract liabilities due to resolution of prior year tax matters and other significant one-off items outside the control of management.
2 Comparatives have been restated to reflect an amendment to IAS 19 Employee Benefits. 3 JV relationship management costs are now reflected in Group corporate centre costs, previously these were included within maintenance expenses as part of our
Canada specific management actions (Capital management) 3 72 Operating assumption and actuarial reserving changes (Spread/risk margin) 68 84
Group non-operating loss before tax The Group non-operating loss in 2013 was £187m (2012: loss £142m). The losses in 2013 were primarily due to short-term fluctuations in investment return and economic assumption changes, with losses of £92m (2012: loss £29m) mainly due to a rise in yields on debt securities. Nonoperating restructuring and corporate transaction expenses of £73m (2012: £109m) relate to business unit restructuring programmes, Solvency 2 and costs arising from the acquisition of the private client division of Newton Management Limited.
Assets under administration and net flows AUA increased by 12% to £244.2bn driven by a combination of net inflows across our businesses and positive market movements: • Overall net inflows increased to £9.6bn (2012: £5.0bn) reflecting strong net inflows into our newer style fee based propositions such as MyFolio and Wrap and the global expansion at Standard Life Investments
• Reduced new business contribution in the UK and Europe reflects changes in product mix, with lower sales of annuities combined with increased sales of lower margin corporate pensions business. The overall margin was 1.4%, with a reduction in UK and Europe partly offset by an increase in Asia and Emerging Markets.
EEV operating profit before tax EEV operating profit before tax decreased by 16%, with core profits largely stable and lower efficiency and back book management profits: • Core operating profits decreased by 1% to £687m • Efficiency operating loss of £91m was primarily due to increased investment costs allocated to covered business • EEV operating profit before tax from back book management of £319m
Reconciliation of Group operating profit to EEV operating capital and cash generation for the year ended 31 December 2013 £16m DAC/DIR, intangibles, tax and other £602m 2 Group operating profit after tax consists of: Group operating profit before tax of £751m, tax charge on operating profit of (£141m) and share of joint ventures’ and associates’ tax expense of (£8m).
Reconciliation of Group operating profit to EEV operating capital and cash generation As with EEV operating capital and cash generation, Group operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between Group operating profit and EEV operating capital and cash generation, there are differences which include: • £36m negative impact from the difference in the treatment of assets and actuarial reserves • £16m positive impact from the difference in the treatment of deferred acquisition costs (DAC)/deferred income reserve (DIR), intangibles, tax and other. Other includes the impact of different methodologies in respect of asset management charges. In EEV operating profit this income is included on an expected return basis but the actual charges are included in Group operating profit.
Group capital surplus The Group capital surplus decreased to £3.8bn (2012: £4.1bn) following the payment of the £302m special dividend and the acquisition of the private client division of Newton Management Limited.
The Group capital surplus remains largely insensitive to a 30% fall in equities from the 31 December 2013 position, with the surplus estimated to reduce by approximately £0.2bn (2012: £0.3bn reduction). Following a 100bps rise in yields, the surplus is estimated to reduce by approximately £0.1bn (2012: £0.1bn reduction). Following a 100bps fall in yields the surplus is estimated to reduce by approximately £0.1bn (2012: £0.4bn reduction).
Group solvency cover 183% 205% 173% 3 2013 based on estimated regulatory returns. 2012 and 2011 based on final regulatory returns. 4 Net of restricted assets of £1.2bn (2012: £1.2bn, 2011: £1.0bn).
2 2013 reflects the payment of the 2012 final dividend of £230m, the 2012 special dividend of £302m and the 2013 interim dividend of £124m. 2012 reflects the payment of the 2011 final dividend of £216m and the 2012 interim dividend of £115m.
This liquidity stress testing ensures that we can withstand a scenario of significant falls in asset values combined with unprecedented levels of surrenders and claims.
Standard Life plc also holds substantial cash and liquid resources. At 31 December 2013, Standard Life plc held £574m (2012: £1,064m) of cash and short-term debt securities and £333m (2012: £nil) of bonds.
Opening 1 January 1,064 565 Dividends received from subsidiaries 629 499
Strategic overview Our UK and Europe business is a leading provider of long-term savings and investment propositions including self-invested and workplace pensions, individual savings accounts, and mutual funds. We have built strong relationships with individual customers, advisers, employee benefits consultants and employers and we offer a comprehensive range of products and services across the value chain, including access to a wide range of investment solutions through Standard Life Investments. We are a customer focused business providing platforms, business services and investment outsourcing options that are simple, effective and efficient. Technology is helping us to improve our customer proposition further and achieve even greater benefits of scale in our business.
The number of active defined benefit schemes is declining, reflecting an underlying shift towards defined contribution schemes. Increasing life expectancy and the reluctance of employers to continue to bear long-term investment risk are key reasons for this shift. Nevertheless, consumers are generally under-estimating how much they need to save for retirement, underlining the importance of auto enrolment.
Small and medium-sized enterprises (SMEs) are central to the UK economy, accounting for 99% of UK businesses and employing over 14 million people. Over the next few years, around 1.4 million qualifying workplace pension schemes will need to be created to cater for an estimated 8.8 million employees who will be auto-enrolled. We have already added over 220,000 new customers as a result of auto enrolment across some of our largest clients. We are now working with advisers across the UK to provide propositions, support and tools for SMEs, who often lack the resources of larger employers, to help make auto enrolment a success for their employees.
UK and Europe operating profit before tax reduced by £13m to £380m. UK and Europe underlying performance increased by £32m to £336m.
Movements in the UK operating profit from 2012 include: • Fee based revenue increased by 9% to £727m mainly driven by higher
• Acquisition expenses increased by just 4% to £181m despite a 31% increase in sales and expressed as a percentage of sales improved to 106bps (2012: 133bps), reflecting the scalability of our business model
• Maintenance expenses increased by 3% to £368m reflecting increased investment management fees due to higher average market levels and the growth in institutional pensions business. As a proportion of average AUA, maintenance expenses improved to 26bps (2012: 31bps) as we continue to benefit from our scalable business model and cost discipline.
Newer style UK retail propositions continue to show momentum which, combined with the benefits of scalability and growth in direct customers coming from our corporate business, helped to deliver 48% growth in profit contribution to £80m. This, together with the 5% increase in contribution from our older style propositions, helped to drive an overall increase in retail fee based business contribution of 15% to £268m (2012: £233m).
In our corporate business, profit contribution increased by 2% to £90m (2012: £88m). Our corporate business continues to provide our old and new retail business with a source of new customers and revenue.
Improved retention in our older style UK retail business led to a 14% reduction in net outflows while AUA grew by 6%, reflecting ongoing increments and positive market movements. We continue to engage with customers with maturing policies who wish to continue to save or annuitise with us.
UK corporate pension AUA increased by £4.7bn or 19% to £29.2bn. Net inflows increased by 62% to £2.0bn (2012: £1.2bn) with our success in securing new schemes and the positive impact of auto enrolment more than offsetting the impact of expected outflows from schemes secured by competitors on a commission basis prior to the implementation of RDR. We continue to secure new schemes and have a solid pipeline of business wins, including SMEs with upcoming auto enrolment staging dates. UK institutional pensions AUA managed by Standard Life Investments increased by 19% to £25.3bn helped by a 4% increase in net inflows to £1.9bn (2012: £1.8bn).
UK spread/risk business AUA reduced to £14.6bn (2012: £15.3bn), as negative market movements caused by an increase in yields on debt securities and scheduled annuity payments more than offset the impact of new annuity sales.
Our business model We have strategically positioned ourselves across the value chain, by providing investment solutions through Standard Life Investments via funds such as MyFolio and through Standard Life Wealth. Our business model also supports the wider Group in generating additional revenue margins.
Net flows AUA 2013 2012 2013 2012 £m £m £bn £bn
• Following a year-long review of the annuities market, the Financial Conduct Authority (FCA) issued their report in February 2014. The FCA is now launching a further study with a view to improving customer outcomes. We support this as we believe it is important that customers understand their options. Our education process begins 10 years before retirement focussing on helping customers to understand all the options available to them so that they can make an informed decision and get the right outcome for their retirement. In the meantime, in Q4 2013, we expanded our propositions by launching our enhanced annuity proposition in response to growing customer demand.
• Standard Life Wealth completed the acquisition of the private client division of Newton Management Limited in September 2013. This will increase the scale of the Group’s discretionary investment management service, broaden the client investment proposition and increase distribution capability. In November 2013, we announced that Standard Life Wealth will move from the UK and Europe business and will be reported as part of Standard Life Investments results from 1 January 2014.
• We now have 1m customers with whom we have a direct relationship and we are developing new services to support those customers in order to improve engagement and increase cross sales, consolidation and retirement services opportunities
• Our Maxxellence investment product in Germany continues to perform well, attracting £33m (2012: £10m) of assets since its launch in 2012.
• We support the FCA’s move to the unbundling of charges and the promotion of clean share classes. We have delivered a simple, consistent and tax-efficient pricing structure, along with clear discounts from external fund managers. This demonstrates our buying power in the market and we believe that this will support asset growth as it will create value for our customers and will remove significant complexity for advisers and our business.
• Our SIPP proposition continues to grow with a 20% increase in customers and AUA up 18% to £23.2bn (2012: £19.6bn) • Our distribution arrangement with RBS Group for private banking customers continues to develop and has now contributed £0.2bn in Wrap platform AUA. We have also launched an online feature allowing customers who have already taken advice from their RBS adviser to top up online through their wrap platform.
• We successfully implemented auto enrolment for 219 existing and 71 new schemes in 2013, which combined with regular joiners across the 35,000 schemes we administer, means that we have secured 292,000 new employees resulting in the number of total employees increasing to 1.4 million
• We are continuing to see high levels of enquiries from employers as they review their entire defined contribution pension provision.
• We expect to continue to deliver further unit cost reductions through automation and greater operational efficiencies • Auto enrolment is expected to deliver scale with acquisition costs per new joiner falling, as demonstrated with the continuing trend towards online interaction with customers and self-servicing. 79% of opt-outs for auto enrolment were processed without manual intervention or interaction with our customer service representatives.
• Staff costs represent approximately 87% of total UK operational direct costs. Overall, there has been a 15% reduction in employee numbers since 2011, whilst UK revenue per average employee has increased by 21%.
1. Strategic report continued 1.4 Business segment performance continued 1.4.2 Standard Life Investments Financial highlights 2013 2012 Movement Operating profit before tax £192m £145m 32% Operating return on equity 67.4% 52.0% 15.4% points Earnings before interest and tax (EBIT)1 £192m £145m 32% EBIT margin1 37% 36% 1% point Third party assets under management (AUM) £97.4bn £83.0bn 17% Total assets under management £184.1bn £167.7bn 10% Third party net inflows £10.1bn £6.1bn 66%
1 EBIT and EBIT margin are key performance metrics for the investment management industry.
We have further expanded our range of investment solutions, with developments in real estate, multi-asset portfolios and emerging markets being of particular note. We continue to broaden the diversity of our AUM with 53% (£5.3bn) of third party net inflows coming from outside the UK, including £2.1bn from the US, and 46% from the Institutional distribution channel.
Results for Standard Life Wealth will be reported as part of Standard Life Investments from 1 January 2014. This follows the acquisition of the private client division of Newton Management Limited which created a deeper operational and investment link between Standard Life Wealth and Standard Life Investments. We believe that there are substantial opportunities to accelerate the growth of Standard Life Wealth by utilising Standard Life Investments’ infrastructure, internal expertise and international exposure.
Despite many investors still seeking income opportunities in a period of low interest rates, demand for sustainable earnings and growth opportunities in equities and commercial real estate has increased. Standard Life Investments stands to benefit by providing robust and innovative investment solutions that satisfy changing client risk appetites.
Confidence among institutional clients continues to grow and strong inflows have also been recorded across the global wholesale market. The advantages of our strategic positioning have been reflected in Standard Life Investments’ ability to attract flows across a range of higher margin products through a broad suite of investment solutions, continuing product innovation and expanding geographic reach.
Share of joint ventures' and associates' profit before tax 22 18
Operating profit before tax and EBIT increased by 32% to £192m, with a 1% point increase in EBIT margin to 37%.
The key highlights were: • Fee based revenue exceeded half a billion pounds for the first time, rising 28% to £521m. This reflected the shift in mix towards higher margin products such as UK mutual funds and multi-asset investment solutions, and the increased market levels. The changing mix helped to increase the revenue yield on third party AUM to 44bps (2012: 40bps).
Investment performance Strong growth in 2013 was underpinned by excellent money weighted average investment performance. 99% of third party assets under management were ahead of benchmark in the year with 94% ahead over 3 years and 96% over 5 years. It is particularly encouraging that equity funds performed strongly through stock selection during the recent period of turbulence, with 99% of equity funds ahead of benchmark at 1 year. Impressive performance continues to be delivered by the credit teams, with 100% of funds ahead of benchmark at 1 year. Our suite of multi-asset funds outperformed their cash benchmark over all key time periods since inception. In addition, the strength of our mutual funds proposition is demonstrated by fifteen of our funds being in the top decile of the peer group over 1 year and twelve funds being in the top decile over 3 years. A large proportion of eligible and actively managed funds (45 out of 61) were rated ‘Silver’ or above by Standard & Poor’s.
Third party AUM increased to a record £97.4bn (2012: £83.0bn) representing 53% of total AUM (2012: 49%). In-house AUM increased to £86.7bn (2012: £84.7bn) with investment performance returns and favourable market movements more than offsetting scheduled outflows from the with profits business. As a result, total AUM reached £184.1bn (2012: £167.7bn).
Inflows during 2013 reflected the diverse nature of our product offering, our expanding global distribution capability and the increasingly international nature of our client base. Assets under management generated from sales in our Boston office broke through $7bn, with net inflows in 2013 increasing to £2.1bn (2012: £1.8bn). In the UK and Europe we increased the institutional client base by 11%.
1. Strategic report continued 1.4 Business segment performance continued 1.4.2 Standard Life Investments continued At an asset class level, we saw a broad mix of net inflows into fixed income, multi-asset, real estate and cash.
Our pipeline of institutional business remains robust with fixed income, real estate and multi-asset propositions continuing to attract considerable interest, increasingly from outside the UK. There is also demand for our mutual funds in the UK and for our SICAV funds in continental Europe and Asia Pacific.
• Sales of high margin products enabled us to increase the revenue yield on our third party gross sales to 53bps (2012: 52bps) resulting in the average revenue yield on third party assets increasing to 44bps (2012: 40bps)
• Continued to collaborate across the Group to maximise the Group’s share of the value chain, for example our MyFolio range of funds, which won ‘Best New Fund Launch’ at the Professional Adviser awards
• Continued investment to extend our geographical footprint with expansion in Boston and Hong Kong • Investment in core operational and technology infrastructure to support future growth • Ongoing management of costs, combined with expansion in revenue margins, has resulted in a 17% compound annual growth in EBIT over the last six years.
Operating profit before tax1 £251m £353m (29%) Operating return on equity1 14.7% 24.5% (9.8% points) Assets under administration £27.4bn £27.8bn (1%) Net flows £376m £407m (8%) EEV operating profit before tax1 £393m £310m 27%
Strategic overview In Canada, we celebrated our 180th anniversary in 2013 and continue to help our customers to look forward to their financial future with confidence and optimism. Demographic and market changes are creating opportunities to grow our fee based business. We aim to achieve this by providing innovative retirement and investment solutions as well as exceptional levels of customer service.
Our corporate pension business creates employer and individual member solutions through innovation in technology and a comprehensive investment platform. In addition, our highly ranked retail sales team are providing advisers with solutions and tools to bring them closer to their customers, including our market-leading retail segregated funds. We are building on the strength of Standard Life Investments to provide global products in a Canadian market experiencing increased demand for investment diversification. We have expanded distribution across the corporate broker network, increasing our presence with investment advisers. We are engaging directly with our corporate pension members as we look to consolidate their assets on our investment platforms. We also continue to focus on maximising the value of our back book of spread business, improving its profitability, capital efficiency and risk exposure.
Market update Consumer confidence has reached its highest level since 2010 and Canada continues to be seen as a safe haven for international investors. While Canadians are feeling more optimistic about their current and future finances, they remain cautious about future job prospects, reflecting global economic worries and subdued national growth prospects. Longer term, the combination of declining population growth and an ageing population is expected to increase the emphasis on private sector retirement and health benefit provisions. This increases opportunities for providers of investment products, as well as decumulation and payout propositions.
Rising interest rates and equity market volatility have left investors looking for alternatives to traditional investments and savings propositions, with net new flows in the retail investment space improving but remaining below historical levels. As a result, our retail business has a complete suite of income-oriented investment funds, a leading retail segregated fund offering and Standard Life Investments’ successful Global Absolute Return Strategies (GARS) offering has been launched for the Canadian retail market. These are aiming to meet the need of risk-averse customers seeking stable yields. Retail mutual fund regulation is evolving towards increased cost and performance transparency. While we do not expect that this will lead to the elimination of upfront sales commissions in the short term, we are leveraging the UK experience with RDR to take advantage of this evolving environment. Our new fee based class of segregated funds are designed for advisers and clients moving away from traditional commission-based products.
Underlying Specific management actions Operating assumption changes 1.4 Business segment performance continued 1.4.3 Canada continued Profitability Operating profit before tax 2013 2012 £m £m
Operating profit before tax decreased by £102m to £251m (2012: £353m) mainly due to lower gains from one-off actuarial reserving changes and a reduced level of management actions compared to 2012. Canada underlying performance increased by 67% to £182m (2012: £109m).
• Capital management decreased by £91m due to reduced gains on property sales of £3m (2012: £72m) and lower returns following de-risking in 2012, which resulted in surplus assets being invested in lower yielding bonds rather than properties.
EEV operating profit EEV operating profit before tax increased to £393m (2012: £310m), mainly due to improved modelling of future taxes within the actuarial reserves, partly offset by lower property disposal gains and the impact of assumption changes. Operating return on equity Operating return on equity decreased to 14.7% (2012: 24.5%) in line with lower operating profit and higher levels of capital at the start of the year following management actions undertaken in 2012.
Assets under administration and net flows Total AUA decreased by 1% to £27.4bn reflecting adverse exchange rate movements partly offset by positive net inflows. AUA increased by 7% in constant currency.
Spread/risk AUA decreased to £8.4bn resulting from scheduled net outflows and adverse market movements.
Analysis of Canada operating profit before tax 2013 2012 £m £m
Specific management actions (Capital management) 3 72 Operating assumption and actuarial reserving changes (Spread/risk margin) 24 91
1 Canada categories for AUA and net flows have been revised to align with other business segments.
Our business model We look to further enhance our position in the market and strengthen our relationships with customers and advisers by providing innovative retirement and investments solutions, enabled by Standard Life Investments’ global investment capabilities. Maximising revenue
• The average revenue yield on our fee business remained stable at 113bps (2012: 113bps)
• We continue to work closely with Standard Life Investments on distributing global investment products through our retail investment funds offering, securing a greater proportion of the value chain and driving future revenue growth. Across all our product lines 20 new funds managed by Standard Life Investments were launched in 2013.
1. Strategic report continued 1.4 Business segment performance continued 1.4.4 Asia and Emerging Markets Financial highlights – wholly owned 2013 2012 Movement Operating loss before tax (£11m) (£5m) (120%) Operating return on equity (14.1%) (10.2%) (3.9% points) Assets under administration £296m £215m 38% Net flows £80m £55m 45% EEV operating loss before tax (£8m) (£19m) 58%
Product enhancements and growing our distribution capability are key areas of focus for our wholly owned business. This will help meet the needs of our wide range of customers and also allow us to adapt to the rapidly changing regulatory environment. In Hong Kong, work is continuing to improve our business quality with a shift towards increasing direct contact with customers and closer distribution relationships with key independent financial advisers (IFAs). For the newly opened branches in Singapore and Dubai, the focus is on expanding distribution and developing our operational capability.
The Asia Advisory Board (AAB) was established during 2013 to provide guidance and advice on our strategy to grow across the region. The work of the AAB will support our businesses in the region as well as inputting to our joint ventures. The AAB is chaired by Gerry Grimstone and consists of Standard Life and external members. The life joint venture business in India, HDFC Life, continues to be one of the top private providers in its local market, meeting the needs of their customers through offering a range of insurance solutions and demonstrating strong customer-focused business practices. In December 2013 HDFC Life paid its first dividend to shareholders. This is a significant milestone in the company’s development and is a result of successful growth and HDFC Life board’s confidence in the future sustainability of the business.
Singapore and Dubai are both high growth, high value emerging markets. In Singapore, the full implications of the comprehensive Financial Advisory Industry Review, chaired by the Monetary Authority of Singapore, are not yet known however we support any move to increase transparency for customers.
The Indian economy had a turbulent year in 2013 with economic growth rates declining. Life insurance penetration rates are still low in India compared to more developed markets. Regulatory change continued in 2013 which led to uncertainty for both companies and customers. HDFC Life continues to adapt proactively to the regulatory and market changes, to focus on providing quality products and services to customers and to consolidate its standing and reputation in the market.
• The joint venture businesses delivered an operating profit before tax of £5m (2012: £8m). This reduction was primarily driven by changes in the new business mix in India towards more profitable products which have a higher new business strain and a strengthening of Sterling against the local currencies.
EEV operating profit Total EEV operating profit increased to £15m from a loss of £1m in 2012. The wholly owned businesses recorded a total EEV operating loss of £8m (2012: loss £19m). Higher sales in Hong Kong and business written by our new branches in Singapore and Dubai have benefited the result.
EEV operating profit in our joint venture businesses increased to £23m (2012: £18m). In constant currency the EEV operating profit has increased by 44%. This increase has been driven by new business contribution increasing to £19m (2012: £13m), a 48% increase in constant currency. Operating return on equity Operating return on equity for our total Asia and Emerging Markets operations was a negative return of 2.3% (2012: positive return of 1.3%) driven by the operating loss after tax.
AUA in the joint venture businesses increased by 7% to £1.6bn (2012: £1.5bn) mainly due to net inflows of £231m (2012: £249m). Net inflows in India were broadly in line with 2012 levels. In China, net inflows were lower in 2013 due to the product mix being weighted more towards higher margin regular premium business rather than lower margin single premium products, which would have higher initial flows.
1. Strategic report continued 1.5 Risk management Risk management is an integral part of the Group’s corporate agenda. Our risk management strategy is to actively support the development of long-term value creation by ensuring well informed risk-reward decisions are taken in pursuit of the Group’s business plan objectives and to ensure capital is delivered to areas where most value can be created for the risks taken. Further details on our risks and our management of these risks are included in Note 41 – Risk management in the Group financial statements section of this report. The framework we use to manage our risks is set out in the Corporate governance section.
Appetite The Group has appetite for market risk exposures that arise as a consequence of core strategic activity. Business units are expected to limit market risk exposures by matching the features of liabilities to features of assets. Exposures may be incurred where there is an overriding business need and specific appetites will be established as necessary. Exposures may also be incurred with surplus assets subject to limits on the quantum and term of exposures.
The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group riskadjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and maintains robust risk limits which business units must adhere to.
• Assets held to back annuities and surplus in Canada. Fixed interest risk • Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in fixed interest assets
SLAL post-demutualisation • Assets held to back subordinated debt, including a small proportion in SLAL which are asset backed securities that are held for historical reasons
• Continued the dynamic hedging of guarantees provided for Canadian Segregated Funds
• Reviewed and affirmed our currency hedging strategy which, within certain parameters, seeks to minimise currency volatility within the regulatory surplus and reduce the currency risk relating to dividend receipts from overseas operations.
During the year, UK sovereign debt credit ratings were cut by two major rating agencies. We had anticipated this and were well-prepared.
Demographic and expense risk Liquidity risk Operational and strategic risk The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. This includes risks relating to insurance and investment contracts.
The risk that the Group is unable to realise investments and other assets in order to settle its financial obligations when they fall due, or can do so only at excessive cost.
The Group has an appetite for demographic risks since we expect acceptance of such risks to be value additive and limits are established to reflect planned business activities. The Group recognises expense risk may arise from core strategic activity but has limited appetite for significant expense over-runs.
The Group always aims to meet its liabilities as they fall due.
The Group recognises that core strategic activity brings with it exposure to operational risk. However, the Group has limited appetite for large operational losses due to the related reputational damage and opportunity costs. The Group seeks to manage existing operational risk exposures and proactively control new exposures.
Persistency • Changes in the value of future profits earned on unit linked funds and collective investment schemes and future recourse cash flow payments from the HWPF
• Operational aspects of the business, for example the management of cash as it flows into our business as premiums and out of our business as claims and the payment of corporate cash flows including dividends, coupons and debt repayment
• The collateralisation of derivatives which results in cash volatility as the value of the derivative changes.
The key operational and strategic themes affecting the Group are: • Ability to deliver the strategic plan • The significance of adverse global economic volatility • The changes to the tax, legal or regulatory environment and resultant impact on our model and strategy
• Inadequate control environment internally and in relation to third parties
• Insufficient capacity and capability to deliver change programmes and projects
• Reputational damage. We have continued to monitor opportunities for enhancing back-book profitability via reinsurance or capital market solutions. We remain focused on developing propositions to increase the retention of funds when insurance and savings contracts reach maturity. We have continued to monitor emerging research into longevity, for example from the Office for National Statistics and the industry-wide Continuous Mortality Investigation, in order to inform our in-house view of likely future improvements in life expectancy. We have renegotiated the terms of certain reinsurance arrangements in Canada to assist with the management of our longevity risk.
We have continued to work on implementing appropriate processes and controls to prepare for tax, legal and regulatory changes. In particular, aligned to regulatory developments, we have increased our focus on conduct risk management to ensure this is embedded across the Group and we meet, if not exceed, regulatory expectations. We continue to prepare for the changes in requirements for Solvency 2. We continue to monitor developments and prepare for possible outcomes from the referendum on Scottish independence in 2014 and any potential referendum on UK membership of the European Union.
1. Strategic report continued 1.6 Our customers Understanding our customers – their financial needs today and in the future – helps drive what we do and enables us to create commercial value. We’re constantly looking at what our customers tell us to see how we can meet their changing needs and how to make improvements to the experience we give them.
During 2013, we commissioned research to help us understand more deeply how people feel about saving for the long term. Our Saving in mind research has helped us understand more clearly how emotions and positive communications can help us build stronger customer relationships. We also published a report on how families share and talk about their money called The Family Financial Tree – looking at how money passes through the generations and, significantly, how families talk to each other about their finances. The insight can help us develop products and services that help customers to make informed savings decisions and be more confident about their financial futures, and we think it can also inform approaches taken across our whole industry.
We continue to find better ways of generating valuable customer insight. For example, we have hired a dedicated customer insight manager for our Asia and Emerging Markets business. We have also set up a working party to build a consistent approach to customer measurement and segmentation across the Group. This is made up of members of our UK and Europe, Canada, Asia and Emerging Markets and Standard Life Investments businesses. They look at the aspects of customer measurement and insight that can be shared across the business, as well as sharing best practice and helping to build a more comprehensive view of our customers around the world.
Helping our customers Online technology plays a big part in the ways we help our customers deal with us quickly, more easily and at times that suit them. We use feedback from customers to continue to improve the online experience. The main areas we looked at improving were around the information, guidance and transactional services that we offer. During 2013 we launched Lifemap, a tool we have developed to help customers with their financial priorities. It allows customers to select what their current priority is and receive some guidance accordingly.
We have continued our relationship with our online community, which now has more than 1,500 customer members. This is used on a regular basis to get feedback on products, services and experiences from our customers to inform our decision making, as well as for research into customer needs and expectations.
In 2013 we also launched our Financial Inertia programme in Canada. Following research that we commissioned, we found out that over 40% of Canadians are concerned about their finances, but that life goals, behaviours and values can hold many back from taking action. The Financial Inertia programme offers a dedicated website which provides a series of educational tools to help people reach their long-term savings and investment objectives. By using these tools, it can help people understand more clearly what might be holding them back from long-term saving, and how they can make this fit more easily into their lives.
Treating customers fairly For many years we have aimed to put our customers at the centre of everything we do, and one of the ways we show our commitment to this is through the policies we follow.
In Canada, we also follow the Sound Commercial Practices Guideline, which includes properly informing customers being offered a product or service and acting fairly in dealings with them.
Satisfied customers We have worked to improve how we measure and understand the experiences that we deliver to our customers. We continue to measure customer complaints and the causes of these issues, which gives us a clear idea of what we can do to put things right. In 2013 we received 5,785 customer complaints in the UK, which was down from 5,979 in 2012. We have also established new measures to help us understand more clearly how our customers feel about their experiences with us. Across our businesses in the UK, Canada, and Asia and Emerging Markets, we use the Net Promoter Score (NPS) measure to find out how likely people would be to recommend us. We use NPS along with a number of other measures, to plan and prioritise changes we can make to 30 Standard Life
Awards and recognition Awards and recognition for our individual businesses in 2013 include: UK and Europe
• Fundata Award won for Ideal Monthly Income Fund for superior risk-adjusted performance relative to peers • Award of Excellence for Fund Information from the Insurance and Financial Communicators Association for our Global Equity
• Best for Adviser Support/Customer Service in the Asia category of the International Adviser Life awards • Readers’ Choice award for the Best International Life Company – Global at the International Adviser Life awards • HDFC Life Smart Woman Plan voted as 'Life Insurance Product of the Year 2013' – Nielsen's Product of the Year Consumer
The four strategic themes of our people strategy 1 Strengthening our leadership – developing powerful, consistent leadership and identifying and growing tomorrow’s leaders at all levels across the organisation 2 Developing our organisational capability – building the people resources, capabilities and behaviours we need to support the business 3 Transforming the way we work – designing and building an organisation that is fit for purpose and scaleable for the future 4 Building the environment we work in – defining and building the high performance culture we aspire to.
Graduates Graduates help to support our future growth and we continue to put a focus on the structured development of them through our graduate and award-winning internship programmes. Our group-wide graduate programme continues to cover a wide variety of disciplines and we’ve increased our number of cross-group moves, including international placements. To strengthen our global graduate capability we began recruitment activity in Montreal, Boston and Hong Kong.
Employability Employability is a key focus of our sustainability activities. To us, it means working to help improve the opportunities that people, particularly young people, are afforded in society. Find out more about our progress in this area in Section 1.8 – Our sustainability strategy.
Well-being continues to be a strategic priority. To promote a healthy work environment we participated in the Global Corporate Challenge, a healthy living and activity campaign, for the second time. Spaces filled up quickly and we improved our global ranking, finishing as the ninth most active organisation out of the 1,200 that took part. To recognise our success, we received a recognition of achievement award and were highlighted as a case study organisation on the challenge website. We also ran our first green travel week where activities such as walking and cycling to work were encouraged. This was in addition to a focus on mental health that also took place across the Group.
Our Board benefits from diversity in its widest sense by ensuring an overall balance of skills, independence, knowledge and experience. As at 31 December 2013, the Board comprised eleven Directors made up of nine males (82%) and two females (18%) (2012: males 67%, females 33%). The departure of Jackie Hunt and the retiral of Sheelagh Whittaker during the year affected our diversity statistics at Board level and when considering all future appointments, the Board follows the principles of its Diversity statement which you can read in the Corporate governance section.
Our talent pipeline continues to show a balanced male/female mix with 49% females joining our graduate programme, and 42% joining the Emerging Leaders Group. The total number of employees in our Group is 8,589 comprising 4,367 females (51%) and 4,222 males (49%).
We also look to apply the internal governance principles we use ourselves in the relationships we have with other organisations. Broadly we do this through influencing: • as an investor, through Standard Life Investments • as a buyer of goods and services.
Investor In 2013, Standard Life Investments, our global asset management business, continued to influence as an investor. This was done through voting or other types of engagement. We had 511 Environmental, Social and Governance engagements and voted at 1,939 shareholder meetings. Where possible, we use our influence with the companies we invest in to encourage best practice in Environmental, Social and Governance issues. We feel it is important to be an active shareholder. It allows us to voice the sustainability issues that matter to us and also to help protect the interests of our customers.
Standard Life Investments is also an active member of several organisations that champion good governance: • ABI Investment Committee • Asian Corporate Governance Association • CBI Companies Committee • Council for Institutional Investors.
We have been fully committed to the UK Living Wage since April 2012 and we promote this with our suppliers. All third party dedicated resource providing catering, cleaning, security and vending services on our UK premises are paid the UK Living Wage as a minimum. We have also addressed zero hour contracts with these service providers and, with the exception of a small number of hospitality staff, we have successfully negotiated moving those people working with us from zero hour contracts to fixed hour contracts. 3. Developing and engaging our people We make it a priority to invest in our employees’ professional and personal development, so that they can continue to do their jobs as effectively as possible. In particular, leadership and employee engagement are central to our strategy to develop our people. Find out more about what we have delivered against this theme in Section 1.7 – Our people strategy.
Total greenhouse gas emissions4 Tonnes CO2e 32,796 32,263 36,092 +2% -9%
At our Group headquarters in Edinburgh, we have been replacing the chiller units that provide the building’s air conditioning. Our headquarters is a large building at 36,533m2 and the costs to operate it are significant. The new chiller units produce less carbon dioxide and based on initial assumptions could potentially reduce our energy bill by £90,000 in their first year.
Measurement We measure our progress against seven key performance indicators and publish the results in our annual sustainability report which is available online at www.standardlife.com/sustainability. We also take part annually in two global sustainability surveys – Dow Jones Sustainability Indices (DJSI) and FTSE4Good. Each is internationally-recognised for its methodology and scrutiny of a company’s sustainable credentials. Both surveys ask for a wide variety of data with strict criteria on what and how evidence can be presented. DJSI survey In 2013, we maintained our listings in two of DJSI’s key indices – the DJSI World and DJSI Europe. These indices list the top 10% and 20% respectively of sustainable companies in our industry in the survey (1,831 in total). We also achieved our best overall rating to date in the survey, scoring 76% with the highest score for companies in our industry being 83%. FTSE4Good We also take part in the FTSE4Good index, which is another well-known sustainability survey. We qualified for their 2013 survey, which rates the Environmental, Social and Governance credentials of over 2,400 companies worldwide.
We publish the results on our website at www.standardlife.com/sustainability 36 Standard Life
Our focus on employability We focus on employability because it runs across our material themes. To us, it means working to help improve the opportunities that people, particularly young people, are afforded in society. We are a large employer, with around 8,500 people working for us across the Group. We believe that this carries with it a big responsibility, both for us as an employer in aiming to maintain a diverse, sustainable workforce and in the communities and wider societies in which we operate.
During the year, we continued our involvement with Edinburgh City Council’s Edinburgh Guarantee programme, offering full-time paid work placements for 35 school-leavers and young people, which makes 54 in total since the programme began in 2012. From the last intake of 2013, 10 of the 15 young people have gone on to be successfully recruited into a permanent role with us, and four have gone on to further education. We believe the programmes offer young people a great opportunity to begin their working lives or further education. Through the placements, young people get access to more than just paid work. They are offered help and advice from colleagues as well as the opportunity to apply for internal vacancies across the Group. Our ultimate aim is to help young people find the destination that’s right for them, whether it’s work, further education or another positive development area.
Diversity and employability Diversity, particularly age diversity, plays an important part in employability too. Our customers come from all walks of life. They cover a broad range of ages, have different professions, lifestyles and different wants and needs. So it’s really important to us that our employees reflect that diversity as well. We believe that widening the diversity of our employee population helps us to reflect society better. There’s no better alternative, we feel, to understanding our customers than having employees with similar experiences who are able to see things from their customer’s point of view.
Our ambitions for the future We have made good progress against each of our sustainability themes during 2013. Several of our initiatives do, by their nature, take several years to complete. We have set out our ambitions for the next three years as follows: • Fully embed sustainability into all business units plans across the Group, ensuring that every part of the business takes a consistent balanced view of our key sustainability issues and considers these in everything they do • Lead by example in how we build our long-term customer relationships and as a way of demonstrating how this can help restore confidence in our industry • Aim to be an industry leader in managing talent and diversity • Grow our reputation as a business that uses its influence responsibly – in how it governs, invests and manages its supply chain • Work with our key stakeholders to make a positive difference on Environmental, Social and Governance issues • Build an enviable reputation as a leader and authority on employability.
The key initiatives that, if delivered successfully, will help us achieve these ambitions include: • Review our environmental targets to ensure they continue to be relevant and stretching but achievable • Enhance our online sustainability reporting to ensure we engage our key stakeholders • Review our material themes with key stakeholders to ensure we continue to tackle the big issues for our business • Build on our current employability activities with increased Edinburgh Guarantee intake and further positive intervention work in other UK locations.
1. Strategic report continued 1.9 Basis of preparation Overview Our Strategic report for the year to 31 December 2013 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the FCA. In August 2013, Parliament approved The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These regulations came into force for periods ending on or after 30 September 2013. Under section 414 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair, balanced and understandable review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 – Chief Executive’s overview. Principal risks are detailed in Section 1.5 – Risk management. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles (nonGAAP ) measures, which have been used in the Strategic report, are useful for both management and investors and make it easier to understand our Group’s performance.
The most important non-GAAP measures in the Strategic report include operating profit, European Embedded Value (EEV) operating profit and EEV operating capital and cash generation. All non-GAAP measures should be read together with the Group’s IFRS consolidated income statement, consolidated statement of financial position and consolidated statement of cash flows, which are presented in the Group financial statements section of this report.
Going concern After making appropriate enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. For more detail, see the Corporate governance section.
IFRS and EEV reporting The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in the Strategic report and in the Group financial statements section of this report have been prepared on the basis of the IFRS accounting policies in the Group financial statements section of this report. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued by the Chief Financial Officers (CFO) Forum. The EEV financial results in the Strategic report and in the EEV financial information have been prepared in accordance with the EEV methodology in the EEV financial information section of this report. Group operating profit and EEV operating profit The 2013 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 106 of this report, presents profit before tax expense attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in the Group accounting policies at (jj). Group operating profit has not been audited by our independent auditors. The 2013 EEV consolidated income statement on page 219, presents EEV profit showing both operating and non-operating items. By presenting our results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.
Forward-looking statements This document may contain ‘forward-looking statements’ about certain of the Standard Life Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: ‘believes’, ‘intends’, ‘targets’, ‘estimates’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’ and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group’s control. As a result, the Group’s actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.
Malcolm J Wood, Group Company Secretary and General Counsel Standard Life plc (SC286832) 27 February 2014 38 Standard Life
Board of Directors as at 27 February 2014 Board of Directors Our business is managed by our Board of Directors. Biographical details of the Directors as at 27 February 2014 are listed below.
Gerry Grimstone Chairman Age: 64 Tenure: 8 years Nationality: British Qualifications: MA and MSc Oxford University
Gerry is Chairman of both the Nomination and Governance Committee and the Corporate Responsibility Committee.
Keith Skeoch Executive Director Age: 57 Tenure: 8 years Nationality: British Qualifications: BA Sussex University and MA Warwick
Appointed Director in January 2012. He is the Company’s Senior Independent Director and the non-executive Chairman of Standard Life Investments (Holdings) Limited. John is a nonexecutive Director of Standard Chartered plc, where he also sits on the audit and remuneration committees and is a Senior Adviser to Greenhill & Co International. From 2001 to 2005, he was Deputy Chairman of Cazenove Group plc and then Vice Chairman of JP Morgan Cazenove from 2005 to 2008. He served as a non-executive Director of Jardine Lloyd Thompson Group plc from October 2008 until June 2012, including three years as Chairman of its remuneration committee.
Non-executive Director Age: 59 Tenure: 6 years Nationality: British Qualifications: BCom University of Witwatersand, South Africa; AMP INSEAD. Fellow of the Chartered Institute of Bankers of Scotland
Appointed Director in January 2008. He is also Senior Independent Director of Blackrock World Mining Trust plc; Chairman of TTT Moneycorp Limited and Director of the Scottish Chamber Orchestra. He was formerly Global Head of Equities at UBS Warburg and a member of the Group Management Board of UBS AG. He was appointed Chairman of The Royal Bank of Scotland Group plc’s remuneration committee in February 2009 and retired from that board in 2011 after almost ten years’ service as a nonexecutive Director.
Appointed Director in October 2011. He is also Vice Chairman of TDC; executive Chairman of Volia; independent Director of CIEL Investment Limited; Director of Cordial Consulting Limited and Vice Chairman of AgroGeneration. From 2000 to 2005 Pierre was Chief Executive Officer of BT Retail and, subsequently, Chief Operating Officer of Capgemini Group and Chairman of Eircom. Until June 2012 he served as Chief Executive Officer and then non-executive Chairman of Numericable Completel in Paris.
Harvard Business School. Member of the Institute of Chartered Accountants of England and Wales
Non-executive Director Age: 59 Tenure: 4.5 years Nationality: British Qualifications: BA University of Manchester. Member of the
David is Chairman of the Audit Committee and a member of the Risk and Capital Committee and the Nomination and Governance Committee.
Appointed Director in July 2012. She is also Chairman of Sumitomo Mitsui Banking Corporation Europe Limited, and holds non-executive Director appointments with GE Capital Bank Limited; Dominion Diamond Corporation; Alent plc and The London Metal Exchange. Noel has recently been appointed a Director of London First. Noel was previously with Citicorp for 15 years, latterly as the Chief Operating Officer of Citibank International. She previously held nonexecutive Director appointments at Logica plc; LME Holdings Limited; Avocet Mining plc and RSA Insurance Group plc.
Noel is Chairman of the Risk and Capital Committee and a member of the Audit Committee.
Martin Pike Non-executive Director Age: 52 Tenure: appointed September 2013 Nationality: British Qualifications: BA and MA
The results of the Group on both IFRS and EEV bases are presented in the Group financial statements and EEV financial information. A detailed description of the basis of preparation for IFRS (including operating profit) and EEV results are set out in the Group accounting policies section of the Group financial statements and Note 1 of the EEV financial information respectively. More information about the Group’s use of financial instruments and related financial risk management matters is in Note 23 and Note 41 to the Group financial statements.
Forward-looking statements carry an element of risk and uncertainty. As such, the Group’s actual future financial condition, performance and results may materially differ from the plans, goals and expectations described in these statements.
Dividends The Board recommends paying a final dividend for 2013 of 10.58p per ordinary share. This will be paid on 22 May 2014 to shareholders whose names are on the Register of Members at the close of business on 11 April 2014.
The total payment is estimated at £251m for the final dividend and together with the interim dividend of 5.22p per share totalling £124m paid on 29 October 2013, the total dividend for 2013 will be 15.80p per share (2012: 27.50p inclusive of the special dividend paid in 2013) totalling £375m (2012: £647m inclusive of the special dividend paid in 2013).
On 31 December 2013, there were 2,376,616,730 ordinary shares in issue held by 107,416 registered members. The Standard Life Share Account (the Company-sponsored nominee) held 947,113,201 of those shares on behalf of 1,128,016 participants. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid.
Shareholder Date of Transaction Type of Transaction Percentage of Voting Rights Following Transaction
BlackRock, Inc. 10 December 2013 Adjustment to the calculation of notifiable interest in voting rights
The Board may decline to register the transfer of: • a share that is not fully paid • a certificated share, unless the instrument of transfer is duly stamped or duly certified and accompanied by the relevant share certificate or other evidence of the right to transfer, is in respect of only one class of share and is in favour of no more than four joint transferees
• an uncertificated share, in the circumstances set out in the uncertificated securities rules (as defined in the Articles) and where, in the case of a transfer to joint holders, the transfer is in favour of more than four joint transferees
• a certificated share by a person with a 0.25% interest in the Company, if that person has been served with a restriction notice under the Articles, after failing to provide the Company with information about interests in those shares as set out in the Companies Act 2006 (unless the transfer is shown to the Board to be pursuant to an arm’s length sale under the Articles).
Powers to purchase the Company’s own shares At the 2013 Annual General Meeting (AGM), shareholders granted the Directors limited power to: • allot the Company’s ordinary shares up to a maximum aggregate amount of £78,601,061 • disapply, up to a maximum total nominal amount of £11,790,159 or 5% of its issued ordinary share capital, shareholders’
pre-emption rights in respect of new ordinary shares issued for cash • make market purchases of the Company’s ordinary shares up to a maximum of 235,803,185 or 10% of its issued ordinary shares.
Significant agreements There are a number of agreements to which the Company is party that entitle the counterparties to exercise termination or other rights in the event of a change of control of the Company. These agreements include: • Under a £500m revolving credit facility between the Company and the banks and financial institutions named therein as lenders
(Lenders) dated 5 March 2013 (the Facility), in the event that (i) any persons or group of persons acting in concert gains control of the Company or (ii) Standard Life Assurance Limited ceases to be a member of the Group, then any Lender may elect within a prescribed time frame to cancel its outstanding commitment under the Facility and declare its participation in all outstanding loans, together with accrued interest and all amounts accrued immediately due and payable, whereupon the commitment of that Lender under the Facility will be cancelled and all such outstanding amounts will become immediately due and payable
• Under a shareholders' agreement dated 10 June 2003 (as amended) between Standard Life Investments Limited (SLI) and HDFC, pursuant to which the Group holds its interest in HDFC Asset Management Company Limited (HDFC AMC) upon a change in the ownership structure of SLI that results in the acquisition by a third party, either directly or indirectly, of more than 20% of the issued, subscribed and paid-up capital of SLI, HDFC will have 90 days from the date upon which SLI notifies it in writing of the occurrence of such a change to purchase the Group's shares in HDFC AMC at a mutually agreed price
Directors and their interests The Directors who served throughout the year were: • Gerry Grimstone (Chairman) • Colin Buchan • Pierre Danon • Crawford Gillies • David Grigson • Noel Harwerth • Jackie Hunt (Chief Financial Officer) (resigned on 26 April 2013) • David Nish (Chief Executive) • John Paynter • Lynne Peacock • Martin Pike (appointed as a non-executive Director on 27 September 2013) • Keith Skeoch • Sheelagh Whittaker (retired on 14 May 2013).
Details of the Directors’ beneficial interests in the Company’s ordinary shares, the Standard Life (Employee) Share Plan, the Sharesave Plan and the share-based executive long-term incentive plans (LTIPs) are set out in the Directors’ remuneration report together with details of the executive Directors’ service contracts and non-executive Directors’ appointment letters.
Copies of the following documents can be viewed at the Company’s registered office (details of which can be found in the Contact details section on page 289) during normal business hours (9am to 5pm Monday to Friday) and will be available for inspection at the Company’s AGM on 13 May 2014: • the Directors’ service contracts or letters of appointment • the Directors’ deeds of indemnity, entered into in connection with the indemnification of Directors provisions in the Articles • the Articles • the rules of the proposed new LTIP.
Appointment and retirement of Directors The appointment and retirement of Directors is governed by the Articles, the Companies Act 2006, the UK Corporate Governance Code, and related legislation.
Directors’ liability insurance The Company maintains directors’ and officers’ liability insurance on behalf of its Directors and officers which gives appropriate cover for any legal action brought against them. The Company also maintains a third-party indemnity policy for the boards of trustees of the UK, Irish and Canadian staff pension schemes. The trustees include individuals who are directors of subsidiaries within the Group.
We have maintained good relationships with our different staff representative bodies and a positive employee relations (ER) environment. Throughout 2013 we have continued to review and develop the organisational model to make sure that it is optimal to support our business strategy. A theme of the ER environment has, therefore, been around restructuring. This restructuring meant that, during 2013, around 250 people were made redundant. More than half of these were voluntary leavers. VIVO, one of our staff representative bodies in the UK, supported this as an effective means of mitigating compulsory redundancies. As part of our performance culture, each employee takes part in regular discussions with their manager. They agree performance goals and how their aspirations, strengths and limitations can be developed and addressed at work. We believe great performance should be rewarded, and we think the process we follow to do that should be clear to everyone. Our approach continues to support our reward principles by linking pay to performance and ensuring our remuneration remains competitive to the market.
As at 31 December 2013, 64% of the Group's employees were shareholders through participation in The Standard Life (Employee) Share Plan (the Plan). The Plan allows employees to buy ordinary shares in the Company directly from their earnings up to a market value of £125 per month, or an equivalent sum in a relevant currency. These are called Partnership shares. For each Partnership share that an employee buys under the Plan, the Company matches the purchase by allocating them one ordinary share up to a maximum total value of £25 per month, or an equivalent sum in the relevant currency. As at 31 December 2013, 3,657 (65%) of eligible employees in the UK were making a monthly average contribution of £42. A similar tax approved plan is used in Ireland and has a 47% take up. Even though the Plan cannot be structured on a tax favourable basis in Canada, Germany or Austria, more than 640 employees in these countries are buying shares each month.
Sustainability We launched our sustainability strategy in 2010. It is mapped to our Group’s business strategy, so that the commercial aims of our business are linked to our environmental, social and governance responsibilities. You can find out more in Section 1.8 of the Strategic report – Our sustainability strategy and in the Environmental, social and governance risk paragraph of the Corporate governance section.
Greenhouse gas emissions We have disclosed our greenhouse gas emissions in Section 1.8 of the Strategic report – Our sustainability strategy.
Auditors The Audit Committee is responsible for considering the Group’s external audit arrangements. A resolution proposing the re-appointment of PricewaterhouseCoopers LLP as auditors to the Company and giving authority to the Directors to determine their remuneration will be submitted at the AGM to be held on 13 May 2014.
Annual General Meeting This will be held at 2pm (UK time) on Tuesday, 13 May 2014 at the Edinburgh International Conference Centre, The Exchange, 150 Morrison Street, Edinburgh EH3 8EE, Scotland. Details of the meeting content can be found in our AGM guide 2014 which will be available online at www.standardlife.com from 1 April 2014.
Malcolm J Wood, Group Company Secretary and General Counsel Standard Life plc (SC286832) 27 February 2014
Directors’ responsibilities for preparing the financial statements The following statements should be read with the statement of auditor’s responsibilities included in the independent auditor’s reports. They are made to help shareholders distinguish between the responsibilities of the Directors and those of the auditor’s in relation to the financial statements for 2013.
As well as recognising the formal disclosure requirements of the UK Corporate Governance Code (the “Code”), this section tells you how the Board meets its governance responsibilities. All the Directors view the Code as an important tool in supporting how we deliver the Group’s strategy and as an opportunity to drive and support effective behaviours at Board level and across the Group.
The Nomination and Governance Committee is responsible for the oversight of the corporate governance framework and its implementation. The Committee members are Gerry Grimstone (Chairman), Colin Buchan, David Grigson and John Paynter. Sheelagh Whittaker retired from the Committee on 14 May 2013. David Nish, Chief Executive, attends Committee meetings by invitation to discuss matters such as talent development and management succession.
During the year the Committee met five times. Its key duties are to support the composition and effectiveness of the Board, to oversee the development and implementation of the Group’s corporate governance framework and to oversee the Group’s activities to strengthen its talent pipeline at all levels. In this section, you can read about the Committee’s role in the processes to: • review Board diversity, skills and experience • identify and recommend Directors to be appointed to the Board • oversee succession planning, leadership and talent development and diversity levels throughout the Group • support the review of the Board’s effectiveness.
Committee effectiveness The Committee reviews its remit and effectiveness annually. Members completed an online self-assessment questionnaire and reviewed the Committee’s terms of reference. After analysing the 2013 questionnaire responses, the Committee concluded that it: • was continuing to focus Director recruitment on the skills and experience required by the Board • was seeing continued progress in the succession, talent and development, diversity and leadership programmes across the
Together with the Directors’ remuneration report, this section explains how our corporate governance framework supports the way we apply the Code’s main principles of good governance.
The Group’s Code of Business Conduct complements the Board Charter. It sets out our standards of conduct and governing principles in respect of operational excellence, compliance responsibilities, customer service, our people and other stakeholders.
The governance framework also sets out the Board’s relationship with the boards of the Company’s principal subsidiaries. In particular, it identifies the matters which must be referred from subsidiary boards to the Board and Board Committees for approval.
Role and responsibilities of the Board The Board’s role is to organise and direct the affairs of the Company and the Group to maximise value for shareholders, in accordance with the Company’s constitution and all relevant laws, regulations and corporate governance and stewardship standards. The Board’s role and responsibilities, collectively and for individual Directors, are set out in the Board Charter. The Charter also identifies matters that are specifically reserved for decision by the Board. These include approving, overseeing and challenging: • how strategy, objectives and business plans are developed and implemented • capital and management structures • dividend policy • financial reporting • how risks are managed, including the Enterprise Risk Management (ERM) framework, risk strategy, risk appetite limits and internal controls • key Group policies • significant corporate and other transactions • significant external communications • terms of reference of Board Committees • appointments to the Board and Board Committees • the matters to be escalated from subsidiary boards to the Board for approval.
The Chief Executive, within authorities delegated by the Board: • leads the other executive Directors and the executive team in the day-to-day running of the Group • develops appropriate capital, corporate, management and succession structures to support the Group’s objectives • makes and implements operational decisions • develops strategic plans and structures for presentation to the Board • reports to the Board with timely and high quality information • in conjunction with the Chairman, represents the Group to external stakeholders, including shareholders, customers, suppliers, regulatory and governmental authorities, and both the local and wider communities.
The heads of each business unit and the Group functions manage their teams within authorities set out in the Board Charter and an approved scheme of delegation. This includes reporting to the Chief Executive on how they are complying with Group policies and performing against approved plans and budgets.
In terms of gender diversity, two female members of the Board stepped down during 2013, and the Board currently comprises two women and nine men. The departures of Jackie Hunt and the retiral of Sheelagh Whittaker affected our diversity statistics at Board level, however, when considering future appointments, the Board follows the principles of its Diversity statement. The Board also benefits from the diverse backgrounds of its members which enhance its collective business, operational and international strength.
Board changes during the period Appointments Martin Pike joined the Board on 27 September 2013 as a non-executive Director and became a member of the Risk and Capital Committee and the Investment Committee. Martin is a qualified actuary and his executive career was spent with Towers Watson. In recent years, Towers Watson has, on occasion, provided consultancy support to Standard Life Assurance Limited. When considering Martin’s appointment, the Board concluded that this relationship did not impact his independence.
Jackie Hunt, Chief Financial Officer, resigned on 26 April 2013. Until the appointment of her replacement, the reporting lines to this position have been reassigned. David Nish has been ensuring that the activities of the Chief Financial Officer’s role have continued to be carried out, fully supported by the Director of Group Finance and the finance directors of the principal subsidiary companies. Since Jackie’s departure the Nomination and Governance Committee has been overseeing the process to recruit her successor and monitoring closely the recruitment plan.
Having identified the capabilities needed for Board roles, and the succession timeframe, the Nomination and Governance Committee considers the related role profile submitted to external search consultants along with the request to prepare a list of suitable candidates. The Group has used the services of JCA Group, Russell Reynolds Associates, Egon Zehnder and Odgers Berndtson to support its recent recruitment searches. These external search consultants do not have any other connection with the Group.
The Committee reviews the list of potential candidates and agrees a shortlist of who they wish to interview. Subject always to the satisfactory completion of all background checks and regulatory approvals, the Committee makes recommendations to the Board on any proposed appointment. The other Board members are also offered the opportunity to meet the recommended candidates. As part of its recommendation, the Committee considers the external commitments of candidates to assess their ability to meet the necessary time commitment and whether there are any conflict of interest matters to address.
Board effectiveness Review process Board effectiveness is key to the Group’s success. The Board has, with the help of the Nomination and Governance Committee, developed a formal annual review process to assess how well the Board, its Committees, the Chairman and the Directors are performing collectively and individually. It also looks at how performance could be improved. The 2013 review, as in 2012, was led internally having been supported by an external facilitator in 2011. In 2014 we intend to incorporate external input into the review process.
The survey questions were reviewed and refreshed to focus on generating robust input from the Directors. Directors completed questionnaires about the Board, each Committee they sit on, the Chairman’s performance and their own individual performance. They were encouraged to provide open and honest feedback, explain the ratings they gave and suggest how the Board or 52 Standard Life
At the end of the exercise, the Board concluded that it had performed effectively since the last review and could demonstrate continuing progress and improving trends in many areas. Suggestions where further improvements could be made included: • enhancing the risk related information the Board receives, in particular information relating to strategic risk, conduct risk and technology risk • increasing the level of customer related feedback brought to the Board • continuing to offer employees the opportunity to interact with the Board • continuing the non-executive Directors’ programme of individual meetings with various parts of the Group • continuing to focus on the quality and efficiency of Board papers.
Chairman The review of the Chairman’s performance was led by the SID. It was based on formal feedback given in the confidential online questionnaires. The questions covered: • the Chairman’s role to lead the Board and encourage effective participation • how he informs the Board of stakeholders’ views • his relationships with both executive and non-executive Directors.
Individual development and engagement plans (“Plans”) were prepared to support each meeting. The Plans built on the responses to particular questions and areas of interest and training needs identified by each Director as well as the follow-up points raised in each of the Group Secretariat interviews. The meetings were designed to review whether each Director was contributing effectively to the Board and to the Board Committees, and whether they continued to have sufficient time to commit to the role. The meetings also considered individual training, development and engagement opportunities for each Director. The Plans summarised the internal and external continuing development the non-executive Directors had undertaken during the year and considered the
2. Governance information – Corporate governance continued extent to which each non-executive Director had implemented the points raised in the previous year’s review. Each Director takes forward the resulting actions, supported by the Chairman and the Company, using either internal resources or external expertise.
Director induction and development The Chairman, supported by the Group Company Secretary and General Counsel, is responsible for arranging a comprehensive and structured preparation and induction programme for all new Directors. The programme recognises the Director’s background knowledge and experience and is tailored to his or her individual requirements. All Directors are also required to complete the Financial Conduct Authority’s (FCA) and Prudential Regulation Authority’s (PRA) Significant Influence Function Holder’s approval programme before they are appointed and to self-certify annually that they remain competent to carry out this aspect of their role. The formal preparation and induction programme includes: • meetings with each executive Director, key members of senior management, the heads of the operating businesses and Group functions • focused technical meetings with internal and external experts on specific areas including Solvency 2, conduct risk, risk and capital management and financial reporting • visits to business units • meetings with the external auditors and the FCA/PRA supervisory team • the Group’s corporate governance and risk management frameworks and the role of the Board and its Committees • key Board materials and information, shareholder communications and financial reports • the Group’s organisational structure, strategy, business activities and operational plans • the Group’s key performance indicators, financial and operational measures and industry terminology • their individual responsibilities both as Directors and as holders of a Significant Influence Function.
Succession planning and talent development The Board knows that comprehensive contingency and succession planning and talent development are key to effective operation and long-term success. The Nomination and Governance Committee regularly reviews the results of succession planning activities, including key man and retention risk, and talent development programmes at all levels across the Group. These programmes take into account the skills and expertise required by the Board and senior management currently and in the future. They recognise both the talent available within the Group and the need for external recruitment, and they consider the opportunities within the Group for people to develop through initiatives such as overseas placements. The programmes are led by the Group Talent and Organisation Development team. During the year, the Committee received updates on how the programmes at graduate and emerging leader levels, as well as the accelerated programme for senior leaders, have operated. They also received an analysis of how the Group’s executive job family had changed over recent years, evidencing the Group’s balance of managing underperformance as well as developing talent. They received updates on the specific individual development programmes in place for executive team members and their potential successors. The Committee believes that the plans and programmes continue to strengthen succession planning and talent development. The results of the Committee’s reviews are presented at least annually to the Board for discussion. The Board members are keen to interact with the members of the development schemes and have met with, and had presentations from, key talent across the Group. Directors have been able to join the completion events for several of the programmes.
Board meetings and meeting attendance The Board and its Committees meet regularly, operating to an agreed timetable. Meetings are generally held in Edinburgh or London and, on occasion, at the offices of one of our international businesses. In September 2013, the Board met in Frankfurt. This gave the Directors the opportunity to meet with senior leaders there, learn more about how the German business operates and find out more about our customers in Germany and their needs. During the year, the Board held specific sessions to consider the Group’s strategy and business planning. The Chairman and the non-executive Directors also met formally and informally without the executive Directors present. At these meetings, matters including executive performance and succession were discussed.
The Board has a formal procedure for holding unscheduled meetings. This is used when, exceptionally, decisions on matters specifically reserved for the Board need to be taken urgently. Directors are required to attend all meetings of the Board and the Committees they serve on, and to devote enough time to the Company to perform their duties. Board and Committee papers are generally distributed before meetings. The Board sometimes needs to call or rearrange meetings at short notice and it may be 54 Standard Life
As at 27 February 2014 1 Resigned from the Board on 26 April 2013. 2 John Paynter was given a short period of leave of absence from the Board for medical treatment. 3 Appointed to the Board on 27 September 2013. 4 Retired from the Board on 14 May 2013.
Board Committees The Board has established Committees that oversee, consider and make recommendations to the Board on important issues of policy and governance. At each Board meeting, the Committee Chairmen provide reports of the key issues considered at recent Committee meetings, and minutes of Committee meetings are circulated to the appropriate Board members. The Committees operate within specific terms of reference approved by the Board and kept under review by the Nomination and Governance Committee. These terms of reference are published within the Board Charter on the Board of Directors section of our website at www.standardlife.com/about/board and are also available from the Group Company Secretary and General Counsel. All Board Committees are authorised to engage the services of external advisers at the Company’s expense, whenever they consider this necessary. The Chairman of each Committee and the Nomination and Governance Committee review Committee membership at regular intervals. The Nomination and Governance Committee considers all proposed appointments before they are recommended to the Board.
The Committee’s remit is to consider and to make appropriate recommendations to the Board on: • any matter relating to the financial affairs of the Group • the Group’s internal and external audit arrangements • the Group’s internal controls over financial reporting.
During the year, the Committee met five times to coincide with the Company’s financial reporting cycle requirements. It met regularly with each of the external and internal auditors without management being present to allow the Committee to discuss any issues of emerging concern in more detail. Invitations to attend the Committee meetings on a regular basis are extended to the Chairman, the Chief Executive, the Chief Financial Officer, the Chief Executive of Standard Life Investments, the Director of Group Finance, the Group Chief Risk Officer and the Group Chief Internal Auditor (GCIA). In June 2013, David Grigson attended the local audit committee meetings of the Group’s principal Canadian subsidiaries.
• Half Year Results 2013 • external audit results of Half Year Results review • external audit plan for 2013 for all audited entities • current material legal actions and litigation.
April to June October to December • Interim Management Statements/Q1 Trading Results • completion of the 2012 external audit for all audited entities • the 2013 external audit engagement letter for all audited entities • the 2012 external audit fee and the proposed 2013 fee for all audited entities.
Charter and the GIA annual plan • the effectiveness of the external auditors and their proposed re-appointment at the 2014 AGM • the effectiveness of the Audit Committee.
At every meeting the Committee: • reviews the findings of GIA reports and how the high-priority findings are being followed up by management • reviews the results of the monitoring of financial crime, fraud risk assessments and calls to our dedicated Speak Up helpline • reviews reports from the chairmen of the subsidiary audit committees • reviews the findings from external audit work • reviews the non-audit services requested of the external auditors by the business units, both in terms of the nature of the service and the level of proposed fee.
• reviewed the consistency of the views of management and the external auditors.
Disclosure The Committee also considered the processes to prepare and review the Annual Report and Accounts 2013 (ARA). In particular, the Committee sought assurance on the internal and external verification and compliance processes which had taken place as well as the quality of the internal review of the ARA. Following its review, the Committee was able to confirm to the Board that it believed the ARA, taken as a whole, is fair, balanced and understandable.
• the results of management’s assessments of the Group’s going concern position and Group solvency position, including recommending to the Board that the going concern assessment was reasonable (you can read more in the Going concern section of this report)
The Committee is also responsible for making a recommendation to the Board each year on the appointment, reappointment or removal of the external auditors. The current audit firm was appointed for the 1994 financial year. The external audit was put out to tender in 2003, following which the auditors were reappointed for the financial year beginning 1 January 2004. The audit engagement partner rotates every five years in accordance with Auditing Practices Board (“APB”) ethical guidelines and 2013 is the second year for the current partner. The Committee believes that the present auditors’ performance and reappointment should be considered every year rather than only when a tender is due. Therefore, there is a standing annual agenda item to review the auditors’ performance in detail against the relevant duties in the Committee’s terms of reference and taking into account all other appropriate factors, governance standards and guidance. The members of the audit team are not present for this. As part of this review, the Committee considers the way the audit engagement partner reports to and interacts with the Committee and the quality and succession planning of the audit engagement partner and the senior audit team. The Committee also seeks the views of the senior members of the Group Finance team who work most closely with the audit team. The Committee considers the quality of the regular and ad hoc reports received from the audit team on the output of audit activities, considering whether this is consistent with the reports from management, and the updates about independence, internal quality processes and technical knowledge. In particular the Committee looks for evidence that the external auditors have maintained a high level of professional scepticism, have brought a high level of professional challenge to management, and have reported transparently and comprehensively to the Committee.
The Policy permits non-audit services to be purchased, following approval, when they are closely aligned to the external audit function and when the external audit firm’s skills and experience make it the most suitable supplier. These include: • accounting consultations and audits in connection with acquisitions and disposals of businesses • due diligence related to mergers and acquisitions • tax compliance and advisory services • employee benefit plan audits • attesting to services not required by statute or regulation • assurance services relating to regulatory developments affecting the Group • consultations concerning financial accounting and reporting standards not relating to the audit of the Group’s financial statements • sustainability audits/review.
Internal audit The Group has an internal audit function (GIA) and the Committee considers its effectiveness annually, in particular monitoring its independence, objectivity and resourcing in the context of the Institute of Internal Auditors’ (IIA) professional standards. A new GCIA was appointed in February 2013. The Committee approves the scope and content of the annual internal audit plan, which is updated on a rolling basis to allow GIA to address any emerging issues. The plan is based on the audit universe, discussed with management and the external auditors and mapped to the key risks within the Own Risk and Solvency Assessment (ORSA). The Committee receives regular reports on: • the implementation of the approved plan • key findings from completed reviews, including the impact on financial reporting processes and related applications • updates on how effectively management has implemented agreed improvement actions • the GCIA’s assessment of the internal control environment at each business unit.
Financial crime and whistleblowing The Committee reviews the arrangements for Group employees to raise concerns, in confidence, about possible wrongdoing in financial reporting and other matters. At each meeting it receives reports on all calls to our dedicated Speak Up helpline. Any concerns are investigated and the Committee oversees the follow-up action taken. The Committee also receives updates at every meeting from the Group Head of Financial Crime who reports on compliance with the Group’s anti-bribery policy, and any other activities associated with financial crime. Staff are trained how to detect and report the signs of possible fraudulent or improper activity and about the existence of the Speak Up helpline.
Advice and development In carrying out its duties, the Committee is authorised by the Board to obtain any information it needs from any Director or employee of the Group. It is also authorised to seek, at the expense of the Group, appropriate professional advice inside and outside the Group, whenever it considers this necessary.
At each quarterly meeting, the Committee: • reviews the Group Chief Risk Officer’s status reports on risk dashboards and risk metrics • reviews matters escalated from the Group Enterprise Risk Management Committee (“Group ERMC”) • reviews compliance reporting on matters arising from the approved annual plan • reviews any with-profits matters related to risk management of the use of capital • reviews the ORSA • discusses emerging external risks and their impact on the risk strategy.
The Committee continued to monitor regulatory developments relevant to the Group. This included considering the impact of the FCA and the PRA replacing the Financial Services Authority in April. In response to the European Union (EU) formally announcing a delay in the implementation date for Solvency 2 regulations, the Committee considered the likely impact of the delay and the Group’s planned response to ensure the Group remained well positioned to meet the regulatory requirements and deliver process improvements that assist in managing capital effectively.
The Committee noted improvements that were made to internal risk reporting during the year which included increased focus on risks relating to conduct, the customer and the regulatory environment. In addition to standing agenda items, the Committee also received a number of thematic reviews on areas of specific interest. These ‘deep dives’ included reviews of hedging, credit risk management, the use of correlations, persistency risk management and longevity risk management.
Committee effectiveness The Committee reviews its remit and effectiveness annually. Members of the Committee completed an online self-assessment questionnaire and reviewed the Committee’s terms of reference in late 2013. The general consensus from the completed questionnaires was that the Committee continues to make good progress and to evolve.
You can find out more about the Group’s main sources of risk and how risks are managed in Section 1.5 of the Strategic report - Risk management. You can also find out more about risk exposures in Note 41 to the Group financial statements.
The Committee members are Colin Buchan (Chairman), Crawford Gillies, Pierre Danon and Martin Pike (appointed 27 September 2013) who are all considered by the Board to be independent non-executive Directors. Sheelagh Whittaker retired from the Committee on 14 May 2013. During the year the Committee met three times and reported to the Board on matters relevant to the investment activities and stewardship role of the Group as an investor and fund manager.
At each meeting, the Committee: • receives updates from Standard Life Investments on the performance of financial markets and various investment classes and the global outlook, covering both micro and macro-economic situations • oversees investment activity within Standard Life Assurance Limited considering matters such as fund performance, investment objectives, investment benchmarks and asset allocation • receives updates on specific corporate governance and stewardship matters related to investments managed by Standard Life
The Committee members are Gerry Grimstone (Chairman), Crawford Gillies, Lynne Peacock and David Nish.
The Committee members are Niall Franklin (Chairman), Graham Aslet, Clifton Melvin and Ross Ainslie (appointed 1 July 2013). Ray Greenshields retired from the Committee on 31 March 2013. The Committee members are appointed by the SLAL Board on the recommendation of the Nomination and Governance Committee. The WPC met eight times during 2013. Directors of the Standard Life plc and SLAL Boards and senior actuaries involved with the management of the with-profits business, in particular the UK & Europe Chief Risk Officer, the With Profits Actuary and the Actuarial Function Holder, routinely attend these meetings.
During 2013, the Committee reviewed: • allocation of costs • management of with profits assets and, in particular, the setting of investment strategy • management of bonus rates and fair payout bases.
Communicating with investors The Company continues to develop a dialogue with all its shareholders. As part of this, the Investor Relations and Group Secretariat teams support communication with investors. During 2013, the Group continued its programme of domestic and international presentations and meetings between the executive Directors and institutional investors, fund managers and analysts. The wide range of relevant issues discussed at investor presentations and meetings covers business strategy, financial performance, operational activities and corporate governance - but excludes inside information. The Chairman has his own investor contact programme and brings relevant issues to the attention of the Board. The Remuneration Committee also consulted with major institutional shareholders regarding executive remuneration during the year. More information on the consultation can be found in the Directors’ remuneration report on page 70.
We have hosted several short analyst and investor events designed to give deeper insight into particular areas of our business, created a company profile which is intended to give a high level introduction to the Group and are in the process of developing divisional profiles to give further high level insights.
The Chairman’s statement and the Strategic report in this ARA aim to provide a balanced overall assessment of the Group’s activities, performance and prospects. This information will be supported by a presentation at the 2014 AGM – an event that provides a valuable opportunity for the Board and shareholders to communicate. Shareholders will be invited to ask questions during the meeting and have an opportunity to talk with the Directors after the formal part of the meeting. The voting results will be published on our website at www.standardlife.com after the meeting. These will include the number of votes withheld.
Institutional investor Standard Life Investments, the Group’s principal asset management company, recognises the importance of good governance and stewardship. As a major investor, it monitors the governance of the companies it invests in. It also holds regular meetings with their senior management representatives. Standard Life Investments maintains principles and policy guidelines on corporate governance, stewardship and voting. During 2013, these guidelines were updated to make them applicable on a global basis. The guidelines support Standard Life Investment’s approach to engaging and to voting at shareholder meetings. Standard Life Investments also makes voting reports available to clients and publishes summary information on its website. The policy guidelines are applied pragmatically, after all relevant information has been carefully considered. When assessing the Company’s compliance with the principles and provisions of the Code, the Nomination and Governance Committee also reviewed the Company’s compliance with these principles and policy guidelines. The Committee concluded that the Company complied with the guidelines during the year.
Standard Life Investments is a strong supporter of the principles of good stewardship that are set out in the Stewardship Code, believing that it is mutually beneficial for companies and long-term investors such as Standard Life Investments to have a relationship based on accountability, engagement and trust. Standard Life Investments has made public its processes to comply with the Stewardship Code’s seven best practice principles. You can read more about this and its governance and stewardship annual review at www.standardlifeinvestments.com
In line with the Code and the further guidance in the Turnbull Report, the Board has reviewed the effectiveness of the system of internal control. The system was in place throughout the year and up to the date of approval of the Annual Report and Accounts 2013. In order to support this review, a certification exercise was completed by each of the business unit Chief Executive Officers, Chief Financial Officers, Chief Risk Officers and Group function executives. They were asked to confirm the following: • that they had maintained the risk management system (incorporating the system of internal control), reported significant control breakdowns throughout the year and that necessary actions had been taken or were being taken to remedy and monitor these breakdowns
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report. The Strategic report includes details on our cash flow and capital management - Section 1.3 Group financial overview-and a section describing our key risks-Section 1.5 Risk management. Further details of the Group's risk and capital management procedures and governance are outlined later in this section. In addition, the Group’s financial statements include notes on the Group’s borrowings and subordinated liabilities (Notes 35 and 36), management of its risks including market, credit and liquidity risk (Note 41), its contingent liabilities and commitments (Notes 44 and 45), and its capital structure and position (Note 48).
The recommendation of Group Finance and supporting information regarding the appropriateness of the going concern basis was submitted to the Audit Committee. The Committee reviewed the recommendation taking into account the relevant FRC guidance (Going Concern and Liquidity Risk; Guidance for Directors of UK Companies). After making appropriate enquiries, and taking account of the above, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
There are five key elements to our ERM framework which are set out in the adjacent diagram. The operation of this framework provides for a risk-based approach to managing our business, integrating concepts of strategic planning, operations management and internal control.
You can find out more about each element of the framework below.
We believe that our current ERM framework is closely aligned to the requirements of emerging regulatory frameworks relating to risk management and systems of governance, although we recognise there will continue to be developments in line with regulatory developments and industry best practice.
You can find out more information about our risk exposures at 31 December 2013 in Note 41, Risk management which shows the impact of applying this framework in managing our business and in Section 1.5 of the Strategic report – Risk management.
Risk culture Our approach • right people, right jobs, right behaviours, roles and responsibilities clearly defined • right structure, effectively implemented, risk focused committees and management • Group-wide awareness, deepening understanding of risk, ongoing embedding and change.
The RCC also provides advice to the Remuneration Committee on an arm’s length basis on various matters, including whether specific risk adjustments need to be applied to performance-related payments in incentive packages.
The Group ERMC consists of the members of the executive team which includes the Group Chief Risk Officer. The Group ERMC meets at least quarterly, and usually in conjunction with the executive team. The main role of the Group ERMC is to: • oversee compliance with the Group’s ERM framework • support the Chief Executive in the management of risk across the Group.
The Group ERMC is supported by the Group Credit Risk Committee which deals with all types of credit risks arising from the current and proposed activities of the Group. In addition, our internal Chief Risk Officer (CRO) Forum, comprising our business unit CROs, meets monthly to review risk matters.
Group Risk supports the operation of these risk committees (the RCC, the Group ERMC and the Group Credit Risk Committee) and provides assurance, assistance and advice to them as required.
Group Risk is supported by the Risk functions within the business units which each have their own business unit ERMC. The business unit risk functions are responsible for providing assurance that the financial and non-financial risks inherent in business activities are identified and managed in accordance with the appetite and limits approved by the Board and relevant subsidiary boards. They are also responsible for producing risk management information for use within the business unit and for aggregation across the Group.
Three lines of defence The Group operates a three lines of defence model of risk management, with clearly defined roles and responsibilities for committees and individuals: First line: day-to-day risk management is delegated from the Board to the Chief Executive and, through a system of delegated authorities and limits, to business managers.
These metrics enable us to measure risk and capital consistently across the Group’s diverse range of businesses, activities and projects. These metrics supplement, rather than replace, the wide range of metrics currently used throughout the Group and, where appropriate, make allowance for local regulatory capital considerations. The Group’s risk profile is assessed and reviewed regularly.
Risk control processes Our approach • embedded and comprehensive policy framework covering financial and non-financial risks • operational risk and control: integrated system, consistent application • active control management: make the right things happen the first time, identify when things have not gone well and understand why, recover the position quickly when things have not gone well.
Assess Assess exposures to each major source of risk, using qualitative and quantitative techniques as appropriate.
We manage our financial and non-financial risks using a control framework which comprises of: policy framework, control selfassessment (CSA), risk assessment, key risk indicators, risk event and action plan management, supported by the Operational Risk and Control (ORAC) system.
Governing principles Owner: Group Risk Risk appetite framework Owner: Group Risk
The Group pro-actively manages tax risks and employs an experienced in-house tax team to oversee the tax affairs of the Group who report the Group's tax position and material tax issues to the Audit Committee.
In addition, we complete a regular environmental risk assessment which identifies and assesses risks, such as the cost and source of energy, energy-efficient ratings of Company property, and responsible sourcing of materials. The standards in the Group Community Investment Policy provide clear guidance on which charities can and cannot be supported, and reaffirm that our community involvement should have a positive and sustainable effect.
PricewaterhouseCoopers LLP provide limited-scope assurance on seven key performance indicators (KPIs) spread across our five material themes which relate to our environmental, social and governance disclosures. These KPIs are: • Customer complaints recorded • Impact of technology on employee engagement • Succession planning for critical roles • Voting at shareholder meetings of investee companies • Environment, Social, Governance engagements • Carbon footprint (greenhouse gas emissions reported as kg of CO2e) • Total community contribution.
You can read more about how we have progressed against these themes in Section 1.8 of the Strategic report – Our sustainability strategy on pages 34 to 37, or at www.standardlife.com/sustainability 68 Standard Life
Emerging risk management Our approach: • defined process for the identification of emerging risks • supported by reverse stress testing of business plans • raising awareness at executive level and across the Group.
The Group has defined a clear and simple process for identifying and managing emerging risks. The process provides for: • the identification of emerging financial and non-financial risks • the creation of action plans and identification of early warning indicators • the effective management of emerging risks by the appropriate risk committee • the passage of any risks identified into ‘business as usual’ processes where appropriate.
Reverse stress testing and analysis is a key component of the emerging risk process and our method for carrying it out has been further embedded during the year. Reverse stress testing serves to enhance our risk processes by subjecting our business plans to a combination of stress events. This enables us to take a forward-looking view of risks driven by our business model along with any capital implication associated with these risks.
Risk and capital models Our approach: • modelling and understanding our business • managing complexity, achieving consistency and clarity with common metrics • risks effectively quantified and business fully profiled.
The Group continually strives to enhance its internal risk and capital models. Our main objective is to improve the consistency of the quantitative measurement of risk and use of capital across all businesses.
The process is based on a consideration of the general environment, the competitive environment and external events that could prevent, or impact the achievement of the strategy.
Remuneration Committee Chairman’s statement Introduction I am pleased to present the Remuneration Committee’s report on Directors’ remuneration for the year ended 31 December 2013 which has been prepared in line with the new reporting requirements which came into effect on 1 October 2013. This sets out our remuneration policy for our Directors and how our remuneration policy was applied during 2013.
2013 saw strong financial performance with Group operating profit before tax of £751m, revenue up 7% on 2012 and continuing capital strength. As well as delivering strong financial performance, the Group has continued to deliver on its strategy and ambitions through a stronger customer focus, realisation of investment in technology through improved efficiency and effectiveness of its operations and by positively engaging its people in why the Group exists as a business.
Reflecting on the overall acceleration in growth on the prior year and the strong performance of the executive Directors, the Remuneration Committee decided to approve payments under the Group annual bonus, for 2013, of 75.14% of the Chief Executive’s (CE) maximum potential bonus (131.5% of salary) and, for the Chief Executive, Standard Life Investments (CE, SLI) of 79.75% of his maximum potential bonus (47.85% of salary). In addition, the Remuneration Committee approved a total of 100% of the CE, SLI’s maximum potential bonus (305% of salary) under the Standard Life Investments’ annual bonus arrangement.
Given the performance delivered in 2013 relative to the stretching longer term targets set in 2011, the Remuneration Committee also determined that the awards granted in 2011 under the Standard Life Long-term Incentive Plan (the current Group LTIP) should vest at 64% of the maximum award and those granted in 2011 under the Standard Life Investments Long-term Incentive Plan (SLI LTIP) should vest at 60.9% of the maximum award.
The Remuneration Committee reviews the way that the performance has been achieved and receives input from the Risk and Capital Committee. This is in order to ensure that the performance has been achieved in a manner consistent with the Group’s risk strategy and is an appropriate reflection of the Group’s performance. The total remuneration in respect of 2013 for the CE is £4,049k and for the CE, SLI is £4,201k. The breakdown is set out on page 84 of this report.
In setting salary for 2014 for the executive Directors, the Remuneration Committee considered updated market analysis for the CE as well as the anticipated salary increases to be awarded to employees across the Group. In recognition of this, and his personal performance, he has been awarded a 2.53% increase moving his base salary from £790,000 to £810,000 from 16 March 2014. In setting salary for the CE, SLI, the Remuneration Committee considered his contribution to Standard Life Investments’ growth, the anticipated salary increases to be awarded to employees generally, his personal performance and his standing in the broader investment community. Reflecting this, the CE, SLI has been awarded an increase of 2.8% moving his base salary from £437,750 to £450,000 with effect from 16 March 2014.
Our remuneration policy is designed to support our overall strategic objectives of driving customer and shareholder value and delivering sustainable business growth. Remuneration is one of the key tools we have as a business to incentivise our people to achieve these objectives while ensuring we are able to attract and retain the right talent given the aspirations and opportunities of the Group.
In reviewing our remuneration policy for our executive team we have re-assessed our remuneration principles to ensure that these continue to be relevant and appropriate. The revised principles that underpin our remuneration policy are summarised below: • The design and structure should be simple in design and operation • The overall remuneration policy should encourage significant levels of long-term share ownership to ensure the executive has wealth not just income at risk to align executives’ interests with shareholders and to incentivise continued delivery during and beyond the performance period
• Performance should be assessed over a meaningful period that reflects our focus on sustained performance, suitable for a longterm business
• Award level and design should be competitive in order to attract, retain and incentivise a talented executive team through alignment with Group performance and reflect the individual’s value in the market, without paying more than is necessary • We should provide an appropriate level of fixed remuneration and ensure that incentive arrangements balance risk and reward • Our remuneration policy should reflect Standard Life’s role as a leading investor and promoter of best remuneration practice and governance in the wider market.
Proposed new Group long-term incentive plan During 2013, we carried out a review of our long-term incentive arrangements for our executive team and senior management. This was in the context of the expiry of the current Group LTIP at the end of 2014 as well as emerging views on best practice in executive pay.
As a result of the review, a new long-term incentive plan, underpinned by our remuneration principles, is being presented to shareholders for approval. Subject to this approval, the Standard Life plc Executive Long Term Incentive Plan (the new Group LTIP) will be used to grant awards from 2014 onwards.
The Remuneration Committee values the opportunity to listen to our shareholders’ views and is committed to maintaining an open and transparent dialogue with shareholders on executive remuneration. We therefore undertook an extensive consultation exercise with our major institutional shareholders in the process of developing the new Group LTIP involving face to face meetings. The structure now being proposed to shareholders is reflective of the feedback we received.
Future policy report This section sets out the remuneration policy for executive Directors and non-executive Directors, which is subject to a binding vote of shareholders and will, if approved, take effect from 13 May 2014 – the date of the 2014 AGM.
The Remuneration Committee sets base salaries taking into account a range of factors including: • the individual’s skills, performance and experience • internal relativities and wider workforce salary levels • external benchmark data • the size and responsibility of the role • the complexity of the business and geographical scope • economic indicators.
Base salaries may be reviewed more frequently at the discretion of the Remuneration Committee.
Core benefits currently provided include health screening, private healthcare, death in service protection, disability benefit and reimbursement of membership fees of professional bodies.
Where the Remuneration Committee considers it appropriate other benefits may be provided on recruitment or relocation.
Promote share ownership by all employees to drive performance aligned to our shareholder interests.
Executive Directors can participate in the all-employee share plans operated by Standard Life on the same basis as all other employees. The two current all employee share arrangements are: • The Standard Life (Employee) Share
The maximum opportunity is in line with all other employees and as determined by the prevailing HMRC rules on maximum employee payment limits.
The level of pension benefit and level of cash allowance are reviewed periodically taking into account: • external benchmark data • pension legislation • other elements of the remuneration package.
Employer contribution into the Group’s defined contribution pension plan of up to 32% of salary.
A portion of the award may be based on individual performance objectives. This will be no more than 20% of the overall award.
Rewards Standard Life Investments’ employees for the delivery of individual performance objectives in the year and on Standard Life Investments’ corporate and investment performance.
Bonus pool is determined by reference to Standard Life Investments’ financial performance.
Personal bonus awards are based on personal performance against agreed Standard Life Investments’ business scorecard objectives and awarded from the bonus pool.
Company awards are made from the bonus pool after deduction of personal bonus payments and the size of the award reflects the value of total reward positioned against market.
The maximum award opportunity for the CE, SLI in respect of any financial year is 105% of salary in respect of the personal bonus element and is 200% of salary in respect of the company bonus element.
The Group CE and Group CFO do not participate in this plan.
In the event that stretch targets are exceeded the Remuneration Committee retains the discretion to award a higher company bonus to the CE, SLI provided it is in line with its principles on remuneration.
Such discretion would only be used: (i) if the company bonus and personal bonus were at a maximum (ii) following consultation with the Group’s largest shareholders on the use of such discretion (iii) on the basis that the award made to the CE, SLI did not exceed 2.5% of Standard Life Investments’ profits delivered above the stretch targets.
The award opportunity for the personal bonus and company bonus at threshold performance is zero, with up to 50% of the award normally payable for target performance. 100% of the award is payable for maximum performance.
The Standard Life plc Executive Long Term Incentive Plan (new Group LTIP)
Group LTIP awards are normally granted in the form of nil-cost options. They may however be awarded in other forms if it is considered appropriate.
Dividend-equivalents accrue over the five-year period. These will normally be paid in shares on a reinvested basis.
The Remuneration Committee may adjust and amend awards in accordance with the Group LTIP rules.
Awards are subject to review by the Remuneration Committee and the Risk and Capital Committee at the end of the three-year performance period to confirm that vesting of the award is appropriate. This will take into account performance relative to the Group scorecards over the plan period.
The Group cumulative operating profit and Group cumulative net flows performance condition ranges will be disclosed in the Directors’ remuneration report published in the year in which the awards are made.
Rewards the delivery of Standard Life Investments’ long-term strategy and the delivery of sustainable returns to the Group.
SLI LTIP awards are normally granted in the form of nil-cost options. They may however be awarded in other forms if it is considered appropriate.
Awards are also subject to review by the Remuneration Committee and the Risk and Capital Committee at the end of the three-year performance period to confirm that vesting of the award is appropriate.
Notes to policy table The deferred element of the Group annual bonus plan, the new Group LTIP and the SLI LTIP shall be operated in accordance with the rules of the respective plans. The rules for the new Group LTIP will be set out for approval at the 2014 AGM. The rules of the SLI LTIP were approved by shareholders in 2010.
Awards granted to executive Directors under the current Group LTIP (in the form of nil-cost options) are subject to the achievement of Group operating profit performance targets measured in the final financial year of the three year performance periods . The Remuneration Committee has the discretion to amend the final vesting level of these awards if it does not consider that it reflects the performance of the Group. Awards are also subject to review by the Risk and Capital Committee at the end of the performance period to confirm that vesting of the award is appropriate. The maximum individual award under this plan is 200% of salary. These awards accrue dividend-equivalents over the performance period which will normally be paid in shares on a re-invested basis. The performance target ranges for these awards are disclosed in this or previous remuneration reports with the target performance level disclosed retrospectively in the remuneration report for the final year of the performance period.
Awards granted to the CE, SLI under the SLI LTIP in 2011, 2012 and 2013 are consistent with the remuneration policy table above.
Malus or clawback may apply where stated in the policy table on pages 72 to 77.
The following table sets out why the performance conditions that are currently used for the annual Group performance scorecard were chosen.
Net flows are a measure of the assets that customers have invested with us during the year (premiums and deposits), minus the assets they’ve taken out (withdrawals, claims and annuity payments). This reflects our ability to win/retain business and is an indicative measure of customer satisfaction.
The following table sets out why the performance conditions currently used in the Standard Life Investments’ personal and company bonus plan were chosen.
The following table sets out why the performance conditions currently used in the SLI LTIP were chosen: Performance metric Consolidated cumulative three-year third party earnings before interest and tax
Remuneration arrangements throughout the Group The following overarching principles are applied to our remuneration policy and practice throughout the Group: • Remuneration is linked to performance, is transparent and easy to understand • The policy encourages behaviours that deliver results which are aligned to the interests of our key stakeholders • Remuneration is competitive and reflects financial and personal performance and the individual’s value in the market, without paying more than is necessary • The policy provides an appropriate balance of fixed and variable remuneration.
Develops our organisational capability by building resource capabilities and the behaviours we will need to deliver the Standard Life Investments’ annual business plan.
The Board annually sets the fees for the nonexecutive Directors other than the fee for the Chairman of the Company which is set by the Remuneration Committee.
The Chairman and non-executive Directors are not eligible to participate in any incentive arrangements. Additional fees or benefits may be provided at the discretion of the Remuneration Committee in the case of the Chairman, and the Board in the case of the other non-executive Directors, to reflect for example, housing, office, transport and other business related expenses incurred in carrying out their role.
Directors’ remuneration report; and the maximum level of bonus and long-term incentive awards which may be awarded to a new executive Director (excluding the CE, SLI) at or shortly following recruitment shall be limited to 475% of salary. The maximum level for the CE, SLI will be 865% of salary. These limits exclude buyout awards and are in line with the policy table above.
Components and approach The remuneration package offered to new appointments may include any element of remuneration included in the remuneration policy set out in this report, or any other element which the Remuneration Committee considers is appropriate given the particular circumstances but not exceeding the maximum level of bonus and long term incentive awards detailed above. In considering which elements to include, and in determining the approach for all relevant elements, the Remuneration Committee will take into account a number of different factors, including (but not limited to) typical market practice, existing arrangements for other executive Directors and internal relativities, and market positioning.
The terms and provisions that relate to remuneration in the executive Director contracts (that are not set out elsewhere in this report) are set out below. It is intended that the terms for any new appointment would be in line with these: Provision Policy Notice periods Six months by the executive Directors to the Company.
Termination payments Any payment in lieu of notice will be up to 12 months' salary, pension contributions and the value of other contractual benefits. A duty to mitigate applies. The payment may be made in phased instalments. Rights to bonus and existing long-term incentive awards are governed by the rules of the respective plans.
Time commitment Two to three days per week for the Chairman. For other non-executive Directors – 30 to 35 days a year.
Chairman – six months. For other non-executive Directors – no notice period.
Remuneration Fees as set out in on page 95. Reimbursement of travel and other reasonable expenses incurred in the performance of their duties. No pension, annual bonus or other incentive payment permitted.
Gerry Grimstone 6 June 20031 as Director and 28 February 2007 as Chairman (continuation 27 May 2010 and 28 May 2013)
Colin Buchan 27 November 2007 (continuation 25 January 2011 and 17 December 2013) Pierre Danon 28 November 2011 Crawford Gillies 7 December 2006 (continuation 11 January 2010 and 3 December 2012) David Grigson 26 October 2009 (continuation 30 October 2012) Noel Harwerth 18 July 2012 John Paynter 21 December 20112 Lynne Peacock 13 March 2012 Sheelagh Whittaker Martin Pike 1 Initially appointed as a Director of The Standard Life Assurance Company and appointed as a Director of Standard Life plc effective from 30 March 2006. 2 Appointed Senior Independent Director with effect from 25 May 2012 for a three-year term. Letter of appointment dated 24 May 2012. 3 Retired on 14 May 2013. 4 Appointed with effect from 27 September 2013.
The remuneration policy for loss of office for executive Directors is as follows: • Any payment in lieu of notice will be up to 12 months' salary, pension contributions and the value of other contractual benefits • There is a duty to mitigate any termination payments • The payment may be made in phased instalments and the policy is to do this for notice periods over six months • Rights to all-employee plans, bonus awards and long-term incentive awards are governed by the rules of the respective plans • Awards under all-employee share plans vest in accordance with their terms, under which good leavers are entitled to shares on or shortly after cessation. Other leavers would usually forfeit awards. • Typically, for good leavers, rights to annual bonus and long-term incentive awards will be pro-rated for time in service to termination as a proportion of the performance period and will, subject to performance, be paid at the usual time (which in the case of the new Group LTIP will normally include the holding period). Outstanding deferred share awards will typically vest in full at the date of termination.
In both the annual bonus plans’ and long-term incentive plans’ rules, the distinction is made between good leavers and other leavers. A good leaver is someone whose employment comes to an end because of death, ill health, injury, disability, redundancy or retirement as determined by their employing company, sale of the employing company or business or any other circumstance at the discretion of the Remuneration Committee. For the purposes of the SLI LTIP, a good leaver may also include an individual who is transferred out of Standard Life Investments to another company in the Group. In determining whether an individual is a good leaver, the Remuneration Committee will exercise its judgement in a manner which seeks to be in the Company’s interests 82 Standard Life
taking into account all relevant factors in relation to the departure. Where judgement has been exercised the Remuneration Committee would provide an explanation in the following year’s Directors’ remuneration report.
In the event of a change of control, executive Directors may receive a cash bonus in respect of the year in which the change of control occurs which, unless the Remuneration Committee determines otherwise, will be time pro-rated by reference to the bonus year. Outstanding deferred share awards will typically vest in full. Long-term incentives will normally vest early, taking into account the extent to which any relevant performance conditions have been met and, unless the Remuneration Committee determines otherwise, the time that has elapsed from the beginning of the relevant performance period. If the Company undergoes a winding up or is subject to a demerger, delisting, special dividend or other event which in the opinion of the Remuneration Committee may affect the current or future share price, the Remuneration Committee may allow awards to vest on the same basis.
The treatment of other awards in the event of a change of control will be in line with the relevant plan rules as approved by shareholders.
Single total figure of remuneration - executive Directors (audited) The following table sets out the single total figure of remuneration for each of the executive Directors who served as director at any time during the financial year ending 31 December 2013.
Total remuneration for the year £000s 1 This includes the taxable value of all benefits paid in respect of the year ended 31 December 2013. For executive Directors this includes car allowance of £16,585 for David Nish, £2,490 for Keith Skeoch (Keith Skeoch ceased to receive a car allowance with effect from 16 March 2013) and a car allowance of £5,154 for Jackie Hunt. Also included is private health cover - this amount is not significant.
Annual base salary as at 1 January 2013 Annual base salary from 16 March 2013 Total base salary paid in 2013
The table includes figures for the period from 1 January 2013 to the date Jackie Hunt resigned as a Director.
Jackie Hunt1 25% £44,580 1 Jackie Hunt resigned from the Board on 26 April 2013 and ceased to be a Standard Life employee on 4 September 2013 at which date payment of the cash allowance ceased. The table includes figures for the period from 1 January 2013 to the date Jackie Hunt resigned as a Director.
Group annual bonus Awards in respect of 2013 were made under the Group annual bonus plan. The target and maximum award opportunities (expressed as a percentage of salary) that could be earned in respect of 2013’s Group performance were: Target Maximum opportunity
For David Nish and Keith Skeoch, 90% of the award was based on Group performance and 10% on personal performance. Jackie Hunt is no longer entitled to a bonus award as her employment with the Group ceased on 4 September 2013.
The scorecard weightings, key achievements and overall score for 2013 are shown, for David Nish and Keith Skeoch, in the following table: • The scorecard is based on a scale of 1 to 5 with 5 reflecting maximum, 3 on target and 1 unsatisfactory performance • More information on our financial KPIs can be found in Section 1.2 of the Strategic report • Before approving the level of performance in 2013, the Remuneration Committee sought the views of the Group Chief Risk
(weighting as a % of maximum bonus opportunity) Performance measure Key achievements
1 Life joint ventures refers to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited
• Evolved Customer Personas to profile how our customers feel about their finances and drive more informed treatment and engagement
• Enhanced availability of our customer retirement offering, resulting in 70% of our workplace customers accessing our full retirement journey
• Received over 1,500 pieces of print and on-line media coverage which was largely neutral or positive in tone with only 6% being negative
• Secured a partnership agreement which saw Standard Life Investments become the first ever worldwide sponsor of the Ryder Cup
• We continued our role in supporting the youth employment agenda with a number of initiatives in place and with 54 young people having now completed the Edinburgh Guarantee internship
• We accelerated our diversity agenda across the Group and delivered a range of activities to achieve our goals
• We continue to make good progress in building our corporate systems. These group wide systems provide us with scalable platform on which the business can grow either organically or inorganically.
As a result of the ratings approved by the Remuneration Committee, the Group annual bonus outcome as approved by the Remuneration Committee for 2013 is: Bonus opportunity based on Group performance as a % of total bonus
Bonus opportunity based on personal performance as a % of total bonus
Actual 69.75% 10% 79.75% 47.85% £209,463 1 Bonus paid based on base salary at 31 December 2013.
Half of any Group bonus above 25% of salary awarded is deferred into awards over Standard Life plc shares (subject to the deferred amount being at least 10% of salary) which vest two years from the date of award. In addition, deferred bonus shares are subject to malus between grant and vest and cash awards are subject to clawback for two years from the date of award where information is later proven to be inaccurate or misleading as a result of the executive’s actions, or if the Group’s financial statements are restated.
The determination of annual bonuses at Standard Life Investments is subject to two levels of control. Firstly, the board of Standard Life Investments (Holdings) Limited reviews its financial results, and after taking into account the level of overall performance and risk, its remuneration committee proposes the level of bonus payments. This is then referred to the Remuneration Committee which reviews these recommendations and determines the bonuses to be paid to the most senior executives within Standard Life Investments.
The key achievements during the year in which the bonus outcome was determined were: • Very strong EBIT performance • Maintaining strong investment performance with 99% of third-party funds above benchmark in the year • Third party gross sales increased compared to 2012 • Securing the first global partnership with the Ryder Cup • Building the relationship with John Hancock.
Summary of bonus outcomes (audited) The following table shows the total bonus awards made in respect of 2013: Group cash bonus Group deferred bonus
2011 awards vesting in respect of performance ending in 2013 (audited) Awards were made in March 2011 of 200% of salary to David Nish and Keith Skeoch and 125% of salary to Jackie Hunt. The table below summarises the performance targets for the awards and the outcome.
2013 performance level Below threshold Threshold Target Maximum 2013 Group operating profit before tax (excluding life joint ventures)1 <£650m £650m £725m £800m
Standard Life Investments Long-Term Incentive Plan (SLI LTIP) In addition to the current Group LTIP, Keith Skeoch participated in the SLI LTIP. Under the SLI LTIP: • Awards will only begin to vest if Standard Life Investments’ investment performance is above the lower quartile of the moneyweighted average of all assets under management (both captive and third party assets) compared to other asset managers. Investment performance is based on the three-year money-weighted average investment performance of Standard Life Investments against relevant benchmarks.
Before an award can vest, the Group’s Risk and Capital Committee will need to verify to the Group’s Remuneration Committee that the level of vesting was not as a result of behaviour that has exposed the Group to undue risk. If the Group’s Risk and Capital Committee determines that the Group has been exposed to undue risk, the Remuneration Committee will take this into account when determining the level of vesting.
The following table sets out performance against targets for the 2011 award.
Consolidated cumulative threeyear third party EBIT <60% of target 60% of target 100% of target 140% of target
As performance was above the lower quartile of the money-weighted average of all assets under management (both captive and third-party assets) and the consolidated cumulative three-year third party EBIT was 108.7% of target, the Remuneration Committee determined that 121.8% of target awards (60.9% of the maximum award) granted in 2011 should vest in March 2014.
Awards granted in 2013 (audited): The table below summarises the key details of awards granted to executive Directors under the current Group LTIP and the SLI LTIP in 2013.
Group operating profit before tax (excluding life joint ventures)3 in the year ended 31
Maximum: 140% of third party EBIT target 1 The number of shares awarded is calculated based on the average share price for the five days preceding the grant which was £3.70. 2 This award lapsed on 4 September 2013. 3 Life joint ventures refer to HDFC Standard Life Insurance Company Limited and Heng An Standard Life Insurance Company Limited. 4 Vesting between threshold and maximum levels will be on an incremental basis using predetermined milestones. These will be disclosed on a retrospective basis in the Directors’ remuneration report for the year for which the Group LTIP awards vest. 5 Vesting takes place on a straight-line basis between 60% of target third party EBIT and 140% of target third party EBIT.
Executive Directors were expected to build up a holding of Standard Life plc shares by keeping any shares they or their family members acquire, plus at least half the shares acquired under the current Group LTIP and from deferred bonuses on an after-tax basis, until the guideline was met.
The Remuneration Committee reviews progress against the requirements annually and retains discretion to require executive Directors to purchase shares to meet the requirement.
The Chairman will continue to be subject to a guideline holding of 100% of the value of his fees in Standard Life plc shares within four years of appointment. Gerry Grimstone as Chairman fully met this requirement in 2013 with the value of his shares at the end of the year being 259% of his fees.
The table below shows in relation to each executive Director, the total number of share options with and without performance conditions held at 31 December 2013: Options with performance measures1
Directors’ interests in the Company’s shares through the medium of the Group’s share plans are shown below: Group and Standard Life Investments LTIPs Awards are subject to vesting conditions that are based on continuous employment and on satisfying corporate performance targets over the performance period.
3 The 2010 Group LTIP vested at 100% and the SLI Group LTIP at 69.5% of maximum. 4 Based on the average share price for the five dealing days immediately before the awards were granted. 5 Keith Skeoch’s awards under the SLI LTIP.
Total value on exercise date David Nish 31/03/11 31/03/13 206,609 - 16,936 223,545 - - £2.114 £3.760 30/04/13 £840,552 29/03/12 29/03/14 209,667 - 21,194 - - 230,861 £2.015 - - - 28/03/13 28/03/15 - 153,751 12,513 - - 166,264 £3.326 - - - 416,276 153,751 50,643 223,545 - 397,125 Keith Skeoch 31/03/11 31/03/13 25,529 - 2,091 27,620 - - £2.114 £3.913 07/05/13 £108,077 29/03/12 29/03/14 23,813 - 2,405 - - 26,218 £2.015 - - - 28/03/13 28/03/15 - 18,907 1,538 - - 20,445 £3.326 - - - 49,342 18,907 6,034 27,620 - 46,663 Jackie Hunt 31/03/11 31/03/13 87,863 - 7,201 95,064 - - £2.114 £3.394 10/04/13 £322,647 29/03/12 29/03/14 116,095 - - - 116,095 - £2.015 - - - 28/03/13 28/03/15 - 89,993 - - 89,993 - £3.326 - - - 203,958 89,993 7,201 95,064 206,088 1 All deferred share awards lapse six months after the expected first date of exercise. 2 The Remuneration Committee has invoked the power within the deferred share plan rules for the awards to carry a right to receive rolled-up dividends, but only to the extent that the awards vest. As such, these awards include shares equivalent to the level of dividends announced between March 2011 and November 2013 or the date of vesting if earlier.
Sharesave David Nish and Jackie Hunt were granted options under the Standard Life Sharesave Plan on 15 September 2011. David Nish was granted options over 9,669 Standard Life plc shares exercisable from 1 November 2016 and Jackie Hunt was granted options over 5,715 Standard Life plc shares exercisable from 1 November 2014. Jackie Hunt’s options lapsed on 4 September 2013 when her employment with Standard Life ceased.
Executive Directors’ external appointments Subject to the Board’s approval, executive Directors are able to accept a limited number of external appointments to the boards of other organisations and can retain any fees paid for these services. Executive appointments held during the year are shown below.
Deputy Chairman of the Board of the Association of British Insurers (ABI) Chairman of the Long Term Savings and Life Insurance Committee of the ABI Member of the Advisory Council of TheCityUK Non-executive director of the UK Green Investment Bank plc £30,000
Director of the Investment Management Association Member of the Advisory Board of Reform Scotland Non-executive director of the Financial Reporting Council £nil1
LTIP award granted, and also the impact of the increase in the Standard Life plc share price which moved from £1.86 at the award date to £3.46 on the first possible date of exercise and which drives the value outcome of the Group LTIP plan.
Relative importance of spend on pay The following table compares our spend on employee remuneration to that paid in the form of dividends to our shareholders. Also shown is a measure of our profit before tax which is provided for context: Remuneration payable to all Group employees (£m)
2013 679 375 751 2012 645 3451 867 1 A further £302m was paid in the form of a special dividend at the same time as the final dividend for 2012
Implementation of policy in 2014 Base Salary The Remuneration Committee considered it appropriate to award increases as follows: Increase to base pay Base pay effective from 16 March 2014
For David Nish and Keith Skeoch, 90% of the award will be based on Group performance and 10% on personal performance. Keith Skeoch will continue to participate in the Standard Life Investments’ personal and company bonus plan. The maximum awards under this plan are 105% of salary and 200% of salary respectively.
Long-term incentive arrangements Subject to the approval of the new Group LTIP at the 2014 AGM, the Remuneration Committee proposes to grant awards equivalent to 200% of salary to David Nish and 200% of salary to Keith Skeoch, in the form of nil-cost options under this plan. Vesting of these awards, in 2019, is based on the following performance measures measured over the period to 31 December 2016: • Cumulative Group operating profit before tax performance weighted at 70% of the award • Cumulative Group net flows weighted at 30% of the award.
Vesting :100% of award Cumulative Group operating profit before tax 1 Maximum: £2,585m
Insurance Company Limited. 2 Cumulative Group net flows excluding life joint ventures which refer to HDFC Standard Life Insurance Company Limited and Heng An Standard Life.
Maximum % of target award vesting and target for maximum vest 2014 SLI LTIP award, vests in
Investments’ EBIT to 31 December 2016 and subject to an investment gateway
2 Sheelagh Whittaker resigned at the close of the AGM on 14 May 2013. 3 Martin Pike was appointed on 27 September 2013. 4 Lord Blackwell and Baroness McDonagh resigned from the Board at the close of the AGM on 25 May 2012.
The following table shows the number of Standard Life plc shares held by each of the non-executive Directors: Total number of shares owned at
Martin Pike - 40,000 40,000 - 1 Includes shares held by the Director and by their connected persons.
Chairman of Standard Life Investments £38,250 £38,250 1 The core fee of £71,400 paid to each non-executive Director (including the Chairman) will total £642,600 for 2014 (2013: £642,600). This is within the maximum £1m permitted under Article 87 of Standard Life plc’s articles of association. Total fees including additional duties are expected to amount to £1,068,450 for 2014 (2013: £1,068,450).
If you would like a copy of the Remuneration Committee’s terms of reference these can be found in the Board Charter which you can obtain from www.standardlife.com/about/board_committees or request a copy from our Group Company Secretary and General Counsel.
Fees paid to Deloitte LLP during 2013 for professional advice to the Committee were £155,000.
As noted on page 39, Gerry Grimstone is an independent non-executive of Deloitte LLP. He was appointed to this role to represent the public interest following a recommendation by the Financial Reporting Council that all major audit firms should have such representation. His remuneration for that role is a fixed sum and has no relationship to Deloitte's business activities. Both the Chairman and the Remuneration Committee recognised the need to ensure there is no conflict of interest arising from the appointment of Deloitte LLP to advise the Remuneration Committee. The Chairman did not play a part in the tender and selection process. We were satisfied at the date of the appointment that the nature of the Chairman's appointment to Deloitte LLP did not create a conflict of interest. We continue to monitor this position and are satisfied that the continuing appointment does not give rise to a conflict of interest. Deloitte LLP operates appropriate safeguards to maintain the independence of its advice, for example, the team responsible for providing advice to the Remuneration Committee are not rewarded for cross-selling non-related services to Standard Life and work is contracted for independently from work performed by the rest of the firm. Whilst Gerry Grimstone has access to the Remuneration Committee advisor to the extent that he is invited to attend Remuneration Committee meetings, he does not meet with the Remuneration Committee advisor other than in those meetings to discuss matters relating to Standard Life. Communication between Deloitte LLP and the Remuneration Committee is on instruction from the Remuneration Committee Chairman.
Activities of the Remuneration Committee: The Remuneration Committee met 12 times during 2013. The key issues discussed/approved were: January to March • 2012 Directors’ remuneration report • Approving 2013 executive Director and executive team salaries and the vesting outcomes of the 2012 bonus plans and longterm plans dependant on 2012 performance • Agreeing the 2013 Group scorecard • Set targets for 2013 LTIP.
April to June • Development of thinking around the direction of the new Group LTIP.
July to September • 2013 mid-year performance review for annual bonus and LTIP awards • Approval for 2013 invitations for the UK and Ireland Sharesave plans. October to December • Investor consultation on proposed new Group LTIP • 2013 annual bonus update and principles for the 2014 salary and bonus planning cycle • Performance updates for the outstanding LTIP awards granted in 2011, 2012 and 2013 • Chairman’s 2014 fee.
The following table sets out actual voting on our previous remuneration report presented at the 2013 AGM on 14 May 2013: For Against Abstain 2012 Directors’ remuneration report
Related party transactions: All transactions between Directors and the Group are on commercial terms that are equivalent to those available to all employees. During the year to 31 December 2013, the Directors contributed £2,869,942 (2012: £898,905) to products sold by the Group.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Group 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.
Overview of our audit approach Materiality We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements both individually and on the financial statements as a whole.
Based on our professional judgement, we therefore determined materiality for the Group financial statements as a whole to be £40 million. Our view on overall materiality was communicated to the Audit Committee.
Accordingly, we identified 10 of the Group's reporting units which, in our view, required an audit of their complete financial information, either due to their size and/or their risk characteristics. These focussed on the material reporting units within the UK and Europe, SLI and Canada reportable segments. In addition, specific audit procedures on certain balances and transactions were performed at a further 10 reporting units within the Group across all reportable segments. Additional procedures were also performed at the Group level over the group consolidation and other reporting packs in order to gain further audit evidence. Overall we concluded that this gave us the evidence we needed for our opinion on the Group financial statements as a whole.
We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out on page 56.
Area of focus How the scope of our audit addressed the area of focus Valuation of insurance contract and pension scheme liabilities
The key judgements relate to annuitant mortality assumptions where small changes can have a significant impact on the Group’s balance sheet (see Notes 33 and 37 to the Group financial statements).
We evaluated the methodology for those models focussing on significant changes by obtaining documentation of the key changes approved by the directors and assessing these against compliance with relevant financial and regulatory reporting requirements.
We performed audit procedures over the key changes in the methodology and assumptions used, in particular the expected future improvements in annuitant mortality. Having ascertained the extent of change in the assumptions that either individually or collectively would result in a significant impact on the financial statements, or a material misstatement, we considered the likelihood of such a movement in those key assumptions arising.
We also performed an independent annual benchmarking survey which allowed us to further challenge the assumption setting process by comparing the assumptions used relative to the Group’s industry peers.
Due to the nature of the investment portfolio, the key judgements relate to the valuation of derivatives and real estate investments. (see Note 42 to the Group financial statements).
We assessed the models and inputs used for a sample of derivative investments across the investment portfolio for which there is no active market price available, recalculating the valuation using independent models and assessing data inputs against recognised market data providers.
We tested journal entries posted to revenue accounts to identify unusual or irregular items. We substantively tested manual journals, suspense accounts, control accounts and reconciliations over key financial reporting processes such as outstanding premiums and management fee income.
We assessed the overall control environment of the Group, including the arrangements for staff to ‘whistle-blow’ inappropriate actions, and interviewed senior management and the Group’s Internal Audit function.
Going Concern Under the Listing Rules we are required to review the directors’ statement, set out on page 64, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the Group’s financial statements using the going concern basis of accounting. 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.
Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility. Corporate Governance Statement Under the Companies Act 2006, we are required to report to you if, in our opinion a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate governance statement relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code (‘the Code’). We have nothing to report having performed our review.
Other information in the Annual Report 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 Group financial statements • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit • is otherwise misleading.
We have reported separately on the Company financial statements of Standard Life plc for the year ended 31 December 2013 and on the information in the Directors’ remuneration report that is described as having been audited.
Stephanie Bruce (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 27 February 2014
Revenue Gross earned premium 4,128 4,315 Premium ceded to reinsurers (93) (95) Net earned premium 4,035 4,220 Investment return 4 15,449 13,982 Fee and commission income 5 977 906 Other income 84 77 Total revenue 20,545 19,185
Total administrative expenses 1,825 1,721 Change in liability for third party interest in consolidated funds 32 865 782 Finance costs 108 77 Total expenses 19,769 18,270
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss 11 (13) 102
Total items that will not be reclassified subsequently to profit or loss 108 68
Items that may be reclassified subsequently to profit or loss: Fair value losses on cash flow hedges 31 - (1)
Share of other comprehensive income of joint ventures 17 (3) -
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss 11 7 -
Non-controlling interests 30 29 523 727 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation.
Pro forma reconciliation of consolidated operating profit to profit for the year For the year ended 31 December 2013 restated1 Notes £m £m
Tax (expense)/credit attributable to: Total tax expense attributable to equity holders’ profits (90) (51)
The consolidated financial statements on pages 104 to 216 were approved on behalf of the Board of Directors, on 27 February 2014 and signed on its behalf by the following Directors: Gerry Grimstone, Chairman David Nish, Chief Executive
Consolidated statement of changes in equity For the year ended 31 December 2013
Total comprehensive income for the year - - - 556 (63) 493 30 523
Issue of share capital other than in cash 28 2 - - - - 2 - 2 Reserves credit for employee share-based payment schemes 31 - - - - 32 32 - 32 Transfer to retained earnings for vested employee share-based payment schemes 30, 31 - - - 33 (33) - - -
Shares acquired by employee trusts - (11) - - - (11) - (11)
Total comprehensive income for the year - - - 730 (32) 698 29 727
Issue of share capital other than in cash 28 1 - - - - 1 - 1 Reserves credit for employee share-based payment schemes 31 - - - - 25 25 - 25 Transfer to retained earnings for vested employee share-based payment schemes 30, 31 - - - 25 (25) - - -
Shares distributed by employee trusts - 17 - (17) - - - - Other movements in non-controlling interests in the year - - - - - - (46) (46) Aggregate tax effect of items recognised directly in equity 11 - - - - 6 6 - 6 31 December 236 (7) 1,110 1,441 1,579 4,359 341 4,700 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation.
Non-cash items relating to investing and financing activity 43 134 84
Acquisition of subsidiaries and unincorporated businesses net of cash acquired (57) -
Effects of exchange rate changes on cash and cash equivalents (20) (79)
Rental income received on investment properties 586 595 1 Comparatives for the year ended 31 December 2012 have been restated to reflect retrospective application of changes to accounting policies as a result of an amendment to IAS 19 – Employee Benefits. Refer to Group accounting policies – (a) Basis of preparation.
Group accounting policies (a) Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of investment properties, owner occupied property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
Amendment to IAS 1 Presentation of Financial Instruments (effective for annual periods beginning on or after 1 July 2012) The amendment to IAS 1 revised the way other comprehensive income is presented. As a result items that can subsequently be reclassified to profit or loss are presented separately from items that will never be reclassified to profit or loss in the consolidated statement of comprehensive income. The tax associated with each category is also shown separately. The amendment has affected presentation only.
Enhanced disclosures are also required by the amendments which are presented in Note 37 – Pension and other post-retirement benefit provisions.
Additionally the Group has adopted the following amendments to existing standards which are effective by EU endorsement from 1 January 2013 and management considers that the implementation of these amendments has had no significant impact on the Group’s consolidated financial statements: • Amendment to IAS 12 Income Taxes: Deferred Tax • Annual Improvements to IFRS 2009-2011.
(a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group’s annual accounting periods beginning on or after 1 January 2014. The Group has not early adopted the standards, amendments and interpretations described below: Consolidation standards IFRS 10 Consolidated Financial Statements IFRS 10 introduces a single consolidation model to be applied to all entities and replaces previous requirements on control and consolidation in IAS 27 Consolidated and Separate Financial Statements and Standing Interpretations Committee (SIC) 12 Consolidation – Special Purpose Entities. IFRS 10 defines control, determines how to identify if an investor controls an investee and requires an investor to consolidate entities it controls under the new standard. IFRS 10 identifies three elements, all of which must be present for an investor to control an investee, which are as follows: • Power over the investee • Exposure, or rights, to variable returns from its involvement with the investee • The ability to use that power over the investee to affect the amount of the returns.
Adoption of the consolidation standards IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) as amended by IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: transition guidance and IFRS 10, IFRS 12 and IAS 27: Investment Entities must be adopted concurrently. The adoption of IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) is expected to have a significant impact on the recognition, measurement and presentation of interests in other entities in the consolidated financial statements of the Group. Additional disclosures will also be presented. The new standards and amendments have been endorsed by the EU for adoption for annual periods beginning on or after 1 January 2014.
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions (effective for annual periods beginning on or after 1 January 2014) The amendments clarify the requirements for attributing employee and third party contributions to periods of service and recognising employee and third party contributions in certain situations. The adoption of the amendment is not expected to have an impact on the consolidated financial statements of the Group. The amendment has not yet been endorsed by the EU.
The mandatory effective date for IFRS 9 has been removed however the standard as amended permits entities to adopt certain elements early without the need to adopt the entire standard. The standard including subsequent amendments has not yet been endorsed by the EU.
(a)(iii) Critical accounting estimates and judgement in applying accounting policies The preparation of financial statements requires management to make estimates and assumptions and exercise judgements in applying the accounting policies that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses arising during the year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. The areas where judgements, estimates and assumptions have the most significant effect on the amounts recognised in the consolidated financial statements are as follows: Financial statement area Critical accounting judgements, estimates or assumptions Related accounting policies and notes
Classification of financial instruments Classification of asset as either held for trading, available-for-sale, FVTPL
Determination of the fair value of complex financial instruments (q) and Note 42
Defined benefit pension plans Determination of assumptions for mortality, discount rate, inflation and the rate of increase in salaries and pensions Assessment of the recoverability of any surplus
Business combinations Identification and valuation of identifiable intangible assets arising from business combinations c(i), j(ii) and Note 1
(b)(i) Subsidiaries Subsidiaries are all entities, including special purpose entities, over which the Group has the power to govern the financial and operating policies. Such power, generally but not exclusively, accompanies a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group until the date that control ceases.
Intra-group transactions, balances and unrealised gains on intra-group transactions are eliminated. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Subsidiaries’ accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. Where the Group owns more than 50% of an investment vehicle, such as open-ended investment companies, unit trusts and limited partnerships, and it is consolidated, the interests of parties other than the Group in such vehicles are classified as liabilities. These are recognised in the third party interest in consolidated funds line on the consolidated statement of financial position and any movements are recognised in the consolidated income statement. The interests of parties other than the Group in all other types of entities are recorded as non-controlling interests in equity.
Group accounting policies continued (b) Basis of consolidation continued (b)(ii) Associates and joint ventures continued Where the Group has a significant holding in an investment vehicle that meets the definition of an associate or joint venture and that investment in an associate or joint venture backs policyholder liabilities, including the unallocated divisible surplus, the scope exemption under IAS 28 Investments in Associates is applied and that investment is designated as at fair value through profit or loss (FVTPL) in accordance with IAS 39 Financial Instruments: Recognition and Measurement. All other associates and joint ventures are accounted for using the equity method and, in this case, the Group’s investment in associates and joint ventures includes goodwill, net of any impairment loss, identified on acquisition. Investments in associates and joint ventures that are accounted for using the equity method are initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the associate and joint ventures. The Group’s share of post-acquisition profit or loss of its associates and joint ventures is recognised in the consolidated income statement and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Where the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations in connection with or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. The accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.
The identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. The consideration transferred in a business combination is measured at fair value at the acquisition date. Any obligation for contingent consideration arising from an acquisition is recognised at fair value at the acquisition date on the consolidated statement of financial position and subsequent changes in fair value are recorded in the consolidated income statement. Acquisition-related costs are expensed when incurred.
Contracts that give rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contain an element that does not transfer significant insurance risk and which can be measured separately from the insurance component. Where such elements are present, they are accounted for separately with any deposit element being accounted for and disclosed in a manner consistent with financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as a reinsurance contracts.
The fee income associated with non-participating investment contracts is dealt with under policy (g)(iv).
(g)(iii) Net investment return Gains and losses resulting from changes in both market value and foreign exchange on investments classified as at fair value through profit or loss, including investment income received (such as interest payments), are recognised in the consolidated income statement in the period in which they occur.
Changes in the fair value of derivative financial instruments that are not hedging instruments are recognised immediately in the consolidated income statement.
Unrealised gains and losses on AFS financial assets are recognised in other comprehensive income unless an impairment loss is recognised. On disposal any accumulated gain or loss previously recognised in other comprehensive income is recycled to the consolidated income statement.
For loans measured at amortised cost, interest income recognised in the consolidated income statement is calculated using the EIR method.
Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under policy (f) above.
(h)(v) Expenses under arrangements with reinsurers Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised as they are incurred in the consolidated income statement as expenses under arrangements with reinsurers.
(j) Goodwill and intangible assets (j)(i) Goodwill In a business combination, goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held interest, over the fair value of the Group’s share of the identifiable assets acquired and the liabilities and contingent liabilities assumed at the acquisition date.
Deferred acquisition costs are amortised in proportion to projected margins over the period the relevant contracts are expected to remain in force. After initial recognition, deferred acquisition costs are reviewed by category of business and written off to the extent that they are no longer considered to be recoverable.
(k)(ii) Canada and Asia and Emerging markets - 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 in (k)(i) for non-participating insurance contracts. Implicit allowance is made for deferred acquisition costs in the Canadian Asset Liability Method (CALM). Therefore, no explicit deferred acquisition costs have been recognised separately for business written by the Canadian subsidiaries.
(n) Income tax The income tax expense is based on the taxable profits for the year, after adjustments in respect of prior years.
(p) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated as at fair value through profit or loss (FVTPL). Financial assets classified as loans include loans secured by mortgages and loans secured on policies.
Group accounting policies continued (q) Equity securities, debt securities and derivatives continued (q)(i) Hedge accounting A hedge relationship will qualify for hedge accounting by the Group if, and only if, the following conditions are met: • Formal hedging documentation at inception of the hedge is completed, detailing the hedging instrument, hedged item, risk management objective, strategy, effectiveness testing methodology and hedge relationship • The hedge relationship is expected to be highly effective at inception in achieving offsetting changes in fair value or cash flow attributable to the hedged risk • The effectiveness of the hedge can be reliably measured and the hedge is assessed for effectiveness regularly during the reporting period for which the hedge was designated to demonstrate that it is has been highly effective.
(q)(ii) Embedded derivatives Options, guarantees and other derivatives embedded in a host contract are separated and recognised as a derivative unless they are either considered closely related to the host contract, meet the definition of an insurance contract or if the host contract itself is measured at fair value with changes in fair value recognised in income.
(r) Financial guarantee contracts The Group recognises and measures financial guarantee contracts in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Group initially recognises and measures a financial guarantee contract at its fair value. At each subsequent reporting date, the Group measures the financial guarantee contract at the higher of the initial fair value recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue and the best estimate of the expenditure required to meet the obligations under the contract at the reporting date, determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(t) Equity (t)(i) Share capital and shares held by trusts An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in the share premium reserve. Incremental costs directly attributable to the issue of new equity instruments are shown in the share premium reserve as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments in a business combination are excluded from the consideration transferred.
(t)(ii) Merger reserve If the Company issues shares at a premium and the conditions for merger relief under section 612 of the UK Companies Act 2006 are met, a sum equal to the difference between the issue value and nominal value is transferred to a ‘merger reserve’.
(u) Insurance and investment contract liabilities For insurance contracts and participating investment contracts, IFRS 4 Insurance Contracts permits the continued application, for measurement purposes, of previously applied Generally Accepted Accounting Principles (GAAP), 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. The Group therefore adopts UK GAAP, including the requirements of FRS 27 Life Assurance in relation to its UK-regulated with profits funds, for the measurement of its insurance and participating investment contract liabilities. As permitted under UK GAAP, the Group adopts local regulatory valuation methods, adjusted for consistency with asset measurement policies, for the measurement of liabilities under insurance contracts and participating investment contracts issued by overseas subsidiaries.
UK and Europe Participating contract liabilities arising under contracts issued by a with profits fund falling within the scope of the Prudential Regulation Authority (PRA) realistic capital regime are measured on the PRA realistic basis. 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.
The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund (SHF) or the Proprietary Business Fund (PBF) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL.
Under the PRA realistic basis, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the FPRL (as a reduction in FPRL where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to FPRL. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
Applying the policy noted above: • The value of participating insurance and participating investment contract liabilities is reduced by future expected (net positive)
Present value of future profits (PVFP) on non-participating contracts held in a with profits fund For with profits funds falling within the scope of the PRA’s realistic capital regime, an amount is recognised for the PVFP on non-participating contracts where the determination of the realistic value of liabilities for with profits contracts in that with profits fund takes account of this value directly or indirectly. The amount is recognised as a deduction from liabilities. Where 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. Otherwise it is recognised as a separate amount reflected in liabilities comprising participating contract liabilities and UDS.
Canada and Asia and Emerging Markets 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.
For non-participating insurance contracts issued by SLCC, the Canadian regulatory valuation technique is applied. Under Canadian regulations, liabilities are determined according to the Canadian Asset Liability Method (CALM). Assets and liabilities are projected under a number of different economic scenarios. These scenarios include the current yield curve as at the valuation date and a number of various rising and falling interest rate environments. Under each scenario, the assets required to support the liabilities are the value of assets which will achieve zero surplus at the end of the projection period. In this valuation allowance is made for income taxes arising from differences between tax and accounting bases that are policy related. Under CALM the deferred taxes recognised under IAS12 relating directly to policy related items included in the computation of liabilities are eliminated in the liabilities and discounted deferred taxes are added. The liability is set equal to the greatest value of the required assets.
Liabilities for non-participating insurance contracts issued by subsidiaries in Ireland and Hong Kong are measured using local reporting valuation techniques.
(w) Non-participating investment contract liabilities Unit linked non-participating investment contract liabilities are designated as at FVTPL as they are implicitly managed on a fair value basis as their value is directly linked to the market value of the underlying portfolio of assets.
(x) Liability adequacy test The Group applies a liability adequacy test at each reporting date to ensure that the insurance and participating contract liabilities (less related deferred acquisition costs) are adequate in the light of the estimated future cash flows. This test is performed by comparing the carrying value of the liability and the discounted projections of future cash flows.
Group accounting policies continued (aa) Pension costs and other post-retirement benefits The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee-administered funds. The pension plans are funded by payments from employees and by the relevant Group companies, determined by periodic actuarial calculations.
(cc) Provisions, contingent liabilities and contingent assets Provisions for restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.