Where the Group is the lessor, lease income from operating leases is recognised in the consolidated income statement on a straight-line basis over the lease term. Initial direct costs incurred in arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.
(gg) Employee share-based payments The Group operates share incentive plans for all employees, share-based long-term incentive plans and restricted stock plans for senior employees and may award annual performance shares or options to all eligible employees when the Group’s profit exceeds certain targets. Further details of the schemes are set out in Note 46. For share-based payment employee transactions, services received are measured at fair value.
At each period end the Group reassesses the number of equity instruments expected to vest and recognises any difference between the revised and original estimate in the consolidated income statement with a corresponding adjustment to the equity compensation reserve. At the time the equity instruments vest, the amount recognised in the equity compensation reserve in respect of those equity instruments is transferred to retained earnings.
Group accounting policies continued (jj) Operating profit continued Operating profit also excludes the impact of the following items: • Restructuring costs and significant corporate transaction expenses • Impairment of intangible assets • Profit or loss arising on the disposal of a subsidiary, joint venture or associate • Amortisation of intangibles acquired in business combinations • Changes in Canada insurance contract liabilities as a result of the resolution of the tax position of individual matters relating to prior years • Items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group.
Diluted earnings per share can also be calculated by adjusting the profit or loss for the effects of changes in income, expenses, tax and dividends that would have occurred had the dilutive potential ordinary shares been converted into ordinary shares.
The goodwill is attributable to the value of future contracts and the workforce of the acquired business as well as the significant synergies expected to arise as a result of the acquisition. Of the goodwill recognised of £40m, £37m is expected to be deductible for income tax purposes.
At 31 December 2013, the fair value of the remaining contingent consideration is £15m and is included in other financial liabilities on the consolidated statement of financial position.
If the acquisition had occurred on 1 January 2013, the Group’s total revenue and profit for the year would have increased by £15m and £2m to £20,560m and £498m respectively.
3. Financial information – Notes to the Group financial statements continued 2. Segmental analysis (a) Basis of segmentation The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed. The Group’s reportable segments are as follows: UK and Europe UK and Europe provide a broad range of pensions, protection, savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
Asia and Emerging Markets The businesses included in Asia and Emerging Markets offer a range of savings and investment products and comprise wholly owned operations in Hong Kong, Singapore and Dubai and investments in joint ventures in India and China.
In February 2013, changes were announced in the way the Group manages its business. The offshore bond business in Ireland which was previously reported in Asia and Emerging Markets is now managed and reported as part of UK and Europe. Additionally, due to changes in the way the Group’s segments are managed, some overhead costs which were previously reported in Asia and Emerging Markets are now reported in group corporate centre in Other. These combined changes provide stronger focus in our chosen markets and will help drive further value in each of the markets in which the Group operates. The reportable segments have therefore been changed for the year ended 31 December 2013. Comparative amounts for 31 December 2012 have been restated on the same basis to allow more meaningful comparison.
In November 2013, the Group announced that the results of Standard Life Wealth Limited (SLW) would be managed and reported as part of the Standard Life Investments segment effective 1 January 2014. Previously this business was managed as part of the UK and Europe segment and accordingly the results of SLW have been presented as part of UK and Europe.
(b)(i) Analysis of Group operating profit by segment The pro forma reconciliation of consolidated operating profit to profit for the year sets out the long-term operating performance of the Group. Operating profit is the key measure utilised by the Group’s management in their evaluation of segmental performance and is presented by reportable segment.
Operating profit/(loss) before tax 380 192 251 (6) (66) - 751
Operating profit/(loss) after tax 332 145 200 (6) (69) - 602
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes 13 (11) 1 (70) (2) (10) - (92)
Restructuring and corporate transaction expenses 10 (59) (2) (2) (5) (5) - (73) Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters 13 - - (15) - - - (15)
Tax on non-operating items 14 - 32 1 4 - 51 Profit for the year attributable to equity holders of Standard Life plc
Each operating segment reports total income as its measure of revenue in its analysis of operating profit. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes. Eliminations relate to inter-segment transactions, which are entered into under normal commercial terms and conditions that would be available to unrelated third parties.
3. Financial information – Notes to the Group financial statements continued 2. Segmental analysis continued (b) Reportable segments - Group operating profit, revenue and asset information continued (b)(i) Analysis of Group operating profit by segment continued
Markets Other Elimination Total 31 December 2012 (restated)1 Notes £m £m £m £m £m £m £m
Operating profit/(loss) before tax 393 145 353 3 (27) - 867
Restructuring and corporate transaction expenses 10 (95) (3) (3) (1) (7) - (109)
Tax on non-operating items 51 1 17 - 4 - 73 Profit for the year attributable to equity holders of Standard Life plc
Total income as presented in the analysis of Group operating profit by segment 1,972 1,776
Change in liability for third party interest in consolidated funds 865 782
(b)(iv) Analysis of assets under administration by segment Group AUA presents a measure of the total assets of the Group including those administered on behalf of customers and institutional clients. AUA represents the IFRS gross assets of the Group adjusted to include third party AUA, which is not included on the consolidated statement of financial position. In addition, certain assets on the consolidated statement of financial position are excluded from the definition, including reinsurance assets, deferred acquisition costs and intangible assets.
Markets Other Elimination1 Total 31 December 2013 £bn £bn £bn £bn £bn £bn £bn Assets under administration Fee based 145 97 17 - - (49) 210 Spread/risk 15 - 8 - - - 23 Assets not backing products in long-term savings business 6 - 2 - - - 8 Joint ventures - - - 2 - - 2 Other corporate assets - 1 - - 1 (1) 1 Total assets under administration 166 98 27 2 1 (50) 244 Third party AUA (79) Reinsurance assets 6 Deferred acquisition costs 1 Assets attributable to third party interest in consolidated funds and non-controlling interests 12 Other 1 Total assets per consolidated statement of financial position 185 1 In order to be consistent with the presentation of new business information, certain products are included in both Standard Life Investments AUA and other segments. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
Non-current non-financial assets for this purpose consist of investment property, investment property held for sale, property, plant and equipment and intangible assets (excluding intangible assets arising from insurance or participating investment contracts).
3. Business written in the Group’s insurance entities (a) How the business is held in the Group’s insurance entities The Group’s insurance and investment contracts are held by the regulated entities within each reportable segment. Each regulated entity operates various funds and how the business is held within these funds is outlined below by reportable segment.
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (a) How the business is held in the Group’s insurance entities continued (a)(i) UK and Europe continued Under the Scheme of Demutualisation (the Scheme) the residual estate of the HWPF exists to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the board of SLAL is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining eligible policies invested in the HWPF. The Scheme provides that certain defined cash flows (recourse cash flows (RCF)) arising in the HWPF on specified blocks of UK and Irish business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the SHF, and thus accrue to the ultimate benefit of equity holders of the Company. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business. Under these mechanisms, profits, on an RCF basis, on non-participating business excluding investment spread profits on annuities and profits, on an RCF basis or German additional expenses basis, on unitised with profits contracts, are transferred to the SHF. All investment return on HWPF investments is retained in the HWPF for the ultimate benefit of participating policyholders. Under the Scheme, transfers to the SHF are subject to certain constraints in order to protect policyholders.
Standard Life International Limited The UK and Europe reportable segment also contains the International Bond issued by Standard Life International Limited (SLIL) to UK residents. Note (a)(iii) below contains a description of the fund structure operated by SLIL.
SLAL operates a Canadian branch. A separate sub-fund of the PBF is maintained for this branch. All contracts issued from SLAL’s Canadian PBF are wholly reinsured to SLCC.
(a)(iii) Asia and Emerging Markets The entities in the Asia and Emerging Markets reportable segment that issue insurance and investment contracts, other than joint ventures, are SLIL and Standard Life (Asia) Limited (SLA). These entities operate using a shareholder fund and a long-term business fund which is sub-divided into unit linked funds and a non-unit linked fund. Where a customer invests on a unit linked basis, the assets and associated liabilities for such unit linked investment elements are held in the unit linked funds. Any liabilities for insurance features contained within a contract that has a unit linked investment element are held in the non-unit linked fund. Deferred income and deferred acquisition costs arising on contracts that have a unit linked investment element are held in the nonunit linked fund.
For those annuities in payment which increase at a predefined rate, the total liability at 31 December 2013 is £274m (2012: £269m) and this represents approximately 8% (2012: 8%) of the total liability for UK annuity in payment contracts held in the PBF. If the market moves in line with the adverse market conditions as shown in the market risk sensitivity analysis, the impact on the shareholder equity from those annuities with a predefined rate of increase and the corresponding assets is not significant.
The International Bond is issued by SLIL to UK residents. It is a single premium whole of life investment bond. The customer has the option to invest in unit linked funds offered by SLIL and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the last life assured an additional benefit of 0.1% of the surrender value is paid unless the death is accidental when an additional benefit of 10% of the surrender value is paid subject to a £1m cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
HWPF participating contract allocations of regular and final bonuses This section firstly describes the method used by the Group to determine the regular and final bonuses allocated to participating contracts held in the HWPF. It then describes the significant types of insurance and investment contracts held in that fund, the nature of any guarantees provided and significant reinsurance contracts.
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) UK and Europe – Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued When setting payout levels, the Group seeks to ensure fair treatment between those participating policyholders who choose to withdraw and those who remain.
In normal circumstances the Group seeks to offer some smoothing of investment returns to participating policyholders at the time of claims due to maturity for life policies or for pension policies where the Group has no right to reduce benefits as defined in the relevant contractual terms and conditions. The Group may, at its discretion, also provide some smoothing of investment returns for death claims and some types of withdrawal at the time of payment. The Group aims to operate smoothing of investment returns in such a way as to be neutral for participating policyholders as a whole over time. The Group monitors the anticipated cost of smoothing on a regular basis and, in most circumstances, will reflect the costs in payouts and in some circumstances adjust the approach to smoothing.
Eligible policies covered by the Mortgage Endowment Promise may receive ‘top up’ amounts, in accordance with the Scheme.
The significant options and guarantees under these contracts are the following: • Contracts where, subject to specified conditions, it is guaranteed either that the unit price will rise at an annual rate of at least 4% per year or that the unit price will not fall, and, that there will be no unit price adjustment (UPA) at specified retirement dates or death
• Certain Trustee Investment Plan contracts where, subject to specified conditions and limits, it is guaranteed that there will be no unit price adjustment (UPA) when units are encashed.
The maturity value, and for certain contracts the surrender benefits, are subject to guaranteed minimum amounts. For some participating unitised policies it is guaranteed that there will be no UPA on claims on or after the surrender option date. Certain contracts are subject to guaranteed annuity amounts or guaranteed annuity factors. In addition certain unit prices in the HWPF are guaranteed not to decrease.
The costs of contracts invested in unit linked funds are recovered by deduction of asset management charges from the unit linked funds which are transferred from the PBF to the HWPF. Under Stakeholder contracts, this asset management charge has a maximum limit. There are no other guarantees on these contracts with the exception that the unit prices of certain cash funds are guaranteed not to fall.
SLAL has reinsured both the longevity and market risk arising on a portfolio of annuity-in-payment contracts held within the HWPF with Canada Life International Re (the reinsurer). In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. In respect of this arrangement SLAL holds a ring fenced pool of assets within the HWPF. See Note 41(c) on credit exposure and Note 6 – Expenses under arrangements with reinsurers for further details of the deposit back. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.
For those annuities in payment which increase at a predefined rate the total liability at 31 December 2013 is £2,977m (2012: £3,271m) and this represents approximately 32% (2012: 32%) of the total liability for UK annuity in payments contracts held within the HWPF.
3. Financial information – Notes to the Group financial statements continued 3. Business written in the Group’s insurance entities continued (b) Insurance, investment and reinsurance contract terms including guarantees and options continued (b)(ii) UK and Europe – Insurance and investment contracts issued before demutualisation and related reinsurance contracts continued The total liability at 31 December 2013 for RPI linked annuities in payment (including any guaranteed minimum rate of escalation) is £2,113m (2012: £2,007m) and this represents approximately 22% (2012: 20%) of the total liability for UK annuity contracts held within the HWPF. There is a subset of annuities where the RPI linked annuity payment cannot fall or is guaranteed to increase at a minimum rate; the majority of such annuities are those whose payment cannot fall.
For CPI-linked annuities, a 1% increase in the CPI would increase liabilities by £65m (2012: £80m). However, inflation risk on these annuities is mitigated by investments in assets linked to inflation.
Perspecta contracts issued up to November 2003 provided the following interest rate guarantees: • 0% for the Daily Interest Fund.
For each TIF, the greatest of 90% of the Government of Canada Bond rate for the same term, less 1.75%, and: • 0% for the 1-year TIF • 1% for the 3-year TIF • 2% for the 5-year TIF • 3% for the 10, 15 and 20-year TIF.
A reduction of 1% in the yield curve would increase the value of the guarantees by £19m (2012: £67m). At 31 December 2013, the liability for all the TIFs (i.e. pre and post November 2003) is £74m (2012: £99m).
SLCC has entered into contracts to reinsure mortality risk arising under these Universal Life contracts. Under these reinsurance contracts, the reinsurers receive regular reinsurance premiums throughout the period until death claims arise on the underlying contracts based on payment schedules established at inception of the reinsurance contract. SLCC receives payments from the reinsurers on the death of the Universal Life policyholders to cover the death benefit due.
Where premiums on individual contracts are invested in segregated funds a death benefit guarantee applies being the greater of the segregated fund value and 100% of the net deposits. In addition provided that the monies have been invested for a minimum of 10 years, the maturity benefit is the greater of the segregated fund value at the maturity date and 75% or 100% of premiums invested, depending on the guarantee option selected, less any cash values previously paid out. Otherwise the maturity benefit is the fund value. The cost of all these guarantees including those in respect of registered retirement income plans (see below), net of supporting fees, has been calculated in accordance with local regulations and results in a reduction in liabilities of £6m (2012: increase £40m) being required. The components of individual contracts invested in segregated funds are classified as non-participating insurance contracts.
Participating individual life contracts (no impact on equity holder profits in the absence of burnthrough) Participating whole life and endowment assurance contracts contain scales of minimum guaranteed surrender values and paid-up policy amounts. Participating whole life contracts issued prior to 1985 include a guaranteed annuity rate option where the lump sum death benefit can be converted into an annuity on guaranteed terms or retained by SLCC whereupon the value accumulates at an annual interest rate of at least 2.5%.
The value of the liabilities in respect of guaranteed benefits is 42% (2012: 48%) of the participating contract liability value which is set equal to the value of the fund in which the contracts participate.
Non-participating life contracts (spread/risk business) This category comprises whole life and term assurance contracts where the guaranteed benefit is payable on death. These contracts are classified as non-participating insurance contracts. This category is closed to new business. (b)(iv) Asia and Emerging Markets – Insurance contracts and investment contracts Unit linked life contracts (fee business) The main contract issued by SLA is the Harvest 101 product. It is a regular premium savings product with a term ranging from five to 25 years. The customer has the option to invest in unit linked funds offered by SLA and mutual funds and deposit accounts offered by other providers. The mutual funds and deposit accounts are recognised as assets by the Group and are classified as unit linked business along with a corresponding liability. On death of the life insured, a benefit of 101% of the fund value is paid. If the death is accidental then an additional benefit of 10% of the initial account value is paid subject to a USD10,000 cap. These contracts are classified as insurance contracts where it is considered that the accidental death benefit transfers significant insurance risk. No other guarantees apply to this contract.
Foreign exchange losses on instruments other than as at fair value through profit or loss (17) (19)
3. Financial information – Notes to the Group financial statements continued 8. Staff costs and other employee-related costs restated1 Notes £m £m
The aggregate remuneration payable in respect of employees: Wages and salaries 528 507
The average number of staff employed by the Group during the year: UK and Europe 3,951 4,229
Total average number of staff employed 8,224 8,447 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. 2 Includes staff in group corporate centre and group information technology.
Information in respect of Directors’ remuneration is provided in the Directors’ remuneration report on pages 70 to 98.
Fees payable to the Company’s auditors for other services: The audit of the Company’s consolidated subsidiaries pursuant to legislation 4.3 3.8
The audit of funds not consolidated in the Group’s financial statements 0.8 0.8
Auditors’ remuneration for the year to 31 December 2013 has been presented across new categories to provide more useful information. Comparatives for the year ended 31 December 2012 have been adjusted accordingly.
For more information on non-audit services, refer to the Report from the Chairman of the Audit Committee in the Corporate Governance report.
Of the restructuring costs, £73m (2012: £109m) is adjusted when determining operating profit before tax, with the remaining £2m (2012: £5m) incurred by the Heritage With Profits Fund.
11. Tax expense The tax expense is attributed as follows: Tax expense attributable to policyholders’ returns 215 218
Deferred tax of £30m (2012: £26m) has not been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries.
Current tax on net change in financial assets designated as available-for-sale 31 (7) -
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss (7) -
Tax relating to each component of other comprehensive income 6 (102)
Tax relating to items taken directly to equity 20 (8) (6)
Adjustment to deferred tax expense in respect of prior years (10) (31)
Total tax expense for the year 305 269 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.
Profit attributable to equity holders of Standard Life plc (£m) 466 665
Basic earnings per share (pence per share) 19.7 28.3 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.
Weighted average number of ordinary shares outstanding for diluted earnings per share (millions) 2,378 2,369
(c)(i) Basic alternative earnings per share restated1 £m p per share £m p per share
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes (92) (3.9) (29) (1.2)
3. Financial information – Notes to the Group financial statements continued 13. Non-operating items Short-term fluctuations in investment return and economic assumptions changes Operating profit is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. As a result, the components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected investment returns, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from operating profit and disclosed separately within the heading of short-term fluctuations in investment return and economic assumption changes.
Hence when management or the Canadian tax authorities successfully challenge an historic tax position which results in a change in the difference between the undiscounted and discounted deferred taxes relating directly to the tax treatment of insurance contract liabilities, a change in insurance contract liabilities is recognised in the income statement thus impacting profit before tax. This change in insurance contract liabilities is removed when determining operating profit before tax. As this amount unwinds under CALM in future years, the associated change in insurance contract liabilities is also excluded from operating profit before tax.
The value in use calculation uses cash flow projections based on business plans for a maximum period of five years. The following key assumptions have been applied by management to the calculations after considering past experience and market expectations for future growth: • A growth rate of 3% has been used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth rates for the industry and the UK economy • Additional net flows into assets under administration and increased market share have been assumed due to enhanced product offerings • Cost savings have been assumed due to synergies expected • A risk-adjusted discount rate ranging from 10% to 15% has been applied.
As a result of the impairment testing carried out, no goodwill was considered to be impaired at 31 December 2013 or 31 December 2012.
3. Financial information – Notes to the Group financial statements continued 16. Deferred acquisition costs 2013 2012 Notes £m £m
At 31 December 905 904 1 A reclassification of certain non-participating investment contracts to non-participating insurance contracts resulted in a release of deferred acquisition costs during the year to 31 December 2012. Refer to Note 5 – Fee and commission income.
The amount of deferred acquisition costs expected to be recovered after more than 12 months is £772m (2012: £799m). Included in deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) amounting to £607m (2012: £649m).
(a) Investments in associates The following are particulars of the Group’s share of significant associates: Name of associate
First Real Properties Limited Canada 49.0 1 98 3 11 27 10 526304 Alberta Limited Canada 50.0 1 25 - - 2 - HDFC Standard Life Insurance Company Limited India 26.0 29 1,149 38 1,025 535 518 Heng An Standard Life Insurance Company Limited China 50.0 11 357 2 325 85 94
Investment property reclassified to assets held for sale 26 (92) -
The fair value of investment property can be analysed as: The rental income arising from investment property during the year amounted to £591m (2012: £604m), which is included in investment return as set out in Note 4 – Investment return. Direct operating expenses (included within other administrative expenses) arising in respect of such rented property during the year amounted to £168m (2012: £179m).
For property located in UK and Europe, all valuations are provided by independent qualified professional valuers at 31 December or as at a date that is not more than three months before 31 December. Where valuations have been undertaken at dates prior to the end of the reporting period, adjustments are made where appropriate to reflect the impact of changes in market conditions between the date of these valuations and the end of the reporting period.
In Canada, property with a value higher than CA$50m are externally appraised every quarter, property with a value between CA$10m and CA$50m are externally appraised twice a year while property with a value lower than CA$10m are externally appraised once a year, with valuations evenly distributed throughout the year. Property not subject to an external appraisal at a quarter end are reviewed in light of the market information provided by the other external appraisals and an internal adjustment is estimated.
3. Financial information – Notes to the Group financial statements continued 18. Investment property continued Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: Not later than one year 453 464
Total operating lease receivables 4,628 4,318 1 The comparative information has been restated to reflect correct timing of future rental receivables.
The methods and assumptions used to value owner occupied property are set out in Note 42 – Fair value of assets and liabilities.
Net investment hedge Total 2013 Notes £m £m £m £m £m £m Investments in associates and joint ventures 17 - - - 22 - 22
Net investment hedge Total 2012 Notes £m £m £m £m £m £m Investments in associates and joint ventures 17 - - - 26 - 26
Derivative financial assets 23 - 2,132 - - 18 2,150 Equity securities and interests in pooled investment funds 41 65,812 - - - - 65,812
Debt securities 41 72,927 - 374 - - 73,301 Receivables and other financial assets 24 - - - 1,717 - 1,717
Loans with variable rates and fixed interest rates are £170m and £2,754m respectively (2012: £197m and £3,102m respectively). Loans that are expected to be recovered after more than 12 months are £2,468m (2012: £2,765m).
23. Derivative financial instruments The Group uses derivative financial instruments in order to match contractual liabilities, to reduce the risk from potential movements in foreign exchange rates, equity indices, property indices and interest rates, to reduce credit risk or to achieve efficient portfolio management. The Group designates certain derivative financial instruments as cash flow hedges and net investment hedges to mitigate risk, as detailed below. Derivative financial instruments that are not designated part of a hedge relationship are held for trading under IAS 39 Financial Instruments: Recognition and Measurement.
Forward foreign exchange contracts with an aggregate notional principal amount of £20m (2012: £22m) and a net fair value asset position of £nil (2012: £nil) were designated as hedges of future cash flows arising from revenue receivable in foreign currency in 2013 and 2012. The cash flows from these instruments are expected to be reported in the consolidated income statement for the following year. In 2013 and 2012, the ineffectiveness recognised in the consolidated income statement that arises from these cash flow hedges was less than £1m.
(b) Net investment hedges The Group hedges part of the currency translation risk of net investments in foreign operations using forward foreign exchange contracts. Forward foreign exchange contracts with a notional principal of £883m (2012: £755m) and a net asset position of £54m (2012: £18m) were designated as net investment hedges and gave rise to gains for the year of £63m (2012: gains of £18m), which have been deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations is measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, is recognised in the consolidated income statement. In 2013, the losses recognised in the consolidated income statement were £5m (2012: £4m). No amounts were withdrawn from equity during the year (2012: £nil), as there were no disposals of foreign operations.
Equity derivatives: Bond derivatives: Interest rate derivatives: Foreign exchange derivatives: Other derivatives: Derivative financial instruments held for trading 78,165 1,713 795 82,979 2,132 853
Net derivative financial instruments cash inflows/(outflows) 654 255 (59) (287) (312) (160) 91
Greater than 20 years Total 2012 £m £m £m £m £m £m £m
The amount of receivables and other financial assets expected to be recovered after more than 12 months is £93m (2012: £95m).
The amount of other assets expected to be recovered after more than 12 months is £44m (2012: £41m).
Investment property classified as held for sale relates to property for which contracts have been exchanged prior to 31 December 2013 but the sale is expected to close during 2014. The consideration for the sale of investment property will be cash. Gains or losses on all investment property, including those held for sale are recorded in Investment return in the consolidated income statement. Investment property held for sale is included in the Group’s UK and Europe reportable segment.
Total cash and cash equivalents for consolidated statement of cash flows 9,035 9,898
Cash in hand is non-interest bearing. Cash at bank, money at call and short notice and deposits are subject to variable interest rates.
29. Shares held by trusts The Employee Shares Trust (EST) purchases and holds shares in the Company for delivery to employees under various employee share schemes. Shares purchased by the EST are presented as a deduction from equity in the consolidated statement of financial position. Share-based liabilities to employees may also be settled by the issue of new shares.
Any corresponding obligation to deliver a fixed number of the Company’s equity instruments to employees, or eligible members of SLAC, is offset within the shares held by trusts reserve.
At 1 January 1,441 1,034 Profit for the year attributable to equity holders 466 665 Dividends and appropriations (636) (331) Transfer from equity compensation reserve for vested employee share-based payments 31 33 25 Remeasurement gains/(losses) on defined benefit pension plans 37 101 (37) Shares distributed by employee trusts (12) (17) Share of other comprehensive income of joint ventures 17 (3) - Aggregate tax items recognised in equity 9 - Aggregate tax items recognised in other comprehensive income 11 (8) 102 At 31 December 1,391 1,441 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.
Net investment hedge 23 - - - 63 - - - - - 63 Fair value gains/(losses) on available-for-sale financial assets - - - - (32) - - - - (32) Revaluation of owner occupied property 19 68 - - - - - - - - 68 Exchange differences on translating foreign operations - - (120) - - - - - - (120) Reserves credit for employee share-based payment schemes - - - - - - 32 - - 32 Vested employee sharebased payments 30 - - - - - - (33) - - (33) Dividends and distributions - - - - - - - (20) - (20) With profits funds: associated UDS movement recognised in equity 33 (48) - 4 - - - - - - (44) Aggregate tax effect of items recognised directly in equity 20 - - - - - - (1) - - (1) Aggregate tax effect of items recognised in other comprehensive income (5) - - - 7 - - - - 2
Special reserve: On 21 July 2006 the Court of Session confirmed a £500m reduction in the share premium account of the Company. Following the reduction, a special reserve was created for the same amount. The special reserve forms part of the Company’s distributable profits for the purpose of section 830 of the Companies Act 2006. The total amount of dividends paid during the year was £656m (2012: £331m), of which £20m (2012: £nil) has been treated as a deduction from the special reserve.
The movement in third party interest in consolidated funds during the year was: 2013 2012 Notes £m £m
Effect of changes in: Effect of: Total change in contract liabilities (972) (40) (308) (1,320) 683 (637)
Following demutualisation, it is necessary to recognise the residual estate in the HWPF as a liability within participating contract liabilities, since this will in due course be distributed to existing HWPF policyholders if it is not otherwise required to meet liabilities chargeable to the HWPF in accordance with the Scheme of Demutualisation (the Scheme). The movement for the year therefore includes the movement in the residual estate.
Effect of changes in: Effect of: Total change in contract liabilities (395) 2,036 (302) 1,339 44 1,383
The principal assumptions for the main UK non-participating insurance contracts are as follows: Valuation interest rates The valuation interest rates used are determined in accordance with the Prudential Regulation Authority’s Integrated Prudential Sourcebook. The process used to determine the valuation interest rates used in the calculation of the liabilities comprises three stages: determining the current yield on the assets held after allowing for risk and tax, hypothecating the assets to various types of policy and determining the discount rates from the hypothecated assets.
(a)(ii) Non-participating insurance contracts – principal assumptions continued The valuation interest rates used are: 1. Business held within the PBF
Annuities Individual/group: Non-linked: Life 3.35% 2.80% Pensions: reinsured externally 3.05% 2.60% Pensions: not reinsured externally 3.60% 3.30% Deferred annuities 3.60% 3.20%
Linked to RPI: Linked to RPI: reinsured externally (0.30%) (0.60%) Linked to RPI: not reinsured externally (0.50%) (0.55%) Deferred annuities linked to RPI (0.50%) (0.55%)
Group after vesting (business written prior to 10 July 2006) Males: 111.1% RMV00 Males: 112.8% RMV00
In the valuation of the liabilities in respect of annuities and deferred annuities issued in the UK, allowance is made for future improvements in the rates of mortality. For 2013 this is based on the Standard Life Assurance Limited (SLAL) parameterisation of the CMI_2013 model with long-term improvement rates of 1.9% for males and 1.6% for females. The Continuous Mortality Investigation Bureau (CMI) is a body funded by the UK insurance and reinsurance industry that produce industry standard mortality tables and projection bases for mortality improvements. CMI_2013 is a model that was published towards the end of 2013.
For contingent spouses' benefits an assumption is also made with regard to the proportions married, based on SLAL’s historic experience.
Canada The Canadian economic environment at the reporting date is used to determine the expected interest rates for the current valuation. The expected experience scenario of risk free rates is derived from the yield curve of Canadian federal bonds at that date, as summarised below: Yield curve – by duration 2013 2012
The following table shows other key investment returns used in the asset and liability projections under Canadian Asset Liability Method (CALM): These investment returns are net of investment expenses and are prudent assumptions as they include risk margins determined in line with Canadian standards of practice. A further drop in the asset values of 30% for equity securities and 25% for property is applied, consistent with Canadian standards of practice, to allow for adverse deviations in projecting cash flows arising from capital gains on non-fixed income assets.
(a)(ii) Non-participating insurance contracts – principal assumptions continued Mortality tables used 2013 2012 1. Assurances Perspecta Universal Life and Term Life 65%-121% of base table (where base table is 71-75% of CIA 97-04) internally developed projection scale CAN1921-2004 M/F (2014)
Participating and non-participating life, closed to new business 72%-99% of CIA 97-04 73%-102% of CIA 97-04 internally developed projection scale CAN1921-2004 M/F (2014)
Mortality assumptions are derived from studies performed during 2013, with data to 2012, using a blend of industry and The Standard Life Assurance Company of Canada’s (SLCC) experience. The rates are expressed as a percentage per the tables shown. For assurance business, the percentages vary depending on the underwriting classification and the duration of the contracts. For annuity business, the percentages vary depending on the gender of the annuitant.
(a)(iii) Present value of future profits on non-participating contracts in the Heritage With Profits Fund The HWPF was established as part of the demutualisation transaction on 10 July 2006. Under the Scheme certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders, and the component related to contracts whose future cash flows will remain in the HWPF, to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining policies invested in the fund.
These components are apportioned in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows: 2013 2012 £m £m
(c) Expected settlement and recovery An indication of the term to contracted maturity/repricing date for insurance and investment contract liabilities is given in Note 41 – Risk management. Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
Change in UDS not recognised in the income statement 31 44 (11)
Financial liabilities measured at amortised cost Total 2013 Notes £m £m £m £m Non-participating investment contract liabilities 41 95,267 - 2,392 97,659
Third party interest in consolidated funds 41 11,803 - - 11,803
36. Subordinated liabilities 2013 2012 Principal Carrying value Principal Carrying value amount £m amount £m
The Canadian dollar subordinated debenture notes were issued by The Standard Life Assurance Company of Canada (SLCC) on 21 September 2012. The maturity date of the notes is 21 September 2022. SLCC has the option to redeem the notes at par on or after 21 September 2017. If the notes are not redeemed the interest rate payable will be reset each quarter to 2.1% over the three month Canadian Dealer Offered Rate (CDOR) rate payable quarterly in arrears. Interest is payable each six months in arrears up to 21 September 2017. The notes are direct, unsecured obligations of SLCC that rank subordinate to all policyholder liabilities and senior creditors of SLCC.
Mutual Assurance Capital Securities (MACS) The MACS were issued on 4 November 2004. The payment of principal and interest in respect of the MACS is irrevocably and unconditionally guaranteed by SLAL. The claims of the holders of the MACS to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders.
3. Financial information – Notes to the Group financial statements continued 36. Subordinated liabilities continued The Euro denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 5.314% per annum payable annually in arrears on 6 January, commencing on 6 January 2006. From and including 6 January 2015, these MACS will bear interest quarterly in arrears, commencing 6 April 2015, at a floating rate of interest to be calculated quarterly based on the aggregate of a margin plus the rate for three month Euro deposits.
Defined benefit Defined contribution UK The Group’s largest defined benefit plan is for employees in the UK and has been closed to new entrants since November 2004. Prior to 2008 the plan provided final salary benefits. From 2008 plan benefits have been accrued on a revalued career average salary (RCAS) basis. A minority of members elected to retain the link to final salary in respect of their pension plan accrued to 31 December 2007 with future accrual from 1 January 2008 on a defined contribution basis.
The plan is governed by a trustee board which comprises both employer and employee nominated trustees and an independent trustee. The plan is subject to the statutory funding objective requirements set up by the Pensions Act 2004. The objective requires a defined benefit pension plan to be funded to at least the level of its technical provisions (which are an actuarial estimate of the assets needed to provide for benefits already accrued under the plan at that time) and regular valuations must be obtained by the trustees to check whether the statutory funding objective is met. After consulting with the employer, the trustees prepare statements of funding and investment principles and, based on the funding valuation, set out future contributions in a schedule of contributions including a recovery plan if one is needed to restore funding to the level of the technical provisions (no recovery plan is currently required).
The Group contributes 9% of members’ pensionable salaries to a group flexible retirement plan. Separate arrangements exist for those in the executive job family. The Group has no further payment obligation once the contributions are paid.
Canada The defined benefit pension plan for employees in Canada closed to new entrants on 31 December 2013 but remains open to future accrual, providing a pension based on final average earnings and years of service.
At the last actuarial valuation effective 1 January 2013 the plan was 99% funded on an on-going basis. The effective date of the next valuation is 1 January 2016.
The Group also operates a small unfunded defined benefit plan for employees in Germany.
Expected contributions to the plans in 2014 are as follows: Defined benefit Defined contribution 2014 2014 £m £m
Impact of amendment to IAS 19 An amendment to IAS 19 Employee Benefits effective for the current period has resulted in a revision to the calculation of the charge to the consolidated income statement in respect of defined benefit plans. This amendment has been applied retrospectively. The expected return on plan assets and unwind of the discount rate on the defined benefit obligation are no longer recognised in profit or loss separately. Instead, the interest on the net defined benefit asset is now recognised in profit or loss. This is calculated as the net defined benefit asset multiplied by the discount rate used to measure the defined benefit obligation.
The impact on the consolidated statement of financial position as a result of the retrospective application of the IAS 19 amendment is a decrease in deferred tax assets of £1m (2012: £1m) and a decrease in the pension and other post-retirement benefits liability of £4m (2012: £5m) with a corresponding change in retained earnings.
UK Canada Other Total UK Canada Other Total £m £m £m £m £m £m £m £m
Interest (expense)/income1 (110) 124 14 - 14 Amounts recognised in consolidated income statement (165) 124 (41) - (41)
Change in effect of limit on plan surplus - - - (51) (51) Remeasurement gains/(losses) recognised in other comprehensive income (96) 248 152 (51) 101
The following table shows the restated movement in the defined benefit asset for the year ended 31 December 2012: Present value of obligation Fair value of plan assets Total
Effect of limit on plan surpluses Total 2012 (restated) £m £m £m £m £m At 1 January 2012 (2,315) 2,756 441 (209) 232
Past service cost and losses on settlements (1) - (1) - (1) Amounts recognised in consolidated income statement (158) 117 (41) - (41)
Remeasurements: Return on plan assets, excluding amounts included in interest expense - 19 19 - 19
Gain from change in demographic assumptions (37) - (37) - (37)
Total assets measured at fair value based on level 2 or 3 inputs 655 590 51 57 9 16 715 663
(e) Principal assumptions The principal economic assumptions for the plans are shown below: UK Canada UK Canada
Rates of inflation: Retail Price Index (RPI) (UK only) 3.70 - 3.30 -
The most significant non-economic assumption is that made in respect of mortality post-retirement. The mortality tables (along with sample complete expectations of life) are illustrated below: Normal
Male, age today Female, age today 2013 Table Improvements NRA 40 NRA 40 UK Plan specific basis
Male, age today Female, age today 2012 Table Improvements NRA 40 NRA 40 UK Plan specific basis (calibrated by Club Vita) reflecting membership demographics
Asset volatility Failure of the asset strategy to keep pace with changes in plan liabilities would expose the plan to the risk of a deficit developing, which could increase funding requirements for the Group.
The UK plan (the Group’s dominant post-retirement defined benefit plan) uses both bonds and derivatives to hedge out inflation risks on the plan’s funding basis, rather than the IAS 19 basis, which is expected to minimise Group support for the plan.
In the UK plan pensions in payment are generally linked to CPI, however inflationary risks are hedged using RPI instruments due to lack of availability of CPI linked instruments. Therefore, the plan is exposed to movements in the actual and expected long term gap between the two indices. Life expectancy Increases in life expectancy beyond those currently assumed will lead to an increase in plan liabilities.
Increase/ (decrease) in fair value of plan assets £m £m £m £m
Rates of inflation Decrease by 1% UK 462 (538) 424 (489)
Canada – post-retirement medical benefits In Canada, certain plans provide employees with post-retirement medical benefits. A 1% point change in assumed medical cost trend rates would have the following effects: One percentage point increase
Cash collateral held in respect of derivative contracts 41 711 811
At 31 December 2013 148 150 1 There has been a reallocation of £6m from provisions to other in 2012 to correct a misclassification.
Charged/(credited) to the consolidated income statement: Release of unused provisions (98) - (98)
Legal provisions A judgment handed down on 1 February 2012 in the Commercial Court in London found in favour of Standard Life Assurance Limited (SLAL) in its claim against the insurers of its 2008/2009 professional indemnity policy in relation to the Standard Life Pension Sterling Fund. During the year ended 31 December 2012 SLAL received a cash receipt of £98m including interest and reimbursement of legal fees.
On 18 December 2012, the Court of Appeal handed down a judgment upholding the decision of the Commercial Court, dismissing the insurers’ appeal and finding in favour of SLAL. In addition, SLAL was awarded its costs in the appeal. In January 2013 SLAL received notification from the lawyers acting for the insurers that they would not seek leave to appeal to the Supreme Court.
Other provisions Other provisions comprise obligations in respect of compensation, staff entitlements and reorganisations.
The Group’s risk management activities support the creation of long-term value by ensuring well-informed risk-reward decisions are taken in pursuit of the Group’s business plan. This includes defining and observing qualitative risk appetite statements for the different risks faced by the Group where these statements clearly articulate the aggregate level and types of uncertainty that the Group is willing to accept in order to achieve the business plan. For certain specific exposures, these statements are supported by quantitative risk limits to ensure that the Group’s risk profile remains balanced and within target ranges.
The risk management framework used by the Group in 2013 to identify, assess, control and monitor risks is set out in the Corporate governance report. This includes information on the use of qualitative risk appetite statements and quantitative risk limits in order to manage the Group’s risks.
The risk metrics used by the Group in managing the business allows the Group to monitor how exposure to different types of risks impacts the shareholder. In pursuing the Group’s business plan, the Group is exposed to the following key risks: Risk Definition
Expense The risk that expense levels are higher than planned or revenue falls below that necessary to cover actual expenses.
Operational The risk of adverse consequences for the Group’s business resulting from inadequate or failed internal processes, people or systems, or from external events. This includes conduct risk as defined below.
Conduct The risk that through our culture, strategies, decision-making and behaviours we do not deliver good outcomes for our customers.
Participating business Participating business refers to the assets and liabilities of the participating funds of the life operations of the Group. It includes the liabilities for insurance features and financial guarantees contained within contracts held in the HWPF that invest in unit linked funds. It does not include the liabilities for insurance features contained in contracts invested in the GWPF or GSMWPF. Such liabilities are included in shareholder business.
The following table sets out the link between the reportable segments set out in Notes 2 and 3 and the risk segments.
SLAL = Standard Life Assurance Limited SLIH = Standard Life Investments (Holdings) Limited SLCC = The Standard Life Assurance Company of Canada SLIL = Standard Life International Limited SLA = Standard Life (Asia) Limited SLW = Standard Life Wealth Limited SLS = Standard Life Savings Limited SLCM = Standard Life Client Management Limited
2 Related to SLIL’s International Bond business. 3 Related to SLIL’s business excluding International Bond business.
SLW will be managed as part of the Standard Life Investments reportable segment from 1 January 2014. For the years ending 31 December 2013 and 2012 SLW was managed as part of the UK and Europe reportable segment.
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (a) Overview continued (a)(i) Application of the risk management framework continued The table below sets out how the shareholder is exposed to market, credit, demographic, expense and liquidity risk at the reporting date, arising from the assets and liabilities of the four risk segments: Risk Shareholder business Participating business Unit linked and segregated funds
Credit The shareholder is directly exposed to credit risk from holding cash, debt securities, loans, derivative financial instruments and reinsurance assets and the associated movement in the value of liabilities.
Assets are managed in accordance with the mandates of the particular funds and the financial risks associated with the assets are expected to be borne by the policyholder. The shareholder’s exposure is limited to changes in the value of future profits earned on unit linked and segregated funds due to market movements. Further information on this exposure is provided in the EEV financial statements.
The shareholder is exposed to longevity and mortality risk on annuity contracts and universal life contracts held by UK and Europe and Canada, and mortality risk on contracts held in non-participating funds by UK and Europe, Canada and Asia and Emerging Markets including those containing insurance features that are invested in unit linked or segregated funds or in the GWPF or GSMWPF. The shareholder is also exposed to expenses and persistency being different from expectation on these contracts.
Liquidity The shareholder is directly exposed to the liquidity risk from the shareholder business.
The shareholder is also exposed to certain risks relating to defined benefit pension plans operated by the Group. These include: • Market risks through the potential impact of market movements on the value of assets held in the defined benefit pension plans • Credit risks through the potential impact of widening credit spreads or credit losses on the assets held in the defined benefit pension plans • Longevity risk through the risk that members of the defined benefit pension plans live longer than expected.
Third party interest in consolidated funds and non-controlling interests Total restated1 £m £m £m £m £m £m £m £m £m £m
Pension and other post-retirement benefit assets 432 339 - - - - - - 432 339
Debt securities: Receivables and other financial assets 469 515 94 496 415 550 64 156 1,042 1,717
Total assets 18,938 20,343 48,461 51,328 104,712 89,651 12,494 12,778 184,605 174,100 Non-participating insurance contract liabilities 9,172 10,107 11,124 12,233 8,016 6,710 - - 28,312 29,050
Non-participating investment contract liabilities 2,392 2,600 - - 95,267 81,601 - - 97,659 84,201
Third party interest in consolidated funds - - - - - - 11,803 12,037 11,803 12,037
Net assets 4,227 4,359 - - - - 333 341 4,560 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.
The key considerations in the asset and liability management of the participating business are: • The economic liability and how this varies with market conditions • The need to invest the assets in a manner consistent with participating policyholders' reasonable expectations and, where appropriate, the Scheme of Demutualisation and the Principles and Practices of Financial Management (PPFM) • The need to ensure that regulatory and capital requirements are met.
(b)(i) Elements of market risk The main elements of market risk to which the Group is exposed are equity and property risk, interest rate risk and foreign currency risk, which are discussed on the following pages. As a result of the diversity of the products offered by the Group and the different regulatory environments in which it operates, the Group employs different methods of asset and liability management across its business units.
Information on the methods used to determine fair values for each major category of financial instrument and investment property measured at fair value is presented in Note 42 – Fair value of assets and liabilities and Note 18 – Investment property. (b)(i)(i) Group exposure to equity risk The Group is subject to equity price risk due to daily changes in the market values and returns on the holdings in its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk: • Direct equity shareholdings in the shareholder business and the Group defined benefit pension funds • Burnthrough from the with profits funds where adverse movements in the market values and returns on holdings in the equity portfolios of these funds mean the assets of the with profits funds are not sufficient to meet their obligations • The indirect impact from changes in the value of equities held in funds from which management charges are taken.
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (b) Market risk continued (b)(i) Elements of market risk continued Exposures to equity securities are primarily controlled through the use of investment mandates including constraints based on appropriate equity indices.
The tables below show the shareholder and participating businesses’ direct exposure to investment property analysed by country and sector.
Shareholder business Office Industrial Retail Other Total 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m £m £m £m £m
Participating business Office Industrial Retail Other Total 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 £m £m £m £m £m £m £m £m £m £m
(b)(i)(iii) Group exposure to interest rate risk Interest rate risk is the risk that arises from exposures to changes in the shape and level of yield curves which could result in the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by different amounts.
The sensitivity of profit after tax to changes in interest rates for both the shareholder business and the participating business is included in the Profit after tax sensitivity to market risk table, shown in section (b)(ii) below.
Hong Kong Dollar US Dollar Other Total restated1 £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Total liabilities (6,019) (5,970) (655) (601) (8,483) (9,778) (44) (37) (36) (86) (8) (5) (15,245) (16,477) Net investment hedges 883 755 - - (870) (743) (13) (12) - - - - - 2, 449 2,374 620 600 238 603 29 38 70 24 287 227 3,693 3,866 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.
(b)(ii) Sensitivity to market risk analysis The Group’s profit after tax and equity are sensitive to variations in respect of the Group’s market risk exposures and a sensitivity analysis is presented on the following pages. The analysis has been performed by calculating the sensitivity of profit after tax and equity to changes in equity security and property prices and to changes in interest rates as at the reporting date. For each sensitivity ‘test’, the impact of a reasonably possible change in a single sensitivity factor is presented, while the other sensitivity factors remain unchanged. Correlations between the different risks and/or other factors may mean that experience would differ from that expected if more than one risk event occurred simultaneously.
Changes in equity security and property prices and/or fluctuations in interest rates will affect non-participating unit linked liabilities and the associated assets by the same amount. Therefore, whilst the profit impact on unit linked and segregated funds is included in the sensitivity analysis where there is an impact on the value of other statement of financial position items, the change in unit linked liabilities and the corresponding asset movement has not been presented. This is also true of the other with profits funds with the exception of the German With Profits Fund (GWPF). As at 31 December 2013 there is no direct impact of market risk on the sensitivity of GWPF. However, there is an indirect impact on the PBF due to a realistic Capital Support Arrangement (CSA) that was introduced during 2011 for the GWPF. This provides support by reducing the liability to transfer future annual management charges to the PBF hence increasing the assets on the statement of financial position to the extent necessary to avoid a realistic deficit (if possible). There is no impact on GWPF participating liabilities. If support is provided under the realistic CSA, there is an increase in expense reserves in the PBF. Further realistic support would be required for the decrease in interest rate sensitivity and this is included within the non-participating insurance contract liabilities in the table below. Earnings over a period may be reduced as a consequence of the impact of market movements on charges levied on unit linked business, segregated fund business and other with profits fund business. For example, if the tests had been applied as at 1 January, the profit during the year would have varied due to the different level of funds under management. In illustrating the impact of equity/property risk, the assumption has been made, where relevant, that expectations of corporate earnings and rents remain unchanged and thus yields change accordingly. The sensitivities take into account the likely impact on individual Group companies of local regulatory standards under such a scenario.
Limitations The sensitivity analysis is non-linear and larger or smaller impacts should not be derived from these results. The sensitivity analysis represents the impact on profit at the year end that the changes in market conditions can have. The sensitivity will vary with time, both due to changes in market conditions and changes in the actual asset mix, and this mix is being actively managed. The results of the sensitivity analysis may also have been different from those illustrated had the sensitivity factors been applied at a date other than the reporting date.
For the participating business, in particular the HWPF and the GWPF, the risk to shareholders is that the assets of the fund are insufficient to meet the obligations to policyholders.
Participating business UK and Europe: Recourse cash flow - - - - - - - - - - - - - - - - - - - - Canada: Assets backing participating insurance contract liabilities 16 (16) 31 (31) 8 (8) 16 (16) (31) 37 Participating insurance contract liabilities (16) 16 (31) 31 (8) 8 (16) 16 31 (37)
1 The amounts in the table above are presented net of tax. 2 A positive number represents a credit to the consolidated income statement.
Equity markets Property markets Interest rates 2012 +10% -10% +20% -20% +10% -10% +20% -20% +1% -1% Increase/(decrease) in profit after tax £m £m £m £m £m £m £m £m £m £m Shareholder business UK and Europe: Deferred acquisition costs - - - (6) - - - - - - Assets backing non-participating liabilities - - - - - - - - (424) 496 Non-participating insurance contract liabilities - - - - - - - - 421 (484) Non-participating investment contract liabilities - - - - - - - - - - Other assets and liabilities - - - - - - - - (38) 27 - - - (6) - - - - (41) 39 Canada: Assets backing non-participating insurance contract liabilities 26 (26) 52 (52) 32 (32) 65 (65) (514) 670 Assets backing non-participating investment contract liabilities - - - - - - - - (5) 5 Non-participating insurance contract liabilities 2 (11) 10 (26) 36 (39) 62 (78) 519 (792) Non-participating investment contract liabilities - - - - - - - - - - Other assets and liabilities (5) 7 (8) 18 29 (29) 58 (58) (50) 61 23 (30) 54 (60) 97 (100) 185 (201) (50) (56) Standard Life Investments 1 (1) 2 (2) - - - - 2 (2) Asia and Emerging Markets: Deferred acquisition costs 1 (1) 2 (2) - - - - 2 (2) Assets backing non-participating insurance contract liabilities - - - - - - - - - - Assets backing non-participating investment contract liabilities - - - - - - - - - - Non-participating insurance contract liabilities - - - - - - - - - - Non-participating investment contract liabilities - - - - - - - - - - Other assets and liabilities - - - - - - - - (1) 1 1 (1) 2 (2) - - - - 1 (1) Other - - 1 (1) - - - - 6 (6) Total shareholder business 25 (32) 59 (71) 97 (100) 185 (201) (82) (26)
(c) Credit risk As described in the table on pages 178 to 179, the shareholder is exposed to credit risk from the shareholder and participating businesses and as a result the following quantitative credit risk disclosures are provided in respect of the financial assets of these categories.
The shareholder is also not exposed to the credit risk from the assets held by third parties in consolidated funds and non-controlling interests and therefore these have been excluded from the following quantitative disclosures.
Individual business units are responsible for implementing processes to ensure that credit exposures are managed within any limits that have been established and for the reporting of exposures and any limit breaches to the Group Credit Risk Committee.
For Canada, the objective evidence that is taken into account in determining whether any impairment of loans has occurred includes: • Loans to customers that are contractually 90 days in arrears with uncertainty as to collectability or asset not well secured • Reasonable doubt as to collectability of full amount of principal and interest • A significant decline in the value of a security underlying a mortgage unless reasonably assumed that mortgage terms and conditions will be met.
Neither past due nor impaired: At 31 December 2013, receivables and other financial assets of £16m (2012: £19m) were past due by less than three months.
UK 360 302 507 607 889 844 955 743 69 74 2,780 2,570 Canada 2,463 3,441 354 179 265 290 1,929 2,211 - - 5,011 6,121 Australia - - 108 85 17 6 4 9 - - 129 100 Austria 20 - - - - - - - - - 20 - Belgium - - 27 53 - - 10 1 - - 37 54 Denmark - - 4 5 - - 15 6 - - 19 11 Finland - - 45 - - - - 1 - - 45 1 France 22 - 236 228 - 4 432 402 - - 690 634 Germany 302 315 84 114 1 22 328 208 - - 715 659 Greece - - - - - - - - - - - - Ireland - - - - 3 10 - 2 - - 3 12 Italy - - 34 33 - 2 71 52 - - 105 87 Japan - 2 110 70 30 18 29 21 - - 169 111 Mexico - 1 - - - - 82 77 - - 82 78 Netherlands - - 398 286 - 1 14 154 - - 412 441 Norway - 1 - 21 - - 37 39 - - 37 61 Portugal - - - - - - - - - - - - Spain - - 9 9 - - 39 39 - - 48 48 Sweden - 1 26 58 1 - 59 60 - - 86 119 Switzerland - - 54 78 - 11 22 13 - - 76 102 US 12 12 229 173 456 424 314 364 - - 1,011 973 Other - 7 125 43 5 2 10 26 201 163 341 241 Total 3,179 4,082 2,350 2,042 1,667 1,634 4,350 4,428 270 237 11,816 12,423 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada. 2 This balance primarily consists of securities held in supranationals.
Not rated loans of £199m (2012: £226m) relate to very high quality mortgages in UK and Europe and Canada.
The shareholders’ exposure to credit risk arising from investments held in the HWPF and other with profits funds is similar in principle to that described for market risk exposures in Section (b). As at 31 December 2013, the financial assets of the HWPF include £5,589m (2012: £6,136m) of assets (primarily debt securities) deposited back under the terms of an external annuity reinsurance transaction, the transaction having been structured in this manner specifically to mitigate credit risks associated with default of the reinsurer. Any credit losses and defaults within the portfolio of assets are borne by the external reinsurer.
Total 13,872 18,661 2,950 3,433 3,341 4,840 3,171 2,827 244 244 23,578 30,005 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada. 2 This balance primarily consists of securities held in supranationals.
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (c) Credit risk continued (c)(iii) Collateral accepted and pledged in respect of financial instruments Collateral in respect of derivative financial instruments is accepted from and provided to certain market counterparties to mitigate counterparty risk in the event of default. The use of collateral in respect of derivative financial instruments is governed by formal bilateral agreements between the parties. The amount of collateral required by either party is calculated daily, based on the value of derivative transactions in accordance with these agreements and collateral is moved on a daily basis to ensure there is full collateralisation. Any collateral moved under the terms of these agreements is transferred outright. With regard to either collateral pledged or accepted, the Group may request the return of, or be required to return, collateral to the extent it differs from that required under the daily margin calculations. Furthermore, alternative collateral such as securities may be provided if acceptable to both parties.
(c)(iv) Offsetting financial assets and liabilities The Group does not offset financial assets and liabilities on the consolidated statement of financial position, as there are no unconditional rights to set off. Consequently, the gross amount of financial instruments presented on the consolidated statement of financial position is the net amount. The Group’s over-the-counter (OTC) derivatives are all subject to an International Swaps and Derivative Association (ISDA) master agreement, which provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy. An ISDA master agreement is considered a master netting agreement.
Demographic and expense risk is managed by assessing certain characteristics based on experience and statistical data and by making certain assumptions on the risks associated with the policy during the period that it is in-force. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes. In analysing demographic and expense risk exposures, the Group considers: • Historic experience of relevant demographic and expense risks • The potential for future experience to differ from that expected or observed historically • The financial impact of variances in expectations • Other factors relevant to their specific markets, for example obligations to treat customers fairly.
Morbidity The Group defines morbidity risk as the risk that paid claims dependent on the state of health of a policyholder are either higher, more volatile, continue for a longer duration or start earlier than those assumed. This risk will be present on disability income, healthcare and critical illness contracts. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected, for example, due to non-disclosure.
Mortality The Group defines mortality risk as the risk that paid death claims are at a higher rate or are more volatile than assumed. This risk will exist on any contracts where the payment on death is greater than the reserve held. This includes the risk of anti-selection that results in a requirement to pay claims that the Group had not expected, for example due to non-disclosure.
Expenses The Group defines expense risk as the risk that expense levels will be higher than assumed. This can arise from an increase in the unit costs of the Group or its businesses or an increase in expense inflation, either Group specific or relating to economic conditions. This risk will be present on contracts where the Group cannot or will not pass the increased costs onto the customer. Expense risk can result in an increase in liabilities or a reduction in expected future profit.
Non-participating insurance contract liabilities (100) 94 (6) 6 - - - -
Non-participating investment contract liabilities - - - - (2) 2 - -
(e)(i) Maturity analysis The tables that follow present the expected timing of the cash flows payable on the amounts recognised on the consolidated statement of financial position for the participating and non-participating contract liabilities of the Group as at the reporting date. To align with the risk management approach towards liquidity risk and existing management projections, the analysis that follows facilitates consideration of the settlement obligations of both insurance and investment contracts.
Greater than 20 years No defined maturity Total 2012 £m £m £m £m £m £m £m £m
Non-participating investment contract liabilities 633 1,479 304 74 45 65 - 2,600
Non-participating insurance contract liabilities 833 2,965 2,961 2,144 1,398 1,932 - 12,233
Non-participating insurance contract liabilities 3,463 1,387 1,112 443 163 142 - 6,710
Total unit linked and segregated funds 10,485 23,809 21,276 13,710 8,315 10,716 - 88,311
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (e) Liquidity risk continued (e)(i) Maturity analysis continued The analysis that follows presents the undiscounted cash flows payable by remaining contractual maturity at the reporting date for all financial liabilities, including non-participating investment contract liabilities. Given that policyholders can usually choose to surrender, in part or in full, their unit linked contracts at any time, the non-participating investment contract unit linked liabilities of UK and Europe life and pensions business and segregated funds business in Canada presented in the table below have been designated as payable within one year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. The Group can delay settling liabilities to unit linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets. In this analysis, the maturity within one year includes liabilities that are repayable on demand.
Deposits received from reinsurers reflect the liability to repay the deposit received from an external reinsurer under the reinsurance transaction referred to in Section (c). The timing and amount of the payment of the cash flows under this liability are defined by the terms of the treaty, under which there is no defined contractual maturity date to repay the deposit as at 31 December 2013 or 31 December 2012.
(f) Securities lending arrangements The Group enters into securities lending arrangements as part of normal operating activities. Assets are pledged by third parties as collateral to support this activity. Collateral held by the Group in respect of securities lending agreements at the reporting date was £153m (2012: £420m) of securities. The fair value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value fluctuates. The Group does not have the right to sell or repledge the collateral.
The loaned securities continue to be recognised on the consolidated statement of financial position and valued in accordance with the relevant Group accounting policy. All rights to income and gains or losses in respect of these assets remain with the Group.
Control Self Assessment (CSA) is a monitoring activity where business managers assess the operation of the controls for which they are responsible and the adequacy of these controls to manage key operational risks and associated business processes. The assessment completed by business managers is validated and challenged by Group Risk in its role of ‘second line of defence’. Independent assurance as to the effectiveness of the CSA process is provided by Group Internal Audit in its role of ‘third line of defence’. The results of CSA are reported through the risk governance structure. The assessment of operational risk exposures is performed on a qualitative basis using a combination of impact and likelihood, and on a quantitative basis using objective and verifiable measures. The maximum amount of operational risk the Group is willing to retain is defined using both quantitative limits, for example financial impact, and also qualitative statements of principle that articulate the event, or effect, that needs to be limited.
Investment property – 2013: £8,545m (2012: £8,565m), Investment property held for sale – 2013: £92m (2012: £nil) and owner occupied property – 2013: £172m (2012: £112m), The fair value of investment property and all owner occupied property is valued by external property valuation experts. The current use is considered the best indicator of the highest and best use of the Group’s property from a market participants’ perspective. No adjustment has been made for vacant possession for the Group’s owner occupied property at 31 December 2013.
Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group’s risk management policies. At 31 December 2013 the residual credit risk is considered immaterial and therefore no credit risk adjustment has been made.
Unlisted equities are valued using an adjusted net asset value. The Group’s exposure to unlisted equity securities primarily relates to private equity investments. The majority of the Group’s private equity investments are carried out through European fund of funds structures, where the Group receives valuations from the investment managers of the underlying funds.
• Corporate bonds listed or quoted in an established over-the-counter market including asset backed securities These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote the instruments are categorised as level 3 instruments.
Investment property - - 14 47 8,531 8,518 8,545 8,565 Owner occupied property - - 1 1 171 111 172 112 Derivative financial assets 541 613 1,226 1,537 - - 1,767 2,150 Equity securities and interests in pooled investment vehicles 89,241 64,653 2 3 1,073 1,156 90,316 65,812 Debt securities 19,305 25,277 41,454 46,621 1,280 1,403 62,039 73,301 Assets held for sale 29 - - - 92 - 121 - Total assets at fair value 109,116 90,543 42,697 48,209 11,147 11,188 162,960 149,940
Non-participating investment contract liabilities - - 95,267 81,601 - - 95,267 81,601 Liabilities in respect of third party interest in consolidated funds1 - - 10,557 10,832 1,246 1,205 11,803 12,037
Total liabilities at fair value 367 127 106,252 93,159 1,261 1,205 107,880 94,491 1 The comparative information has been restated to reflect the categorisation of third party interest in consolidated funds at level 3 rather than level 2.
There were no transfers between levels 1 and 2 during the period (2012: none). Refer to 42(d)(iii) for details of movements in level 3.
Total unit linked and segregated funds 231 82 95,499 82,067 - - 95,730 82,149 Third party interest in consolidated funds and non-controlling interests Liabilities in respect of third party interest in consolidated funds - - 10,557 10,832 1,246 1,205 11,803 12,037
3. Financial information – Notes to the Group financial statements continued 42. Fair value of assets and liabilities continued (d) Methods and assumptions used to determine fair value of assets and liabilities continued (d)(iii) Reconciliation of movements in level 3 instruments The movements during the year of level 3 assets and liabilities held at fair value are analysed below.
At 1 January 8,518 8,695 111 114 1,156 1,245 1,403 1,382 (1,205) (1,205) Total gains/(losses) recognised in the consolidated income statement 323 31 (3) (7) 64 92 (78) 43 (45) 12
Foreign exchange adjustment (102) (47) (5) (2) 7 (24) (80) (23) - - Total gains recognised in revaluation of owner occupied property within other comprehensive income - - 68 5 - - - - - -
At 31 December 8,623 8,518 171 111 1,073 1,156 1,280 1,403 (1,246) (1,205) 1 Includes investment property held for sale of £92m. Investment property held for sale at 31 December 2013 had an opening fair value at 1 January 2013 of £76m.
As at 31 December 2013, £142m of total gains (2012: losses £29m) were recognised in the consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the year end. Of this amount £187m gains (2012: losses £41m) were recognised in investment return and £45m of losses (2012: gains of £12m) was recognised in change in liability for liabilities in respect of third party interest in consolidated funds in the consolidated income statement.
(d)(iv) Sensitivity of level 3 instruments measured as at fair value on the statement of financial position to changes in key assumptions
Effect of changes of significant unobservable assumptions to reasonable possible alternative assumptions For the majority of level 3 investments, the Group does not use internal models to value the investments but rather obtains valuations from external parties. The Group reviews the appropriateness of these valuations on the following basis: • For investment property and owner occupied property (including property that is classified as held for sale), the valuations are obtained from external valuers and are assessed on an individual property basis. The principle assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the table below using knowledge of the investment property market.
The shareholder is directly exposed to movements in the value of level 3 investments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities) however movements in level 3 securities held by the other risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore not included below. The sensitivities presented below are not sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders.
Changes in the assumptions to reasonably possible alternative assumptions would have the following impact on shareholder profit after tax or shareholder total assets or liabilities: • For level 3 private equity investments a 10% increase or decrease in the value of the underlying funds at 31 December 2013 would not have a significant impact on profit after tax or total assets or liabilities
The table below presents quantitative information about the significant unobservable inputs for level 3 instruments: Fair value 2013 £m Valuation technique Unobservable input Range (weighted average) Investment property and owner occupied property 7,450 Income capitalisation Equivalent yield
(e) Fair value of assets and liabilities measured at amortised cost The table below presents estimated fair values of assets and liabilities whose carrying value does not approximate fair value. Fair values of assets and liabilities are based on observable market inputs where available, or are estimated using other valuation techniques.
(e) Fair value of assets and liabilities measured at amortised cost continued It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in the accounting policies and Note 33. The carrying value of participating investment contract liabilities at 31 December 2013 was £14,707m (2012: £14,993m).
Impairment losses reversed on property, plant and equipment 7 (2) -
(b) Issued share capital The Scheme of Demutualisation sets a 10-year time limit, ending in 2016, for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlements. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.
Included in other commitments is £284m (2012: £258m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through contractually agreed additional investments in the subsidiary by the Group and the noncontrolling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.
Total operating lease commitments 158 197 46. Employee share-based payments The Group has established a number of share-based payment schemes for employees. Details of these arrangements are as follows: Share options (i) Long-term incentive plans The Group operates the following long-term incentive plans.
Employees may forfeit some or all of awards made under any of the above share-based payment schemes if they leave the Group prior to the end of the awards vesting period.
Share awards (iv) Share incentive plan The Group operates a share incentive plan, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any year is £1,500. The Group offers to match the number of shares bought up to a value of £25 each month. The matching shares awarded under the share incentive plan are granted at the end of each month. The matching shares are generally subject to a three year service period.
Exercisable at 31 December 34,407 63,320 - 2,950 167p - - - - - Weighted average remaining contractual life of options outstanding (years) 1.41 2.62 1.21 2.58 - 1.65 1.46 1.14 3.31 -
Additionally, the Group incurred an expense for cash-settled share-based payment schemes of £4m in 2013 (2012: £3m). The liability for cash-settled share-based payments outstanding at 31 December 2013 is £5m (2012: £7m).
Transactions with related parties carried out by the Group during the year were as follows: 2013 2012 £m £m
Purchase from: Sales to and amounts due from other related parties include management fees received/receivable from non-consolidated investment vehicles managed by Standard Life Investments.
The summary of compensation of key management personnel is as follows: 2013 2012 £m £m
3. Financial information – Notes to the Group financial statements continued 48. Capital statement Capital management policies and risk management objectives Capital can be measured on a number of different bases, which are set out in the Strategic report Section 1.3 – Group financial overview. The capital statement shows capital based on definitions used for regulatory reporting purposes.
The regulatory results of SLAL have the most significant impact on the Group capital position. The other significant components are insurance entities in Canada and Asia and non-insurance entities, including Standard Life Investments Limited and Standard Life plc. The Group’s capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities mainly comprise investment management and group corporate centre. The Group’s capital position, based on draft regulatory returns, is set out below: UK regulated life business
Analysed as follows: Capital not subject to constraints - - 1,750 1,750 672 2,422 1,195 3,617 Capital subject to constraints 4,815 204 13 5,032 866 5,898 104 6,002 Total available capital resources 4,815 204 1,763 6,782 1,538 8,320 1,299 9,619 Restricted assets within the long-term business fund (1,225) Regulatory capital resources 8,394 Regulatory capital resources requirement 3,846 701 4,547 45 4,592 Regulatory capital surplus 3,802
Unit linked Insurance contracts - 4,910 - 4,910 3,106 8,016 - 8,016 Investment contracts 1,548 80,951 - 82,499 12,768 95,267 - 95,267 Total unit linked liabilities 1,548 85,861 - 87,409 15,874 103,283 - 103,283
Total contract liabilities 41,672 90,711 - 132,383 23,352 155,735 3 155,738 1 Capital resources amounting to £115m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column. Participating contract liabilities amounting to £1,078m relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.
3. Financial information – Notes to the Group financial statements continued 48. Capital statement continued UK regulated life business
Held outside life assurance funds - - 794 794 1,679 2,473 783 3,256 Held within life assurance funds - 1,103 - 1,103 - 1,103 - 1,103 Equity attributable to ordinary equity holders of Standard Life plc - 1,103 794 1,897 1,679 3,576 783 4,359
Total available capital resources to meet regulatory requirement 4,007 128 1,821 5,956 1,836 7,792 1,408 9,200
Participating Insurance contracts 15,203 - - 15,203 716 15,919 - 15,919 Investment contracts 14,989 - - 14,989 4 14,993 - 14,993 Total participating contract liabilities 30,192 - - 30,192 720 30,912 - 30,912
Other non-participating Insurance contracts 12,114 4,564 - 16,678 5,659 22,337 3 22,340 Investment contracts - 301 - 301 2,299 2,600 - 2,600 Total other non-participating liabilities 12,114 4,865 - 16,979 7,958 24,937 3 24,940
Equity holder/inter-fund transfers of £213m (2012: £55m) includes the transfer from the HWPF to the PBF and additional expenses charged on German unitised with profits business.
Group total 2012 (restated)1 £m £m £m £m £m £m £m £m At 1 January 4,121 189 1,687 5,997 1,394 7,391 933 8,324 Methodology/modelling changes 520 12 - 532 8 540 - 540 Change in assumptions used to measure life assurance contract liabilities and experience differences (24) 2 - (22) 7 (15) - (15) New business (13) (95) - (108) (23) (131) - (131) Investment surplus 37 16 47 100 192 292 - 292 Equity holder/inter-fund transfers (55) (153) 208 - 147 147 (147) - Dividend transfers - - (249) (249) (143) (392) 61 (331) Issue of external subordinated liabilities - - - - 246 246 498 744 Other factors (579) 157 128 (294) 8 (286) 63 (223) At 31 December 4,007 128 1,821 5,956 1,836 7,792 1,408 9,200 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.
As outlined in Note 36 – Subordinated liabilities, the Company issued £500m fixed rate subordinated notes on 4 December 2012. The subordinated notes are unguaranteed and have a legal final maturity in December 2042 with the first call date on 4 December 2022. The Standard Life Assurance Company of Canada (SLCC), a wholly owned subsidiary of the Company, issued CA$400m subordinated debenture notes on 21 September 2012 with a redemption date of 21 September 2022.
Based on draft regulatory returns at 31 December 2013, SLAL had available capital resources of £6,782m (2012: £5,956m) and a CRR of £3,846m (2012: £3,092m). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis. However, the CRR reflects the higher value required as a result of the application of the realistic peak.
3. Financial information – Notes to the Group financial statements continued 48. Capital statement continued Other activities At 31 December 2013, capital resources of £1,299m (2012: £1,408m) and capital subject to constraints of £104m (2012: £88m) relate to the Group’s investment management businesses and group corporate centre activities.
Contract liabilities The process used to determine the assumptions that have the greatest effect on the measurement of contract liabilities (including options and guarantees), the quantified disclosure of those assumptions, and the terms and conditions of options and guarantees relating to life assurance contracts that could in aggregate have a material effect on future cash flows are disclosed in Note 3 – Business written in the Group’s insurance entities and Note 33 – Insurance contracts, investment contracts and reinsurance contracts. The sensitivity of contract liabilities to changes in market conditions, key assumptions and other variables, and assumptions about management actions in response to changes in market conditions, are disclosed in Note 41 – Risk management.
49. Investments in subsidiaries The following are particulars of the Company’s principal subsidiaries which are unlisted entities except where indicated: Name of subsidiary Country of incorporation or residence % of interest held1 Nature of business Standard Life Assurance Limited Scotland 100 Life assurance Standard Life Investments (Holdings) Limited Scotland 100 Holding company Standard Life Investments Limited Scotland 100 Investment management Standard Life (Mauritius Holdings) 2006 Limited Mauritius 100 Holding company Standard Life Oversea Holdings Limited Scotland 100 Holding company Standard Life Employee Services Limited Scotland 100 Support services Standard Life Pension Funds Limited Scotland 100 Life assurance Standard Life Savings Limited Scotland 100 Investment management Standard Life European Private Equity Trust PLC2, 3 Scotland 52 Investment trust Standard Life International Limited Ireland 100 Life assurance The Standard Life Assurance Company of Canada Canada 100 Life assurance Standard Life Mutual Funds Ltd Canada 100 Collective investment products Standard Life Investments (Mutual Funds) Limited Scotland 100 Collective investment products Standard Life Investments (Corporate Funds) Limited Scotland 100 Collective investment products SLTM Limited Scotland 100 Collective investment products Standard Life Client Management Limited Scotland 100 Direct sales Standard Life Wealth Limited Scotland 100 Investment management Standard Life (Asia) Limited Hong Kong 100 Life assurance Vebnet (Holdings) Limited England 100 Holding company 1 All issued share capital of the Company’s principal subsidiaries is classified as ordinary. 2 Indicates listed entity. 3 Indicates the entity has had a different reporting date to the Group but has been consolidated consistently at 31 December 2013.
The financial reporting framework that has been applied in its preparation is the EEV basis set out in Notes 1 and 17 to the EEV financial information.
In addition, we read all the financial and non-financial information in the Annual Report and Accounts 2013 to identify material inconsistencies with the audited EEV financial information and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Restructuring and corporate transaction expenses (52) (21) (73) (103) (11) (114)
Consolidation adjustment for different accounting bases4 - - - - (42) (42)
EEV non-operating profit/(loss) before tax 409 (45) 364 289 (71) 218
Tax attributable to: Total EEV profit/(loss) after tax 1,020 (32) 988 1,089 (70) 1,019 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation. 2 The split of EEV operating profit has been updated to reflect changes in segmental reporting. Refer to Note 1 – Basis of preparation. 3 Standard Life Investments non-covered EEV operating profit of £89m (2012: £62m) represents operating profit of £192m (2012: £145m) after excluding profits of £103m (2012: £83m) which have been generated by life and pensions covered business. Refer to Note 6(b) – Standard Life Investments EEV operating profit before tax and Note 17 – EEV methodology.
4 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 17 – EEV methodology.
EEV earnings per share (EPS) For the year ended 31 December 2013 restated1
Weighted average number of ordinary shares outstanding for diluted earnings per share (millions) 2,378 2,369 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation. 2 EEV operating profit before tax of £915m (2012: £1,083m) less attributed tax on EEV operating profit of £232m (2012: £240m).
Fair value losses on non-covered business financial assets designated as available-for-sale (18) -
Total comprehensive income for the year 906 1,014 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation. 2 Consistent with the IFRS consolidated statement of comprehensive income. 3 Other primarily relates to the transfer of Standard Life Savings Limited to covered business. Refer to Note 1 – Basis of preparation. 4 Exchange differences primarily relate to Canada (loss £183m) and India (loss £28m).
Analysed by: Present value of in-force 5,453 - 5,453 5,073 - 5,073
Total equity 8,423 8,142 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation.
Diluted closing number of ordinary shares outstanding (millions) 2,389 2,373 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation.
Approved on behalf of the Board of Directors on 27 February 2014 by the following Directors: Gerry Grimstone, Chairman David Nish, Chief Executive
In February 2013, changes were announced in the way the Group manages its business. The offshore bond business in Ireland which was previously reported in Asia and Emerging Markets is now managed and reported as part of UK and Europe. Additionally, due to changes in the way the Group’s segments are managed, some overhead costs which were previously reported in Other within non-covered business are now reported within Group corporate centre costs in non-covered business.
Standard Life Savings Limited Standard Life Savings Limited, which was previously treated as a non-covered entity within UK and Europe with a look through in covered business relating to mutual funds profits, has been transferred to covered business on the closing EEV consolidated statement of financial position. In addition, to allow for the anticipated transfer of certain mutual funds business to Standard Life Investments during 2014, the PVIF of this business has been extinguished. The impact of these changes is to transfer £52m of net assets from non-covered business to covered business and to reduce closing PVIF by £21m, with no impact on EEV profit. From 1 January 2014, there will therefore no longer be a look through and transfer back of net worth in respect of Standard Life Savings Limited.
2. Segmental analysis – covered business (a) Segmental EEV income statement
Expected return on free surplus (8) 14 2 8 1 2 1 4
Effect of economic assumption changes 269 (115) 14 168 (235) 118 11 (106) Restructuring and corporate transaction expenses (48) (2) (2) (52) (101) (2) - (103)
EEV profit after tax 769 230 21 1,020 637 424 28 1,089 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation.
New business contribution of £320m is £19m lower than 2012, resulting from the combination of higher sales, with PVNBP up £3,610m to £22,903m, along with a lower PVNBP margin of 1.4% (2012: 1.8%).
Development expenses of £56m were £7m lower than 2012, reflecting lower costs in UK and Europe and in Canada.
The £8m expected return on free surplus represents an increase of £4m from 2012. Higher opening free surplus in Canada contributed to a £12m increase, partly offset by a reduction of £9m in UK and Europe, reflecting the increased differential between the expected return on subordinated liabilities and the expected return on assets backing subordinated liabilities.
Long-term investment return and tax variances generated a profit of £293m, which includes a £333m profit from higher than expected investment returns.
The effect of economic assumption changes was an overall gain of £168m. The impact of changes to the long-term corporation tax rate in the UK was a profit of £123m (refer to Note 1 – Basis of preparation). Increased risk free rates were the main driver for both a loss of £625m from higher risk discount rates, which is explained in Note 13 – Principal economic assumptions – deterministic calculations – covered business, and for a profit of £692m from the use of higher future assumed investment returns.
Transfer back of surplus to Standard Life Investments (78) (1) - (79) (60) (2) - (62) Transfer back of net worth to other non-covered business (8) (6) - (14) (3) (3) - (6) Remeasurement gains/(losses) on defined benefit pension plans (7) 31 - 24 (12) (9) - (21)
Foreign exchange differences 13 (183) (25) (195) (16) (49) (16) (81) Aggregate tax effect of items not recognised in income statement - (8) - (8) - 4 - 4
Other within UK and Europe includes a £31m closing adjustment (comprising £52m net assets and (£21m) closing PVIF) to transfer Standard Life Savings Limited between non-covered business and covered business. Refer to Note 1 – Basis of preparation.
UK and Europe lapse variances include negative £31m from UK business, mainly due to the impact of higher transfer activity in corporate pensions prior to the full implementation of the Retail Distribution Review and increased net outflows from institutional pensions.
Tax variances include gains of £57m in UK and Europe and £11m in Canada following the settlement of various prior-year tax negotiations and adjustments to prior year tax provisions. Tax variances in Canada of £117m also include £84m from the release of future tax components of actuarial liabilities and £22m from lower than expected tax in the year.
Lapse assumption losses of £25m in UK and Europe include a £12m loss from increased paid-up rates and a loss of £13m from other policy off-rates. Most of these changes arise from UK pensions business. Canada lapse assumption losses of £56m arise from increased lapse rates for group pensions, mutual funds and life business. Increased paid-up rates were the main source of the £13m loss within Asia and Emerging Markets.
The £43m other assumption changes in Canada includes £18m from an update of commission assumptions and £32m from the impact of asset changes.
6. Non-covered business Non-covered business EEV operating profit is represented by operating profit adjusted for Standard Life Investments look through profits and the return on mutual funds which are recognised in covered business.
Closing EEV non-covered business net assets 514 255 656 1,425 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation. 2 Excluding Group elimination. Refer to Note 7 – Movements in total EEV.
Standard Life Investments covered business profits are included in EEV on a look through basis. This means that the profits from Standard Life Investments which are generated from life and pensions business are allocated to covered business. Therefore, the difference between third party non-covered business EEV operating profit before tax of £89m (2012: £62m) and operating profit for the Standard Life Investments business of £192m (2012: £145m) is the profit allocated to covered business.
Standard Life Investments third party non-covered business EEV operating profit before tax 89 62
Tax on EEV operating profit (92) (106) (2) (32) - (232)
EEV operating profit/(loss) after tax 373 293 18 (1) - 683 29
Markets Total noncovered Group elimination Total Pence per share 2012 (restated)1 £m £m £m £m £m £m p
EEV operating profit/(loss) before tax 803 315 10 30 (75) 1,083
Closing EEV 4,103 2,317 297 1,425 - 8,142 343 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation.
Total EEV non-trading adjustments (707) (309) 1 The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 – Basis of preparation.
8. Reconciliation of EEV net assets to IFRS net assets and IGD regulatory capital resources restated1 £m £m
9. Group EEV capital and cash generation (a) Analysis of Group EEV capital and cash generation 2013 2012
Other covered business 269 (52) 217 389 (64) 325 Covered business operating capital and cash generation 9(c) 509 74 583 700 22 722
(31) - (31) (49) - (49) EEV non-operating capital and cash generation
3. Financial information – Notes to the EEV financial information continued 9. Group EEV capital and cash generation continued (b) Reconciliation of operating profit to EEV operating capital and cash generation
Impact of different treatment of assets and actuarial reserves (30) - (4) (2) - (36)
EEV operating capital and cash generation 413 66 202 (30) (69) 582
EEV operating profit/(loss) after tax 385 66 287 14 (69) 683 1 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). 2 Deferred acquisition costs (DAC) and deferred income reserve (DIR).
Markets Other Total 2012 (restated)1 £m £m £m £m £m £m
Impact of different treatment of assets and actuarial reserves (15) - - (4) - (19)
EEV operating capital and cash generation 418 45 335 (12) (85) 701
Development expenses (52) - (52) 8 (44) (53) - (53) 4 (49) Expected return on free surplus 5 - 5 - 5 3 - 3 - 3 EEV operating profit after tax 9(a) 509 74 583 101 684 700 22 722 142 864
Investment return and tax variances (110) 1 (109) 343 234 22 11 33 353 386 Effect of economic assumption changes 128 (96) 32 111 143 (264) 46 (218) 136 (82) Restructuring and corporate transaction expenses
Foreign exchange differences (31) (84) (115) (80) (195) (9) (27) (36) (45) (81) Aggregate tax effect of items not recognised in income statement
Contribution from new business (194) 20 (174) 372 198 (172) 25 (147) 354 207 Contribution from in-force business: Expected return 446 4 450 (273) 177 427 4 431 (259) 172
3. Financial information – Notes to the EEV financial information continued 9. Group EEV capital and cash generation continued (c) Analysis of covered business EEV net worth and PVIF movements (net of tax) continued Canada 2013 2012 restated1
EEV operating profit/(loss) after tax 172 36 208 85 293 358 (19) 339 (100) 239
Investment return and tax variances (67) 10 (57) 80 23 59 7 66 31 97
Effect of economic assumption changes 92 (89) 3 (88) (85) (94) 38 (56) 146 90 Restructuring and corporate transaction expenses (1) - (1) - (1) (2) - (2) - (2)
Contribution from in-force business: Expected return 50 2 52 (36) 16 55 3 58 (43) 15 Experience variances and operating assumption changes (4) 1 (3) (15) (18) (2) (2) (4) (11) (15)
Investment return and tax variances (6) (1) (7) - (7) 1 1 2 8 10
Effect of economic assumption changes - - - 12 12 - (1) (1) 10 9 Restructuring and corporate transaction expenses (1) - (1) (1) (2) - - - - -
EEV profit/(loss) after tax (43) 9 (34) 55 21 (12) 9 (3) 31 28
The UK and Europe TVOG reflects the value of shareholder exposure to with profit policyholder guarantees. The total comprises £42m for guarantees in the HWPF and £13m for guarantees in the GWPF. The value of this exposure has reduced by £101m during 2013. This arises from a post-tax operating profit of £18m and a post-tax non-operating profit of £83m. The operating profit includes a profit of £31m from revised modelling, a loss of £11m from assumption changes and a £3m loss from new business, whilst the non-operating profit largely reflects favourable assumption changes, particularly from the impact of increased risk free yields.
12. PVIF monetisation profile (a) PVIF (gross of TVOG) emergence In-force New business
PVIF Cash emerging during years (£m) PVIF Cash emerging during years (£m)
3. Financial information – Notes to the EEV financial information continued 13. Principal economic assumptions – deterministic calculations – covered business
Risk-free rate UK / SLIL 3.01 1.74 1.74 1.93 Europe 1.94 1.32 1.32 1.83 Canada 3.16 2.32 2.32 2.17 Hong Kong 1.92 0.91 0.91 1.09
Canada 8.60 8.60 Other Risk-free rate + 3%pa Risk-free rate + 3%pa
UK HWPF 4.10 2.70 4.50 2.50 UK PBF 2.40 3.10 2.30 2.60 Europe HWPF 2.80 2.50 2.50 3.30 Europe PBF 1.50 1.60 1.30 1.70 SLIL 2.20 2.30 2.40 2.10 Canada 3.40 2.70 3.90 2.70 Hong Kong 2.90 2.90 2.90 2.90
UK / SLIL 4.00 3.39 3.39 3.37 Europe (Germany) 1.60 1.87 1.87 1.85 Europe (Ireland) 2.69 2.84 2.84 2.74 Canada 4 1.50 1.50 1.50 0.00 Hong Kong 2.50 2.50 2.50 2.50 1 For Canada, with the exception of AFS assets used to back investment contract liabilities at amortised cost, current holdings are assumed to yield in future years the earned rate for the year preceding the valuation and future reinvestments are assumed to be in a mixture of government and corporate bonds. For AFS assets used to back investment contract liabilities at amortised cost, yields are calculated at acquisition and subsequent changes are ignored.
4 This represents the current rate. The rate in subsequent years is based on a moving 30-year bond yield less a 2% deduction, subject to a floor of 1.50% (with the exception of 31 December 2012 new business, where the rate is based on a moving 30-year bond yield less a 3% deduction, subject to a floor of 0.00%).
For UK, the reduction in the HWPF in-force business risk margin is due to a change in the allowance for longevity risk. The increase in the new business risk margin is primarily due to changes in business mix and asset allocations. For Canada, the reduction in the in-force business risk margin is largely due to an increase to the cost of required capital adjustment.
14. Principal economic assumptions – stochastic calculations Parameters used in the economic scenario generator for UK and Europe The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator which projects the relevant fund under a large number of different future economic scenarios. The economic scenario generator simulates future economic environments in a market consistent manner and allows option pricing techniques to be used to value TVOG.
Swaption-implied volatilities The implied volatility is that required in order that the price of the option calculated via the Black Scholes Formula equals the market price of that option. The model swaption-implied volatilities are set out in the following table: 31 December 2013 31 December 2012 UK Sterling Euro UK Sterling Euro Swap term (years) Swap term (years) Option term (years) 10 20 10 20
For the UK and Europe, the model is calibrated to property-implied volatility of 15% for 31 December 2013 and 15% for 31 December 2012.
Note 10 – Time value of options and guarantees (TVOG) also shows the value of TVOG in Canada and Asia and Emerging Markets, which are in addition to the UK and Europe TVOG. Where material, these values are also calculated using an economic scenario generator similar to that used for the HWPF and GWPF TVOG calculations, although market observed data is not always available at all durations.
Average to 31 December 16. Sensitivity analysis – economic and non-economic assumptions The following table shows the sensitivity of the covered business embedded value and NBC to different scenarios.
The interest returns 1% higher and lower than base case scenarios include consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties.
The prescribed minimum capital scenario shows the sensitivity of EEV results where economic capital has been used in the base EEV calculations.
17. EEV methodology Covered business For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the Group financial statements, unless otherwise stated.
Asia and Emerging Markets covered business consists of: • The Group’s business in Hong Kong (Standard Life (Asia) Limited) • International savings and investment business in Singapore and Dubai sold by SLIL • The Group’s share of results in the JV in India (HDFC Standard Life Insurance Company Limited) and China (Heng An Standard
Life Insurance Company Limited). Standard Life Savings Limited has been transferred to covered business on the closing EEV statement of financial position. Refer to Note 1 – Basis of preparation.
Non-covered business The Group’s non-covered business predominantly consists of: • Within UK and Europe, Standard Life Wealth Limited, the Group’s UK pension plan, other UK subsidiaries and until 31
The capitalised values of the future profits and losses from such service companies are included in the opening and closing embedded value for the relevant businesses, but the net assets remain within the relevant non-covered businesses. A transfer of profits from the covered business to the non-covered business is deemed to occur in order to reconcile the profits and losses arising in the financial period within each segment with the opening and closing EEV net assets.
The projected cash flows are discounted to the valuation date using a risk discount rate which is intended to make sufficient allowance for the risks associated with the emergence of these cash flows, other than those risks allowed for elsewhere in the EEV calculations. In particular, a deduction is made from the present value of the best estimate cash flows to reflect the risks associated with the existence of financial options and guarantees, this deduction being assessed using stochastic techniques.
Free surplus The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the equity holders’ fund, plus the value of the equity holders’ interests in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business.
Risk discount rates Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk free rate (represented by a government bond yield) plus a risk margin. Separate risk margins are determined for market risk and non-market risk, with a reduction to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.
EEV • UK and Europe (business in equity holder owned funds) – 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life’s internal risk-based capital requirement • Canada – the level of required capital is taken as 170% of minimum continuing capital and surplus requirements (MCCSR) • Asia and Emerging Markets – required capital is generally based on the local statutory capital requirements.
The level of TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: • The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market-consistent assumptions • The total cost includes an allowance for non-market risk • Changes in policyholder behaviour are allowed for according to the particular economic scenario • Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)
UK and Europe – other Most with profits business written post demutualisation is managed in a number of new with profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date, some of which increase each year with the addition of bonuses.
3. Financial information – Notes to the EEV financial information continued 17. EEV methodology continued Canada The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts. TVOG has reduced both NBC and closing PVIF for Canada.
Investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing investment management services to the life and pensions businesses rather than the investment fees actually charged.
Expenses – pension plans Pension plans have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits and IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements.
Additional considerations for each territory are noted below. For the UK and Ireland: • Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business • Pensions vesting under other group contracts and individual pensions are included as new business • All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business when received.
For non-covered business, attributed tax is consistent with the IFRS consolidated financial statements, unless otherwise stated.
Where AFS assets are held by an EEV covered business entity and these assets are used to back investment contract liabilities accounted for under local solvency regulations at amortised cost, then the assets are also included within EEV on an amortised cost basis and EEV operating profit reflects the long-term investment return on the assets calculated at acquisition.
Where AFS assets are held by an EEV covered business entity and these assets are used to back subordinated liabilities which are accounted for in EEV at market value, then the assets are also included within EEV on a market value basis. EEV operating profit reflects the long-term investment return on the assets and unrealised gains and losses are included within EEV non-operating profit.
3. Financial information – Notes to the EEV financial information continued 17. EEV methodology continued For Canada, previously issued subordinated liabilities were owned by a non-covered subsidiary of the Group, where the asset was valued on an amortised cost basis. Total Group EEV was adjusted to exclude the difference between the market value and the amortised cost value. During the year ended 31 December 2012, the subordinated liability was fully redeemed and the consolidation adjustment for different accounting bases is therefore no longer required.
The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the European Union.
In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts 2013 (the ‘Annual Report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Company financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion: • the information given in the Strategic report and the Directors’ report for the financial year for which the Company financial statements are prepared is consistent with the Company financial statements • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
3. Financial information – Independent Auditors’ Report on Company financial statements continued
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 Company financial statements • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit • is otherwise misleading. We have no exceptions to report arising from this responsibility.
As explained more fully in the Directors’ Responsibilities Statement set out on page 48, the directors are responsible for the preparation of the Company financial statements and for being satisfied that they give a true and fair view.
We have reported separately on the Group financial statements of Standard Life plc for the year ended 31 December 2013.
Net changes in financial assets designated as available-for-sale R (18) -
Tax effect relating to items that may be reclassified subsequently to profit or loss F 4 - Total other comprehensive income for the year that may be reclassified subsequently to profit or loss (14) -
Company statement of financial position As at 31 December 2013 3BAssets
The financial statements on pages 245 to 269 were approved on behalf of the Board of Directors, on 27 February 2014, by the following Directors: Gerry Grimstone, Chairman David Nish, Chief Executive
Issue of share capital other than in cash O 2 - - - - 2 Reserves credit for employee share-based payment schemes R - - - - 32 32 Transfer to retained earnings for vested employee share-
Other comprehensive income for the year - - - - - -
Total comprehensive income for the year - - - 448 - 448
Shares acquired by employee trusts - (5) - - - (5)
Shares distributed by employee trusts Q - 17 - (17) - -
Cash and cash equivalents at the beginning of the year N 763 477
Company accounting policies (a) Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
The Company has adopted the following new International Financial Reporting Standards (IFRS), International Accounting Standards (IASs) and amendments to existing standards which are effective by EU endorsement for annual periods beginning on or after 1 January 2013 unless otherwise stated: IFRS 13 Fair Value Measurement IFRS 13 replaces the guidance on fair value measurement in existing IFRSs with a single standard. The standard does not change requirements regarding which items should be measured at fair value but provides guidance on how to determine fair value. The standard has been applied prospectively and also requires specific disclosures on fair values. All fair values reported in the financial statements have been determined in accordance with IFRS 13. Additional disclosures have been provided in Note Y – Fair value of assets and liabilities.
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 statement of comprehensive income. The tax associated with each category is also shown separately. The amendment has affected presentation only.
Amendment to IFRS 7 Financial Instruments: Disclosures The amendment to IFRS 7 requires additional disclosures for financial assets and liabilities which are offset in the financial statements or are subject to enforceable master netting agreements or similar arrangements. The additional disclosures are presented in Note V – Risk management.
(a)(ii) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Company
(a)(iii) Standards, interpretations and amendments to existing standards that are not yet effective and are not relevant to the Company’s operations or to the preparation of separate financial statements
• IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2014) • IFRS 11 Joint Arrangements (effective for annual periods beginning on or after 1 January 2014) • IFRS 12 Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014) • IAS 27 Separate Financial Statements (2011) (effective for annual periods beginning on or after 1 January 2014) • IAS 28 Investments in Associates and Joint Ventures (2011) (effective for annual periods beginning on or after 1 January 2014) • Amendment to IAS 36 Impairment of Assets (effective for annual periods beginning on or after 1 January 2014) • International Financial Reporting Interpretations Committee (IFRIC) Interpretation 21 Levies (effective for annual periods beginning on or after 1 January 2014) • Amendments to IAS 39 Financial Instruments: Recognition and Measurement (effective 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) • Annual improvements 2010 – 2012 cycle and Annual Improvements 2011 – 2013 cycle (effective for annual periods beginning on or after 1 July 2014)
Determination of the recoverable amount (b), (e), (g) and Notes G, H and V
(b) Subsidiaries, associates and joint ventures Subsidiaries are all entities, including special purpose entities, over which the Company 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 Company controls another entity.
Foreign currency transactions are translated at the exchange rate prevailing at the date of the transaction. Gains and losses arising from such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income.
(f) Income tax The income tax expense is based on the taxable profits for the year, after adjustments in respect of prior years.
Company accounting policies continued (g) 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 Company intends to sell in the short term. Financial assets classified as loans include deposits with credit institutions and loans to subsidiaries when the loan is classified as a financial liability by the subsidiary.
All of the Company’s equity securities and certain debt securities are designated as at fair value through profit or loss (FVTPL) as they are part of groups of assets which are managed and whose performance is evaluated on a fair value basis so as to maximise returns either for equity holders. All other debt securities are designated as available-for-sale (AFS).
(k)(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’.
The sponsoring employer for the defined benefit plan is Standard Life Assurance Limited (SLAL), and therefore the net defined benefit cost of the plan is recognised by SLAL. As a result, the Company treats its participation in the defined benefit plan as a defined contribution plan. Consequently the costs of this scheme and the UK defined contribution scheme represent the contributions payable for the accounting period.
Contingent liabilities are disclosed if the future obligation is less than probable but greater than remote or if the obligation is probable but the amount cannot be reasonably estimated.
Fair value of options granted under share incentive schemes is determined using a relevant valuation technique, such as the Black Scholes option pricing model.
At each period end the Company reassesses the number of equity instruments expected to vest and recognises any difference between the revised and original estimate in the statement of comprehensive income with a corresponding adjustment to the equity compensation reserve.
Financial assets and liabilities are offset and the net amount reported on the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset, any related interest income and expense is offset in the statement of comprehensive income.
C. Staff costs and other employee-related costs 2013 2012 Notes £m £m
Further information on the Group’s pension schemes is given in Note 37 of the Group financial statements.
The standard rate of corporation tax in the UK changed from 24% to 23% with effect from 1 April 2013. Accordingly, the Company’s UK profits for this accounting period are subject to tax at a rate of 23.25%.
Tax at UK corporation tax rate of 23.25% (2012: 24.5%) (127) (106)
Details of the Company’s principal subsidiaries are given in Note 49 of the Group financial statements.
H. Investments in associates and joint ventures (a) Investments in associates The Company has a 25.3% (2012: 25.3%) interest in Tenet Group Limited, a company incorporated in England. The reporting date for Tenet Group Limited is 30 September as this is its year end date. This is different from the Company’s year end date of 31 December.
(b) Investments in joint ventures The Company has a 50% (2012: 50%) interest in Heng An Standard Life Insurance Company Limited, a company incorporated in China.
The amount of deferred tax liabilities expected to be settled after more than 12 months is £1m (2012: £1m).
Movements in deferred tax liabilities comprise: Amounts credited to net profit - 2
Derivative financial assets K - 18 - - 18 Equity securities and interests in pooled investment funds 15 - - - 15
The amount of debt securities expected to be recovered or settled after more than 12 months is £334m (2012: £1m). Due to the nature of the equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows: Within 1 year 2-5 years Total
Receivables and other financial assets expect to be recovered within 12 months.
Demand and term deposits with original maturity of less than three months 40 22
O. Share capital Details of the Company’s share capital are given in Note 28 of the Group financial statements.
Reserves credit for employee share-based payment schemes - 32 - - 32
Reserves credit for employee share-based payment schemes - 25 - - 25
Subordinated notes: Subordinated guaranteed bonds: Mutual Assurance Capital Securities: 5.314% Euro fixed/floating rate perpetual €360,000,000 315 €360,000,000 306
The principal amount of subordinated liabilities is expected to be settled after more than 12 months. The accrued interest on subordinated liabilities of £53m (2012: £52m) is expected to be settled within 12 months.
The amount of other financial liabilities expected to be settled after more than 12 months is £6m (2012: £6m).
(b)(i) Market risk concentrations The Group manages market risk concentrations by ensuring that exposure is divided among a number of instruments. For each type of asset within a portfolio, responsibility for setting adequately diversified benchmarks and for limiting the structure of market risk exposure is set by the Company.
Derivative financial assets 54 18 - - - - 54 18 Equity securities and interests in pooled investment funds - 4 - - 12 11 12 15
Equity sensitivity to market risk The company classifies certain debt securities which back subordinated debt liabilities as AFS. These debt securities are measured at fair value. Interest is calculated using the effective interest method and recognised in the income statement. Other changes in fair value and the related tax are recognised in other comprehensive income. As a result the sensitivity of the Company's equity to variations in interest rate risk exposures differs from the sensitivity of the Company's profit after tax to variations in interest rate risk exposures.
(c) Credit risk The Group defines credit risk as the risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform these obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to widening of mortgage, bond and swap spreads.
For cash and cash equivalents, the Company maintains exposures within limits that are set with reference to internal credit assessments. For derivative financial instruments, maximum counterparty exposure limits, net of collateral, are set with reference to internal credit assessments. The forms of collateral that may be accepted are also specified and minimum transfer amounts in respect of collateral transfers are documented. No credit limits are set in respect of loans to subsidiaries, where the main exposure is to SLAL, a wholly owned subsidiary undertaking, with long-term ratings of A+ from Standard & Poors’ and A1 from Moody’s. Any loans to subsidiaries require approval from the Group Enterprise Risk Management Committee prior to being transacted.
The total amount in the table below represents the Company’s credit exposure to financial investments (excluding equity securities) at the year end without taking into account any collateral held.
V. Risk management continued (c) Credit risk continued (c)(i) Credit exposure of financial assets continued
The Company holds the majority of its cash and cash equivalents in a money market fund managed by a subsidiary company. This fund was previously internally rated as AAA, as it followed the guidelines prescribed by external rating agencies for money market funds seeking to achieve a AAA rating. The fund ceased to follow these guidelines in 2012 and, as a result, it is no longer considered appropriate to designate a AAA rating for this fund. However, the fund continues to invest in a range of counterparties that are externally rated, and uses concentration limits and maturity limits in managing its exposures.
The Company’s over-the-counter (OTC) derivatives are all subject to an International Swaps and Derivative Association (ISDA) master agreement, which provide a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy. An ISDA master agreement is considered a master netting agreement. The Company does not hold any other financial instruments which are subject to master netting agreements or similar arrangements.
Derivatives1 - - 54 - (47) 7 Loans to subsidiaries2 72 (72) - - - - Total financial assets 72 (72) 54 - (47) 7 Financial liabilities
Financial and cash collateral received Net position £m £m £m £m £m £m
Derivatives1 - - 18 - (10) 8 Loans to subsidiaries2 178 (178) - - - - Total financial assets 178 (178) 18 - (10) 8 Financial liabilities
X. Related party transactions (a) Transactions with and balances from/(to) related parties In the normal course of business, the Company enters into transactions with related parties. The year end balances arising from such transactions are as follows: Due from related parties: Subsidiaries 77 76 Loans to subsidiaries J 644 630
(b) Compensation of key management personnel The Directors and key management personnel of the Company are considered to be the same as for the Group. Information on both Company and Group compensation paid to Directors and key management personnel can be found in Note 47 of the Group financial statements. Information on transactions with/from and balances from/to key management personnel and their close family members can also be found in Note 47 of the Group financial statements.
Y. Fair value of assets and liabilities (a) Determination of fair value hierarchy To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used: Level 1 Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 Fair values measured using inputs that are not based on observable market data (unobservable inputs).
(b) Financial investments and financial liabilities An analysis of the Company’s financial investments and financial liabilities in accordance with the categories of financial instrument set out in IAS 39 Financial Instruments: Recognition and Measurement is presented in Notes J and S and includes those financial assets and liabilities held at fair value.
Derivative financial assets – 2013: £54m (2012: £18m) and derivative financial liabilities – 2013: £53m (2012: £19m) The Company’s derivatives are over-the-counter (OTC) investments which are fair valued using valuation techniques based on observable market data and are therefore treated as level 2 investments within the fair value hierarchy.
• Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit These instruments are valued using models. For unquoted bonds the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.
Derivative financial assets - - 54 18 - - 54 18 Equity securities and interests in pooled investment funds 12 11 - - - 4 12 15
(c)(ii) Reconciliation of movements in level 3 instruments During the year, there were £4m of disposals (2012: £nil) of level 3 equity securities.
Group assets under administration (summary) 12 months ended 31 December 2013 Opening
Standard Life Investments third party 83.0 22.8 (12.7) 10.1 4.3 97.4
Asia and Emerging Markets (wholly owned) 0.2 0.1 (0.1) - 0.1 0.3
Total 218.1 244.2 1 In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations.
Group assets under administration 198.4 29.6 (24.6) 5.0 14.7 218.1 Group assets under administration managed by: Standard Life Group entities 163.3 176.0
3. Financial information – Supplementary information continued 1. Group assets under administration and net flows continued Group assets under administration 12 months ended 31 December 2013
UK retail old fee business F 31.7 0.6 (3.2) (2.6) 4.4 33.5
UK retail and corporate fee business 84.9 10.8 (8.3) 2.5 13.9 101.3
Wholly owned long-term savings F 0.2 0.1 (0.1) - 0.1 0.3
Group assets under administration 218.1 35.7 (26.1) 9.6 16.5 244.2 1 Canada categories have been revised to align with other business segments. The main changes are that group products are now referred to as corporate and individual products as retail. 2 In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations.
UK mutual funds and other £13.0bn (31 December 2012: £8.9bn) and Canada mutual funds of £1.5bn (31 December 2012: £1.6bn).
Corporate pensions F 4,241 (2,260) 1,981 2,971 (1,747) 1,224 UK retail and corporate fee business 10,834 (8,426) 2,408 9,012 (8,092) 920
UK and Europe long-term savings 19,060 (15,702) 3,358 16,154 (14,232) 1,922
Wholly owned long-term savings F 105 (25) 80 76 (21) 55
Joint ventures long-term savings1 411 (180) 231 410 (161) 249 Asia and Emerging Markets long-term savings 516 (205) 311 486 (182) 304
3. Financial information – Supplementary information continued 2. Long-term savings operations net flows continued Three months ended 31 December 2013 Gross flows Redemptions Net flows Gross flows Redemptions Net flows
Joint ventures long-term savings1 90 (39) 51 99 (45) 54 Asia and Emerging Markets long-term savings 118 (46) 72 119 (53) 66
Total worldwide long-term savings 6,010 (4,716) 1,294 5,154 (5,009) 145 1 The method used by our Indian JV, HDFC Standard Life Insurance Company Limited, to calculate redemptions has been revised. The new method has been applied from April 2013 and implemented from Q4 2013 and has an impact of reducing redemptions in 2013 by £15m. Prior period comparatives have not been restated.
Closing AUM at 31 Dec 2013 £m £m £m £m £m £m £m Equities 18,326 2,326 (3,216) (890) 2,105 1,215 19,541 Fixed Income 27,342 4,513 (3,319) 1,194 (1,749) (555) 26,787 Multi Asset1 22,055 12,503 (4,661) 7,842 2,260 10,102 32,157 Real Estate 6,525 612 (334) 278 49 327 6,852 MyFolio 2,241 1,834 (364) 1,470 273 1,743 3,984 Other2 6,531 967 (795) 172 1,326 1,498 8,029 Total third party AUM 83,020 22,755 (12,689) 10,066 4,264 14,330 97,350
Closing AUM at 31 Dec 2013 £m £m £m £m £m £m £m Third party investment products 51,612 15,789 (8,400) 7,389 3,077 10,466 62,078 Third party insurance contracts 31,408 6,966 (4,289) 2,677 1,187 3,864 35,272 Total third party AUM 83,020 22,755 (12,689) 10,066 4,264 14,330 97,350 Total AUM 167,723 184,113 1 Comprises suite of global absolute return strategies and balanced funds. 2 Comprises cash and private equity. Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2013. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column.
Closing AUM at 31 Dec 2013 £m £m £m £m £m £m £m Equities 19,575 722 (942) (220) 186 (34) 19,541 Fixed Income 27,000 965 (1,076) (111) (102) (213) 26,787 Multi Asset1 30,457 2,381 (1,213) 1,168 532 1,700 32,157 Real Estate 6,592 189 (99) 90 170 260 6,852 MyFolio 3,514 471 (95) 376 94 470 3,984 Other2 7,061 631 (174) 457 511 968 8,029 Total third party AUM 94,199 5,359 (3,599) 1,760 1,391 3,151 97,350
Closing AUM at 31 Dec 2013 £m £m £m £m £m £m £m Third party investment products 59,105 4,025 (2,661) 1,364 1,609 2,973 62,078 Third party insurance contracts 35,094 1,334 (938) 396 (218) 178 35,272 Total third party AUM 94,199 5,359 (3,599) 1,760 1,391 3,151 97,350 Total AUM 179,571 184,113 1 Comprises suite of global absolute return strategies and balanced funds. 2 Comprises cash and private equity. Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2013. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column.
3. Financial information – Supplementary information continued 4. Long-term savings operations new business 12 months ended 31 December 2013 Single premiums New regular premiums PVNBP1
Corporate pensions F 1,956 892 882 535 5,885 3,397 73% 73% UK retail and corporate fee business 7,430 5,733 971 636 11,794 8,702 36% 36%
Wholly owned long-term savings F 16 8 67 41 468 252 86% 84%
Joint ventures long-term savings 70 76 89 104 465 522 (11%) (5%) Asia and Emerging Markets long-term savings 86 84 156 145 933 774 21% 25%
Total worldwide long-term savings 16,161 13,333 1,241 932 22,903 19,293 19% 19% 1 Present value of new business premiums (PVNBP) is the industry measure of insurance new business sales under the EEV methodology, calculated as 100% of single premiums plus the expected present value of new regular premiums. New business gross sales for overseas operations are calculated using average exchange rates.
UK and Europe long-term savings 3,437 2,788 263 150 4,856 3,662 33% 32%
Joint ventures long-term savings 10 13 19 28 93 129 (28%) (17%) Asia and Emerging Markets long-term savings 15 15 40 42 251 218 15% 23%
3. Financial information – Supplementary information continued 4. Long-term savings operations new business continued 15 months ended 31 December 2013 PVNBP
UK retail and corporate fee business 3,431 2,760 3,086 2,839 1,892
Joint ventures long-term savings 93 91 68 213 129 Asia and Emerging Markets long-term savings 251 209 185 306 218
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Record date for 2013 final dividend 11 April 2014 Q1 trading results and interim management statement 30 April
Last date for DRIP elections for 2013 final dividend 30 April
Last date for DRIP elections for 2014 interim dividend 24 September 2014 Interim dividend payment date 21 October 2014 Q3 trading results and interim management statement 29 October 282 Standard Life
Back book management We choose to analyse our EEV operating profit before tax in the three components which reflect the focus of our business effort – core, efficiency and back book management. Back book management includes all non-expense related operating variances and assumption changes for covered business plus those development costs directly related to back book management initiatives and, for non-covered business, specific costs attributed to back book management.
Burnthrough costs Burnthrough costs are an estimate of the value of the potential shareholder support that could be required to meet policyholder benefits in a participating fund. It is usually the case that shareholders participate in the profit or surpluses generated within a participating fund only to a limited extent. However, there could be unfavourable outcomes in the future when the assets of the participating fund are no longer sufficient to pay the benefits of the policyholders of that fund. This would be described as a ‘burnthrough event’ and could require some level of financial support from shareholders. The burnthrough cost is normally calculated by projecting a large number of possible future economic outcomes, taking an average over all of these outcomes.
Business unit underlying performance Business unit underlying performance is operating profit before tax after excluding the impact of spread/ risk operating actuarial assumption changes, specific management actions, group centre costs and group centre capital management in the reporting period.
Capital resources (CR) Capital resources include the assets in excess of liabilities, valued on a regulatory basis, and certain other components of capital.
CFO Forum A high-level discussion group formed and attended by the Chief Financial Officers of major European listed, and some non-listed, insurance companies.
Earnings per share (EPS) EPS is a commonly used financial metric which can be used to measure the profitability and strength of a company over time. EPS is calculated by dividing profit by the number of ordinary shares. Basic EPS uses the weighted average number of ordinary shares outstanding during the year. Diluted EPS adjusts the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares, for example share awards and share options awarded to employees.
European Embedded Value (EEV) The value to equity shareholders of the net assets plus the expected future profits on in-force business from a life assurance and pensions business. Prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum and the Additional Guidance issued in October 2005 and the Revised Interim Transitional Guidance issued in September 2012. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the costs of holding required capital, the value of free surplus and TVOG (see TVOG).
EEV operating profit Covered business EEV operating profit represents profit generated from new business sales and the in-force book of business, based on closing non-economic and opening economic assumptions.
Covered business EEV operating capital and cash generation represents the EEV operating profit net worth (free surplus and required capital) on an after-tax basis.
Free surplus The amount of capital and any surplus allocated to, but not required to support, the in-force business covered by the EEV.
Heritage With Profits Fund (HWPF) The Heritage With Profits Fund contains all existing business – both with profits and non profit – written before demutualisation in the UK, Irish or German branches, with the exception of the classes of business which the Scheme of Demutualisation allocated to the Proprietary Business Fund. The HWPF also contains increments to existing business.
Internal rate of return (IRR) A measure of rate of return on an investment and so an indicator of capital efficiency. The IRR is equivalent to the discount rate at which the present value of the after-tax cash flows expected to be earned over the lifetime of new business written is equal to the capital invested to support the writing of the business.
Key performance indicators (KPI) This is a measure by reference to which the development, performance or position of the business can be measured effectively.
Look through EEV covered business profits include the profits and losses arising in Group companies providing investment management and other services, where these relate to covered business. This is referred to as the ‘look through’ into service companies.
Maintenance expenses Expenses related to the servicing of the in-force book of business (including investment management and termination expenses and a share of overheads).
New business contribution (NBC) The expected present value of all future cash flows attributable to the equity holder from new business, as included within EEV operating profit.
Non-covered business Mainly includes Standard Life Investments third party and other businesses not associated with the life assurance and pensions business. Non-covered business excludes Standard Life Investments look through profits and the return on mutual funds which are recognised in covered business. Non-covered business is excluded from the EEV methodology and is included within the Group EEV on an IFRS basis.
Present value of in-force business (PVIF) The present value of the projected future distributable profits after tax attributable to equity holders from the covered business in-force at the valuation date, adjusted where appropriate to take account of TVOG (see TVOG).
Proprietary Business Fund The Proprietary Business Fund in Standard Life Assurance Limited (SLAL) contains, among other things, certain classes of business – pension contribution insurance policies, income protection plan policies and a number of SIPP policies written before demutualisation, as well as most new insurance business written after demutualisation in the UK, Ireland and Germany.
Recourse cash flow (RCF) Certain cash flows arising in the HWPF on specified blocks of UK and Irish business, which are transferred out of the fund on a monthly basis and accrue to the ultimate benefit of equity holders, as determined by the Scheme of Demutualisation.
Return on equity (RoE) The annualised post-tax profit on an IFRS basis expressed as a percentage of the opening IFRS equity, adjusted for time apportioned dividends paid to equity holders. Operating RoE is based on operating profit after tax and total RoE is based on IFRS profit after tax attributable to equity holders.
UK corporate UK corporate provides workplace pensions, savings and benefits to UK employers and employees. These are sold through corporate benefit consultants, independent financial advisers, or directly to employers.
Secretary, registered office and head office Malcolm J Wood Standard Life plc Standard Life House 30 Lothian Road Edinburgh EH1 2DH Scotland
Please remember that the value of shares can go down as well as up and you may not get back the full amount invested or any income from it. All figures and share price information have been calculated as at 31 December 2013 (unless otherwise indicated).