Our good progress has meant that we have been able to continue to grow our dividend well above the rate of inflation. During this prolonged period of low interest rates, we hope that this is welcome news to our shareholders – we attach much importance to maintaining our record of regular increases. We are recommending a final dividend of 10.58p per share. If approved, the final dividend will give a total 2013 dividend of 15.80p, an increase of 7.5% compared to the 2012 interim and final dividend. Our capital position remains one of the strongest in the industry and we expect this to be maintained as the new, EU-wide Solvency 2 regime is introduced.
• New small and medium-sized enterprise pension solution launched to target the significant number of employees who will need to be autoenrolled over next few years
Total EEV operating capital and cash generation decreased by 17% to £582m (2012: £701m): • Gross EEV operating capital and cash generation decreased by £69m mainly as a result of reduced capital and cash generation from back book management. Outflows from new business strain increased by 23%, mainly reflecting higher sales volumes. As a percentage of PVNBP, new business strain was 1.2% (2012: 1.1%).
• Core capital and cash generation was £46m lower than 2012. This included a £50m increase in new business strain, mainly due to higher sales volumes.
1 Profit contribution reflects the income and expenses directly attributable to each of the UK lines of business. It differs from operating profit due to the exclusion of indirect expenses, such as overheads, and capital management.
Fee business AUA increased by 18% in constant currency to £17.3bn due to positive net inflows into retail segregated funds and corporate pensions as well as positive market movements.
Strategic overview Our Asia and Emerging Markets business consists of wholly owned operations in Hong Kong, Singapore and Dubai, and life joint ventures in India and China. The wholly owned and joint venture businesses in Asia continue to evolve to meet the needs of customers in our chosen markets. The wholly owned business restructure was completed successfully in 2013 with the transfer of knowledge, operations and management responsibility to our new hub in Hong Kong.
Other holdings of cash and cash equivalents, debt securities and the reinsurance of certain insurance liabilities to reinsurance counterparties also results in credit risk.
Each one focuses on a different area of our business: customers, the environment, our people, how we operate and the communities in which we operate. We developed them to best reflect the issues that matter most to our business and to our stakeholders on all areas of running a sustainable business. Our stakeholders are a variety of different audiences, including our customers, our people, shareholders, industry analysts, regulators and the media. All sustainability work is overseen by our Corporate Responsibility Committee. Find out more information on this committee in the Corporate governance section of this report.
In October 2013, we signed the UK Armed Forces Corporate Covenant – an initiative set up to support serving members of the Armed Forces, and their families, in the workplace. Serving personnel and their families face particular challenges, for example, being deployed overseas. From 1 January 2014, we enhanced our special leave policy for UK employees, offering up to five days additional paid leave and allowing temporary changes to working patterns for spouses and partners of Service personnel deployed overseas. This complements our existing provision for Reservists – people who volunteer to serve alongside the Regular Forces – where we offer an additional two weeks paid leave over and above an employee’s annual leave to take part in Reservists’ training.
Crawford is Chairman of the Remuneration Committee and a member of the Investment Committee; the Risk and Capital Committee and the Corporate Responsibility Committee.
Lynne is a member of the Remuneration Committee; the Corporate Responsibility Committee and the Audit Committee.
Reporting for the year ended 31 December 2013 The Company is the holding company of the Group. You can find out about the relevant activities of the Company’s principal subsidiary undertakings and their overseas branches in the Group financial overview and Business segment performance sections of the Strategic report.
The Company did not make any market purchases of its ordinary shares during the year ended 31 December 2013, and has not done so since then and up to the date of this report.
No Director had any interest in the Company’s listed debt securities or in any shares, debentures or loan stock of the Company’s subsidiaries. No Director had any material interest in any contract with the Company or a subsidiary undertaking which was significant in relation to the Company’s business, except for the following: • the benefit of a continuing third-party indemnity provided by the Company (in accordance with company law and the Articles) • service contracts between each executive Director and subsidiary undertakings (Standard Life Employee Services Limited and
The Group also encourages share ownership in the Company in the UK and Ireland through the Standard Life Sharesave Plan which was launched in August 2011. In September 2013 we launched a third invitation to UK employees and at the same time made a second invitation to Irish employees. There are now 2,918 employees in the UK and 85 employees in Ireland participating in Sharesave plans. The exercise price was £1.57 under the 2011 invitation; £2.21 (Euros €2.81) under the 2012 invitations and £2.72 (Euros €3.22) under the 2013 invitations.
Group • was continuing to support the Board and the other Directors in their governance responsibilities.
Director independence, external activities and conflicts of interest The Board carries out a formal review of the independence of non-executive Directors annually, including an assessment of their character, judgement and their relationships or circumstances which may affect their independence. The review considers all relevant issues including the number and nature of their other appointments, any other positions they hold within the Group, any potential conflicts of interest they have identified and the length of their service. Their individual circumstances are also assessed against independence criteria, including those in the Code. Following the review, the Board has concluded that all the nonexecutive Directors are independent. As noted above, the Board considered this in particular prior to Martin Pike’s appointment.
Report from the Chairman of the Remuneration Committee “The Committee supports effective governance over remuneration. You can read my full introduction in the Directors’ remuneration report which follows this section”. Crawford Gillies, Chairman
During 2013 the Group has managed its exposures using quantitative risk limits based on economic capital resources and excess working capital risk metrics.
Identify major sources of risk which may affect shareholder value and/or the interests of the Group’s policyholders, customers and other stakeholders.
Control Establish a defined response to risk. Management selects the risk responses, which may include avoiding, accepting, reducing or transferring the risk exposure.
The Group has had another strong year, delivering increased growth in group underlying performance, net flows and returns to shareholders. We believe that the Remuneration Committee’s decisions on the level of pay, annual bonus payments and the level of awards to be granted from the long-term incentive arrangements for the executive Directors reflects its assessment of the Group’s overall performance in 2013.
Further details of the proposed new Group LTIP are set out in this report and in the AGM Guide 2014. A resolution to approve the new plan will be put forward at the 2014 AGM. I hope you will support this resolution and also the resolutions to approve the Directors’ remuneration policy and the Directors’ remuneration report.
The executive Directors are provided with a package of core benefits funded by the Company and are invited to participate, in line with other employees, in their employing company’s voluntary benefits programme which they fund themselves through salary sacrifice.
Any additional bonus payments made to the CE, SLI would be deferred, over a period to be agreed by the Remuneration Committee, into Standard Life plc shares, would be eligible to accrue dividends and would be subject to clawback (details set out later in the report).
Award of shares subject to performance measured over a three-year period with a subsequent two-year holding period. Awards may only be exercised after the five-year combined period.
Vesting of the award is based on the following performance measures: • Cumulative Group operating profit performance before tax weighted at up to 100% of the award
The Remuneration Committee reserves the right to make any remuneration payments and payments for loss of office notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed: (i) before the policy came into effect or (ii) at a time when the relevant individual was not a Director of the Company and the payment was not in consideration for the individual becoming a Director of the Company.
• In certain circumstances, such as the individual’s death, the Remuneration Committee retains the discretion to accelerate payments if it is considered appropriate
• Developed a broader set of propositions to meet our customers’ evolving needs including the Impaired Life Annuity which was launched in Q4/13
• Personal bonus plan – rewards participants for personal performance in the year. Keith Skeoch’s opportunity for 2013 was capped at 105% of salary.
% of award vesting at maximum and performance required for maximum vest 2013 Group LTIP award, vests in March 2016 Nil-cost option
The Remuneration Committee Members: During 2013, the Remuneration Committee was made up of five independent non-executive Directors: Crawford Gillies (Chairman), Colin Buchan, Pierre Danon, John Paynter and Lynne Peacock.
Our role: To consider and make recommendations to the Board in respect of the total remuneration policy across the Group, including: • rewards for the executive Directors, senior executives and the Chairman • the design and targets for any employee share plan • the design and targets for annual cash bonus plans below executive level • changes to employee benefit structures (including pensions) throughout the Group.
The financial reporting framework that has been applied in the preparation of the Group financial statements comprises applicable law and IFRSs as adopted by the European Union.
Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Attributable to: Equity holders of Standard Life plc 466 665 Non-controlling interests 32 30 29
Share of joint ventures’ and associates’ tax expense 2 (8) (9)
The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these consolidated financial statements.
(a)(i) New standards, interpretations and amendments to existing standards that have been adopted by the Group The Group has adopted the following new International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) 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 consolidated financial statements have been determined in accordance with IFRS 13. Additional disclosures have been provided in Note 42 – Fair value of assets and liabilities.
(c) Business combinations and Group reconstructions (c)(i) Business combinations The Group uses the acquisition method of accounting to account for business combinations. At the acquisition date the assets acquired and liabilities assumed as part of the business combinations are identified and assessed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. Only assets acquired and liabilities assumed as part of the exchange in the business combination transaction are considered in applying the acquisition method of accounting.
(g)(ii) Premiums Premiums received on insurance contracts and participating investment contracts are recognised as revenue when due for payment, except for unit linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular (and recurring) premium contracts, receivables are established at the date when payments are due.
Fair value of options granted under each scheme is determined using a relevant valuation technique, such as the Black Scholes option pricing model.
(jj) Operating profit The Group’s chosen supplementary measure of performance is operating profit. Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
Operating profit/(loss) after tax 378 107 274 3 (28) - 734
UK and Irish unitised with profits pension contracts (fee business via RCF) This class of business comprises single or regular premium contracts held in the HWPF under which a percentage of the premium is used to allocate units on a participating basis. Such contracts include hybrid contracts (see accounting policy (f)) resulting in the unitised with profits investment elements being classified as participating investment contracts, although there are some contracts that are classified as participating insurance contracts, for example those with guaranteed minimum pensions. The major unitised with profits pension contracts include Individual Personal Pension Plans (retail), Group Personal Pension Plans, Executive Pensions and Stakeholder (corporate) and Trustee Investment Plans (institutional).
For those annuities which increase at a predefined rate, the total liability at 31 December 2013 is £652m (2012: £713m) and these represent approximately 16% (2012: 16%) of the total liability for Canadian annuity-in-payment contracts. The liability for annuities linked to CPI is approximately £394m (2012: £464m). This represents approximately 9% (2012: 10%) of the total liability for Canadian annuity-in-payment contracts.
Furthermore, it was guaranteed that at least one TIF at a minimum guaranteed interest rate of 3% would be offered as long as the policy is in-force.
Total investment return 15,449 13,982 5. Fee and commission income 2013 2012 Notes £m £m
12. Earnings per share (a) Basic earnings per share Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally to employees.
For share options, a calculation is made to determine the number of shares that could be acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of shares that could be issued, or purchased, assuming the exercise of the share options.
Diluted earnings per share (pence per share) 19.6 28.1 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 dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 16 million (2012: 18 million).
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes (92) (4.0) (29) (1.2)
Profit attributable to equity holders of Standard Life plc 466 19.7 665 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.
For the year ended 31 December 2013, short-term fluctuations in investment return and economic assumption changes resulted in losses of £92m (2012: £29m). Short-term fluctuations in investment return relate principally to the investment volatility in Canada non-segregated funds and UK annuities, and in respect of the Group’s subordinated liabilities and assets backing those liabilities.
Changes in Canada insurance contract liabilities due to resolution of prior years’ tax matters As set out in accounting policy (v)(ii) the Group’s Canadian insurance contract liabilities are measured according to CALM. That valuation includes an allowance for the difference between the undiscounted deferred taxes recognised under IAS 12 Income Taxes relating directly to the insurance contract liabilities and the discounted value of those deferred taxes.
Goodwill is reviewed annually for impairment by comparing the carrying value of each of the investments including goodwill with its recoverable amount. The recoverable amount of the investments is determined by calculating its value in use.
Castan Waterfront Development Inc. Canada 50.0 - 24 - 5 2 -
32. Non-controlling interests and third party interest in consolidated funds The movement in non-controlling interests during the year was: Foreign exchange differences on translating foreign operations 2 (6)
Non-economic assumptions decrease of £93m (net of reinsurance) includes a decrease of £34m (net of reinsurance) in respect of participating business which is primarily in respect of the best estimate non-economic assumptions used in calculating the value of future transfers to equity holders in respect of participating business in the HWPF. Non-economic assumptions also includes a decrease of £50m (net of reinsurance) in respect of changes to mortality assumptions on non-participating business.
The MACS are perpetual securities and as such have no fixed redemption date. The Sterling denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 6.546% per annum payable annually in arrears on 6 January each year, commencing on 6 January 2006. From and including 6 January 2020 and every fifth anniversary thereafter, these MACS will bear interest annually in arrears based on the aggregate of a margin plus the gross redemption yield of the specific gilts.
3. Financial information – Notes to the Group financial statements continued 41. Risk management continued (a) Overview continued (a)(ii) Consolidated financial position by risk segment continued
Pension and other post-retirement benefit provisions 104 130 - - - - - - 104 130
The tables below show the shareholder and participating businesses’ exposure to credit risk from financial assets analysed by credit rating and country.
Non-participating investment contract liabilities - - - - - - - -
For the participating business, the tables above illustrate the impact of demographic and expense risk on the recourse cash flows from the HWPF, which have been determined in accordance with the Scheme and take into account the need to consider the impact of risk on the financial position of the HWPF before any recourse cash flows can be transferred to the SHF. The terms of the Scheme provide for the retention of recourse cash flows under certain circumstances to support the financial position of the HWPF. Refer to Section (b)(ii).
(d) Methods and assumptions used to determine fair value of assets and liabilities Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given below.
Additionally, the Group incurred a contingent consideration liability during the year to 31 December 2013 of £15m as a result of a business combination. There were no significant movements in this liability between the acquisition date and 31 December 2013.
Grant date 25 March 2013 Throughout the year 28 March 2013 14 October 2013
3. Financial information – Notes to the Group financial statements continued 46. Employee share-based payments continued (a) Options granted continued The following table shows the range of exercise prices of options outstanding at 31 December 2013. All options are exercisable for a period of six months after the vesting date.
There are many factors which affect the Group’s capital resources. The determination of the liabilities includes various assumptions including potential changes in market conditions and the actions management might take as a result of those changes. Changes in market conditions and other variables have the potential to significantly affect the capital position. Poor investment returns could depress capital resources, but this could be mitigated by changing the asset portfolio and by the level of bonuses declared. Future annuitant longevity could be significantly different from that assumed in the calculation of the liabilities. European Union developments on solvency requirements could also have a significant impact on the future capital position.
Group total 2013 £m £m £m £m £m £m £m £m At 1 January 4,007 128 1,821 5,956 1,836 7,792 1,408 9,200 Methodology/modelling changes (79) 20 - (59) - (59) - (59) Change in assumptions used to measure life assurance contract liabilities and experience differences 23 60 - 83 1 84 - 84 New business (8) (111) - (119) (22) (141) - (141) Investment surplus 1,484 95 (29) 1,550 (22) 1,528 - 1,528 Equity holder/inter-fund transfers (213) (19) 232 - 19 19 (19) - Dividend transfers - - (262) (262) (281) (543) (113) (656) Other factors (399) 31 1 (367) 7 (360) 23 (337) At 31 December 4,815 204 1,763 6,782 1,538 8,320 1,299 9,619
Long-term investment return and tax variances 293 - 293 498 - 498
Notes to the EEV financial information 1. Basis of preparation The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued by the CFO Forum of European Insurance Companies. 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 cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS) but the timing of recognition of profits is different.
The IFRS reportable segments have been changed for the year ended 31 December 2013, as explained in Group financial statements Note 2(b) – Reportable segments – Group operating profit, revenue and asset information. EEV reporting segments and the formats of the EEV consolidated income statement and EEV consolidated statement of financial position have been amended and reflect the new IFRS reportable segments. Comparative amounts for 31 December 2012 have been restated on the same basis to allow more meaningful comparison.
Expense assumption losses of £40m in UK and Europe and £52m in Canada mainly arise from changes in investment related income and expenses that have been allocated to covered business.
Total Standard Life Investments EEV operating profit allocated to covered business of £103m (2012: £83m) consists of third party related covered business EEV operating profit of £75m (2012: £56m) and other covered business EEV operating profit of £28m (2012: £27m).
EEV non-operating profit/(loss) after tax 396 (63) 3 (31) - 305 13
Present value of in-force life and pensions business net of cost of capital (4,879) (4,425)
EEV operating capital and cash generation 9(b) 508 74 582 679 22 701
Expected return on free surplus 9 - 9 - 9 2 - 2 - 2
Expected return on free surplus 3 - 3 - 3 1 - 1 - 1
Equity-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.
3. Financial information – Notes to the EEV financial information continued 14. Principal economic assumptions – stochastic calculations continued The model equity-implied volatilities are set out in the following table: Term (years) UK equities European equities UK equities European equities
Allowance for risk Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways: • Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate • Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments • Allowing for TVOG.
Associates are entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are entities whereby the Company and other parties undertake an economic activity, which is subject to joint control arising from contractual agreement. Investments in subsidiaries, associates and joint ventures are initially recognised at cost and subsequently held at cost less any impairment charge. An impairment charge is recognised when the carrying amount of the investment exceeds its recoverable amount. Investments in subsidiaries include loans to subsidiaries that meet the definition of equity instruments. Refer to (g) for more information on the measurement of loans to subsidiaries.
Total average number of staff 487 547 1 Staff who work in the Group’s Asia and Emerging Markets business based in the UK.
The following table provides information regarding the market risk exposure of the Company at 31 December 2013 and 31 December 2012, showing diversification by asset type and geographic region.
V. Risk management continued (d) Liquidity risk The Group defines liquidity risk as the risk that the business units are unable to realise investments and other assets in order to settle their financial obligations when they fall due, or can do so only at excessive cost.
Closing AUA at 31 Dec 2012 £bn £bn £bn £bn £bn £bn
Registered office Standard Life plc Standard Life House 30 Lothian Road Edinburgh EH1 2DH Scotland
Glossary Acquisition expenses Expenses related to the procurement and processing of new business written, including a share of overheads.
Assets under management (AUM) A measure of the total assets that Standard Life Investments manages on behalf of individual customers and institutional clients, for which they receive a fee.