Also with regard to our remuneration policy we take into account the globally changing views on remuneration policies as well as the guidelines proposed by regulators and authorities. We are well aware that remuneration is subject to ongoing public debate and we have taken steps to ensure that our remuneration policy strikes a balance between the interests of our customers, employees, shareholders and society at large, and supports the long-term objectives of our company. ING formulated a new moderate and sustainable remuneration policy – with both individual and group objectives – for the Executive Board with an increased focus on long-term value creation and performance measurement based on non-financial indicators. This new policy was approved by the AGM in April 2010. The general principles of the new policy have also been applied to the remuneration of the members of the Management Boards and other senior managers throughout the organisation.
Deepening relationships with all our stakeholders was a key priority in 2010. It is vital to engage in dialogue with all stakeholders and to be more transparent and open for feedback about the way we operate. Gathering their views has proved valuable and, where possible, we have incorporated feedback into our products and services.
Price – year-end 7.28 6.90 7.33 Price/earnings ratio** 8.6 *** ***
Solvency II may require fundamental shifts in product offerings, pricing and investment portfolio allocation, e.g. by making it far less advantageous to offer long-term investment guarantees. Whereas ING has always been, and remains supportive of the Solvency II framework, a number of issues have arisen during 2010 with regard to the development of the detailed implementing measures. To safeguard the (financial) stability of the insurance industry, the volatility of the Market Value Balance Sheet needs to be sufficiently recognised and addressed. Also, to ensure an international level-playing field, differences between solvency regimes need to be taken into account, e.g. by finding a solution for the treatment of third countries in Solvency II. Finally, rules originally designed for banking should not be automatically applied to the insurance industry.
De Nederlandsche Bank. The objective of the 2010 EU-wide stress test was to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks from credit and market risks, including sovereign risks.
In the third quarter of 2010, ING decided to sell its 3% financial investment stake in Kotak Mahindra Bank in India. The sale was in line with the strategic objective to increase focus and divest non-core activities.
Underlying net result was EUR 3,893 million for the full-year 2010, up 300% from EUR 974 million a year earlier. Underlying net result is derived from total net result by excluding the impact from divestments and special items. Divestments recorded in 2010 totalled EUR 394 million, mainly reflecting the EUR 405 million profit on the sale of Private Banking Switzerland and Asia. Special items in 2010 were EUR –1,068 million, reflecting expenses for various restructuring programmes, separation costs and the already mentioned EUR 513 million goodwill write-down in the US. The separation costs were EUR 85 million for the full-year 2010. Divestments recorded in 2009 totalled EUR –150 million. Special items were EUR –1,759 million and included a one-time charge due to an accrual for additional future payments to the Dutch State of EUR 930 million and a EUR 554 million restructuring provision, which was predominantly related to headcount reduction for ING’s Back to Basics programme.
Furthermore, we have taken significant steps to ensure that every customer gets the right products and services, via the right distribution channels, and at the right prices or returns. Therefore, we are evaluating our entire product portfolio and product approval procedures based on sharpened criteria for good customer care. Importantly, financial education – an essential pillar of our corporate responsibility – is embedded in our business strategy through tools and initiatives to improve the financial capabilities of our customers.
More information on Corporate Responsibility at ING can be found on www.ingforsomethingbetter.com of their activities. We measure our remaining emissions and compensate for them by investing in renewable energy projects.
The total result before tax from banking operations rose to EUR 5,830 million in 2010 compared with a loss of EUR 838 million in 2009. The loss in 2009 included EUR –1,726 million of special items, mainly related to additional payments on the Illiquid Assets Back-up Facility and charges for the merger of the retail banking activities in the Netherlands, and EUR –473 million of operating pre-tax results from divested units. In 2010, the divestment of the Swiss and Asian Private Banking activities and the sale of Summit in Canada resulted in a pre-tax gain of EUR 389 million, while the operating pre-tax results from these units amounted to EUR 35 million. Special items in 2010 were EUR –456 million, mainly related to various restructuring programmes, including the merger of the Dutch retail banking activities, and costs related to the separation of Banking and Insurance.
Working towards becoming the preferred bank for our customers > Strong improvement in overall Retail Banking result, driven by all units but especially ING Direct and Retail Netherlands > Increased focus on customer centricity and on the ‘direct if possible, advice when needed’ business model > All Retail units now apply the Net Promoter Score methodology
Customer centricity Building a customer-centric organisation was a main priority in 2010, so that our products, services and processes meet our customers’ needs and profiles. A Customer Suitability programme was launched, which checks whether products should be adjusted to benefit customers. We have taken significant steps to ensure that every customer gets the right products and services, through the right distribution channels, and at the right prices or returns. We are evaluating our product portfolio and product approval procedures, based on sharpened criteria for good customer care. This has resulted in, for example, a further reduction in the number of different types of savings accounts from around 70 to 25 savings accounts by the end of 2010. Furthermore, branch office opening hours have been more closely aligned with shop opening hours.
renamed to WestlandUtrecht Bank and is now commercially independent, but still part of ING. The ‘new’ bank was introduced to the Dutch public via a comprehensive multimedia campaign on TV, billboards and the internet and in 2010 it launched an online savings product called SpaarOnline Rekening.
Retail Belgium conducted NPS surveys on both a ‘transactional’ (e.g. opening an ING Lion Deposit online savings account) and ‘relationship’ level (e.g. overall customer experience personal banking). On average, 6% of the respondents have been recontacted by the regional directors since they raised a specific question or issue when completing the questionnaire. At the same time the surveys allow us to identify opportunities for general improvements, such as optimising the online communication (ING Lion Deposit), expanding target audiences for Investment Conferences (Personal Banking) or planning initiatives on educating the branch employees on how to assist professional clients when contacting the Business Credit Centre via the branch.
ING Bank Slaski was ranked among the 15 best employers in Poland in 2010 and ING Bank Romania ranked third within the Banking and Financial sector. ING Bank Slaski also took the sixth social media to recruit staff (France). All ING Direct units train people in international roles, through long-term and short-term assignments, which not only develops their career skills but improves our strategic manpower allocation.
It also developed ‘ING Inwards’ – an electronic funds transfer solution, developed for Corporate Banking clients. It improves the speed of cash flows, inventory management, risk management and receivables reconciliation.
Commercial Banking offers core banking services such as lending, payments and cash management in more than 40 countries. It provides clients with tailored solutions in areas including corporate finance, structured finance, commercial finance, equity markets, financial markets and leasing. Clients are corporations – ranging from medium-sized and large companies to major multinationals – as well as governments and financial institutions.
REIM continued actively to manage its portfolio and to reduce risk by selling its non-strategic assets. ING Group sold its 50% stake in ING Summit Industrial Fund LP and the manager of Summit, ING Real Estate Canada, to a joint venture between KingSett Capital and Alberta Investment Management Corporation.
Further, ING moved towards fair value accounting policies on reserves for the Guaranteed Minimum Withdrawal benefit (GMWB) as of 1 January 2011 to better reflect the economic value of these guarantees. This enabled ING to substantially increase hedging of interest rates on the US Closed Block VA book without causing significant earnings volatility, because results from hedging derivatives would largely be mirrored in fair-value changes of the guarantees. With increased hedging, interest rate risk would be significantly reduced.
The company with strong cash reserves is positioned to continue delivering solid earnings growth in the booming Brazilian market. ING holds a 36% shareholding in the company.
Administrative expenses grew by 31.2% from EUR 557 million in the previous year. Comparisons with 2009 were impacted by accrual adjustments, which reduced the expense level in the fourth quarter of 2009 by EUR 33 million. Excluding these accrual adjustments and currency effects, expenses rose 19.2% compared with 2009. This increase was mainly due to the introduction of a fixed service fee (EUR 17 million) and higher staff costs.
In September, the Supervisory Board visited ING Belgium in Brussels. During this visit the Supervisory Board was informed extensively on the activities of ING in Belgium and exchanged ideas on ING Belgium in a joint meeting with the Supervisory Board of ING Belgium. Furthermore the Supervisory Board was updated on the performance of the insurance business and on the developments regarding the Basel III and Solvency II regulations and the implementation within ING.
TRANSFER OF SHARES AND DEPOSITARY RECEIPTS AND TRANSFER RESTRICTIONS Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. The Articles of Association do not restrict the transfer of ordinary shares, whereas the transfer of cumulative preference shares is subject to prior approval of the Executive Board. The Articles of Association and the trust conditions for registered shares in the share capital of ING Group (‘Trust Conditions’) do not restrict the transfer of depositary receipts for shares. ING Group is not aware of the existence of any agreement pursuant to which the transfer of ordinary shares or depositary receipts for such shares is restricted.
ATTENDING GENERAL MEETINGS For logistical reasons, attendance at a general meeting by shareholders and holders of depositary receipts, either in person or by proxy, is subject to the requirement that ING Group is notified in advance. Instructions to that effect are included in the notice for the general meeting.
On 16 November 2010, the Board held a meeting to prepare for the meeting of holders of depositary receipts.
Tenure The contract of employment for Executive Board members provides for an appointment for a period of four years and allows for reappointment by the General Meeting. In the case of an involuntary exit, Executive Board members are entitled to an exit-arrangement limited to one year base salary.
REMUNERATION POLICY FOR SENIOR MANAGEMENT As much as possible for a global financial institution of this size, ING aims to take account of all the differences and standards applied within similar financial institutions in the various countries in which it operates. The remuneration of members of the Management Boards and senior management will be in line with the general principles of the amended remuneration structure for the Executive Board, taking into account international and local practices.
The remuneration for a select group of employees will be reviewed and amended as necessary in order to comply with the Capital Requirements Directive III. The amendments relate to the allocation of variable compensation.
Rob Eijt, chairman Alex Hoogendoorn, secretary Goof Bode, deputy chairman Rudie van Doorn, deputy secretary Hans de Boer, Wim Bruijnes, Arno Daams, Anneke Dalger, Jeffrey Dinsbach, Erik Hoijtink, Aad Kant, Jan Krutzen, Job van Luyken, Sjaak Muller, Hennie Post, Koos Rodenburg, Sunil Tahloe, Henk Timmer, Cindy Uit de Bulten, Gerard Veldman, Michel Vonk, Jelte Wiersinga, Bernard Wolters, Bert Woltheus.
For each reporting period every property is valued either by an independent valuer or internally. Indexation is used when a property is valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions and disposals are monitored as part of the procedures to back test the indexation methodology. Valuations performed earlier in the year are updated if necessary to reflect the situation at year end.
Any gain or loss arising from a change in fair value is recognised in the income statement. Subsequent expenditures are charged to the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to ING Group and the cost of an item can be measured reliably. All other repairs and maintenance costs are charged to the income statement.
Value of business acquired (VOBA) VOBA is an asset that reflects the present value of estimated net cash flows embedded in the insurance contracts of an acquired company, which existed at the time the company was acquired. It represents the difference between the fair value of insurance liabilities and their book value. VOBA is amortised in a similar manner to the amortisation of deferred acquisition costs as described in the section ‘Deferred acquisition costs’.
Real estate investments by year of most recent appraisalby independent qualified valuers in percentages 2010
Notes to the consolidated annual accounts of ING Group continued 22 ASSETS BY CONTRACTUAL MATURITY Amounts presented in these tables by contractual maturity are the amounts as presented in the balance sheet.
In January 2010 ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan. In its appeal, ING contests the way the Commission has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disproportionality of restructuring requirements in general.
On these non-voting equity securities a coupon is payable of the higher of: • EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security paid on 12 May 2009; and • 110% of the dividend paid on each ordinary share over 2009 (payable in 2010); • 120% of the dividend paid on each ordinary share over 2010 (payable in 2011); • 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
Repayment non-voting equity shares In December 2009, ING repurchased the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. In March 2011, ING announced that, at the next coupon reset date on 13 May 2011, ING intends to exercise its option for early repurchase of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 will amount to EUR 3 billion and includes a 50% repurchase premium. ING will fund this repurchase from retained earnings. Provided that the strong capital generation continues, ING intends to repurchase the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) ultimately by May 2012 from retained earnings. The final decision on repurchase of these non-voting equity securities (core Tier 1 securities) will be made before the envisaged repayment date and will be conditional upon there having been no material changes regarding ING’s capital requirements and/or ING’s outlook on external market circumstances.
– designated as at fair value through profit and loss 12,707 11,474 12,707 11,474
– effect of investment result risk of policyholders 10,492 17,742 –32,408
Average number of employees at full time equivalent basis 27,750 27,912 29,626 78,389 82,368 95,659 106,139 110,280 125,285
Other interest expenses include nil and nil dividends paid on preference shares and trust preferred securities (2009: nil and EUR 86 million; 2008: EUR 1 million and EUR 94 million).
The Executive Board of ING Group, the Management Board Banking and the Management Board Insurance set the performance targets and approve and monitor the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board, the Management Board Banking and the Management Board Insurance.
Risk Management benefits ING and its shareholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Risk Management helps business units to lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing them to focus on their core expertise with the goal of making ING’s businesses more competitive in their markets.
Stress Testing ING complements its regular standardised risk reporting process with (ad hoc) stress tests. A stress test is an instrument to check whether a financial institution can withstand specific negative events or economic changes. More specific, stress testing examines the effect of exceptional but plausible events on the capital and liquidity position of the financial institution and provides insight in which business lines and portfolios are vulnerable to which type of scenarios.
ING Bank Economic Capital and Regulatory Capital Main risk management tools for ING Bank are Economic Capital and Regulatory Capital. Both of these Capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic risks it faces. The main difference in these metrics is the point of view, where Regulatory Capital is driven by methodologies prescribed by regulators and Economic Capital is driven by internally developed models (all of which are approved by the Dutch Central Bank).
Private Individuals 4,838 4,589 Real Estate 2,777 1,528 General Industries 858 933 Food, Beverages & Personal Care 837 681 Transportation & Logistics 818 415 Builders & Contractors 792 628
Funding type Retail deposits 46% 46% Corporate & other deposits 19% 17% Interbank (incl central bank) 8% 10% Lending/repurchase agreement 7% 8% Public debt 17% 16% Subordinated debt 3% 3%
When interpreting the Economic Capital and sensitivities for AFR, Earnings and US Regulatory Capital it is important to note that these metrics do not take into account discretionary risk mitigation in a specific crisis situation, and are based on instantaneous shock scenarios.
Diversification across the risk categories is 30% for 2010 (32% for 2009 for combined ING insurance business including US).
ING Insurance’s credit exposure arises from the investment of insurance premiums in assets subject to credit risk, largely in the form of unsecured bond investments, and smaller amounts of residential mortgages and structured finance products. In addition, credit exposure also arises from derivatives, sell/repurchase transactions, securities lending/borrowing and reinsurance contracts used to hedge the portfolio. ING Insurance has a policy of maintaining a high quality investment grade portfolio.
• Anti-Fraud – ING has a ‘zero tolerance’ approach towards fraud and therefore implemented the ING’s Global Anti-Fraud Programme in 2010. This programme aims for a high level of fraud resilience and further mitigation of losses deriving from fraud. Design and implementation of additional fraud controls, training and building the anti-fraud community and risk awareness communication are key elements to the programme.
Main developments in 2010 • Regulator relationships – Group Compliance Risk Management continued to invest in pro-active relationships with regulators in the jurisdictions where ING operates, striving for an open approach and cooperation in identifying and mitigating compliance risks for ING. • Promoting Integrity Programme – Group Compliance Risk Management, together with Group Human Resources and Corporate
The following fundamental principles and definitions have been established for the model: • ING Bank uses a one-sided confidence level of 99.95% – consistent with ING’s target debt rating (AA) – and a one-year time horizon to calculate Economic Capital; • It is assumed that all currently known measurable sources of risk are included; • The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set of best-estimate assumptions for each risk type to be used at ING Bank; • The Economic Capital calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value; • The Economic Capital calculations reflect known embedded options and the influence of client behaviour in banking products; • The Economic Capital calculations are on a pre-tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; • The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
Economic Capital (EC) is defined by ING Insurance as the amount of assets that needs to be held in addition to the market value of liabilities to assure a non-negative surplus at a 99.5% level of confidence on a 1 year time horizon. ING Insurance measures Economic Capital by quantifying the impact of adverse events on the Market Value Surplus (MVS), a ‘Surplus-at-Risk’ concept. The change in MVS or Available Financial Resources (AFR) is the combined effect of changes in Market Value of Assets (MVA) minus Market Value of Liabilities (MVL) and an adjustment for illiquidity spreads due to current dislocated asset markets.
Replicating portfolios are currently determined from a single factor RN ESG interest rate model. The RW ESG interest rate scenarios for the Value at Risk calculations are generated using a multi-factor model which allows for non-parallel interest rate moves.
Insurance Groups Directive Year-end actual Capital coverage ratio 250% 247% Required capital 100% 100% Target ratio 150% 150%
• Dodd−Frank also includes various securities law reforms that may affect the Group’s business practices and the liabilities and/or exposures associated therewith, including a provision intended to authorise the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law, which new standard could potentially expose certain of ING’s US broker-dealers to increased risk of SEC enforcement actions and liability. The SEC staff recently released a study on this issue.
In addition, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year-to-year, creating asset liability duration mismatches. A decrease in interest rates may also require an addition to provisions for guarantees included in life policies, as the guarantees become more valuable to policy holders. During a low interest rate period, our investment earnings may be lower because the interest earnings on our fixed income investments will likely have declined in parallel with market interest rates on our assets recorded at fair value. Declining interest rates may also affect the results of our reserve adequacy testing which may in turn result in reserve strengthening. In addition, mortgages and fixed maturity securities in our investment portfolios will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates charged to policyholders and returns on our investment portfolios.