Annual Financial Report (Part

RNS Number : 0567Q

Standard Life plc

07 April 2009

Standard Life plc

Annual Financial Report

Standard Life plc ('the Company') confirms that the Annual Report and Accounts 2008 and Summary Financial Report 2008 are available at www.standardlife.com/ara

The Company also confirms that two copies of these documents have been submitted to the Financial Services Authority ('FSA'), and will shortly be available for inspection at the FSA's Document Viewing Facility at 25 The North Colonnade, Canary Wharf, London E14 5HS.

The mailing to shareholders of the Annual Report and Accounts 2008 and the Summary Financial Report 2008 will commence shortly.

The Company made a voluntary announcement of its Preliminary Results 2008 on 12th March 2009.

To comply with Disclosure and Transparency Rules 6.3.5 and 4.1.3, extracts of the full Annual Report and Accounts 2008 are available below.

6 April 2009

Enquiries:

Kenneth Gilmour, Group Secretariat 0131 245 0751

Standard Life plc

Annual Report

and Accounts

2008

Contents

Business overview

3 The Group at a glance (not included for the purposes of this announcement)

5 Chairman's statement

7 Group Chief Executive's statement

11 Business review

65 Corporate responsibility (not included for the purposes of this announcement)

Governance information

68 Board of Directors (not included for the purposes of this announcement)

70 Board Committees (not included for the purposes of this announcement)

71 Directors' report (not included for the purposes of this announcement)

78 Directors' responsibility statement

79 Corporate governance (going concern statement only for the purposes of this announcement)

89 Directors' remuneration report (not included for the purposes of this announcement)

Financial statements

109 Group IFRS consolidated financial statements

267 Supplementary EEV financial statements

305 Company financial statements (not included for the purposes of this announcement)

Additional information

337 Glossary

343 Shareholder information (not included for the purposes of this announcement)

346 Contact details (not included for the purposes of this announcement)

347 Group operating structure (not included for the purposes of this announcement)

Chairman's statement

Stability in difficult times

Economic conditions in 2008 were extremely tough and remain so. The impact of the financial crisis spread far beyond the banking industry to affect the whole of the corporate world and has shaken people's everyday lives. It has been a deeply unsettling time for all investors, including our own shareholders. But Standard Life's performance in this unpredictable market has been solid and - crucially - we continue to maintain a strong capital base that is resilient to market conditions. Our share price held up well relative to our competitors in 2008, and we continue to generate value for our shareholders.

While volatile financial conditions undermined the stability of businesses around the world, Standard Life's performance was solid and we are recommending a final dividend of 7.70p per share, making a total dividend of 11.77p for 2008, an increase of 2.3%. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance.

>> You can read more about our financial results in the Group Chief Executive's statement and Business review from page 7 onwards.

In a tough year, we believe we continued to deliver long-term value for our shareholders, largely as a result of our commitment to responsible growth. This includes financial management and extends throughout the way we run our business, encompassing fundamentals such as how we look after our customers, develop and challenge our people, support our communities, and reduce our environmental impact.

From a financial perspective, our responsible approach centres on cash generation, capital efficiency and the conservative investment management policy that has given us a strong balance sheet even in a falling market. Our Group capital surplus remained stable at £3.3bn, after allowing for the payment of the final dividend, despite the adverse market conditions and is largely unchanged since last year. We will continue to focus on capital strength as one of our key priorities.

We are also reducing risk in our business wherever we see opportunities to do so. For example, one of our most significant transactions in 2008 was the reinsurance of £6.7bn of UK immediate annuity liabilities to Canada Life International Re. By releasing cash from reserves and reducing our capital requirements, this transaction had the dual benefit of cutting risk for shareholders and increasing returns for policyholders in our Heritage With Profits Fund.

Another keystone of our strategy is to drive for operational excellence and we stepped up efforts to streamline our business in 2008, making the most of synergies across the Group to help us achieve our cost-efficiency targets. We have more to do in this area - in particular, by moving to ensure that all our operations worldwide form an integrated asset managing business with a distinctive competence in both investment management and customer propositions.

>> The Group Chief Executive's statement provides more detail about cost efficiencies and integrated thinking within our businesses.

In the difficult times that we are all facing, it is important for the financial services industry to begin the process of rebuilding the trust of its shareholders and its customers. Confidence has been severely damaged and we all need to find new ways to engage with our stakeholders, including shareholders, customers, intermediaries and the media. Our industry has to work harder to promote financial awareness and help people develop practical money skills. Standard Life intends to be an active participant in this and our commitment is reflected in a range of financial education initiatives, including 'On the Money' - an exciting programme that helps primary school children to grasp simple financial concepts.

In a wider drive to spread knowledge and skills, we encourage our people to support their local communities through voluntary activities, and the Standard Life Chairman's Awards provide a focus for recognising outstanding work in this area. In difficult times many businesses become inward looking, but we intend to put even greater emphasis on corporate responsibility and on living up to the goals we have set ourselves.

Likewise in governance. Standard Life Investments is a leader in this field and I want our Group practices and procedures to be amongst the best in class. There must be a debate in the UK about improving the way boards exercise their responsibilities on behalf of shareholders, particularly in the financial services sector. We intend to contribute fully to these discussions.

I'm delighted to congratulate our Group Chief Executive, Sir Sandy Crombie, on his knighthood in the 2009 New Year Honours List and to thank him for his dedication to Standard Life for more than 40 years. Sir Sandy and the Board have agreed that the process of identifying his successor should start in 2009. There is no fixed timetable and the Board do not envisage making any further statements about this matter until a successor has been confirmed and a timetable for the transition has been set. Sir Sandy will remain as the Group Chief Executive until his successor has been appointed and an orderly handover process has been conducted. As announced, Jocelyn Proteau will retire from the Board at the conclusion of the 2009 AGM. We will miss Jocelyn greatly for his significant contributions, which included bringing a valuable transatlantic perspective to our deliberations, and chairing the board of The Standard Life Assurance Company of Canada with distinction and commitment.

Our customers remain at the heart of our business. For us, treating customers fairly must be more than a regulatory requirement, it must be a deep-rooted attitude. So where things go wrong - and, regrettably, in a complex business like ours they sometimes do - we take rapid remedial action to show our commitment to doing the right thing. When the value of our Pension Sterling Fund fell earlier this year in a way that customers would not have anticipated, we listened to their feedback and acted. We restored the value of the fund and put each customer back into the position they would have been before the fund's fall in value on 14 January 2009, reflecting price movement towards the end of 2008.

Savers and investors face major challenges over the coming years and we aim to help them address these with products that meet their needs and with clear guidance that supports good decisions. As part of this, we have strongly backed our industry's Retail Distribution Review, which marks a move towards greater clarity, professionalism and transparency for customers - and will continue to support it as it moves towards implementation. Last year also saw the Pensions Act 2008 come into force. We applaud its intention to improve levels of long-term savings in the UK through workplace schemes and hope this will give rise to opportunities for Standard Life. However, we are still concerned that it may affect existing high quality schemes, and will continue to engage with the government to help minimise any such side-effects.

The impact of the present economic crisis on all of us is going to be felt for many years to come. It will take concerted international action by governments and radical solutions to help put things right, and we will all have to play a part in this if the opportunities for future generations are to be as great as those we ourselves have had.

More immediately, as we confront the uncertainties of 2009, we will continue to pursue the strategy of responsible growth that has become our hallmark in the last five years. I believe that we remain in good shape to weather these difficult times and that when things improve, as they are bound to do in due course, we will be well placed to take advantage of the opportunities that arise in the UK and internationally.

Gerry Grimstone

Chairman

Group Chief Executive's statement

A solid performance in a challenging market

Standard Life delivered a solid performance in 2008. We have announced good profits, healthy capital and cash generation, and have achieved efficiency improvements a year ahead of target. Our capital position is among the strongest in the industry and is relatively resilient in the event of further deterioration in market conditions.

2008 was an extraordinary year. In the 43 years I have worked in financial services I have experienced nothing like it. The ramifications of the global financial crisis have been felt far and wide, from the biggest financial institutions, down to individual savers and investors. Standard Life has not been immune from these global forces. We have had to respond by making some tough business decisions. However, in the face of these conditions we delivered what I regard as a solid performance during 2008. As explained in more detail below, our business remains in good financial shape and well positioned to withstand further turbulence if that is what lies ahead.

Capital strength

We have maintained a sound capital position in the current tough climate by following strategies that focus on careful management of capital and put emphasis on cash generation. Our Group regulatory capital surplus is robust - it remained largely unchanged at £3.3bn, after allowing for the payment of the final dividend, compared to £3.4bn in 2007 - a major achievement given the volatility of stock markets over the same period. Our increasing emphasis on 'capital-lite' products is key because it generates profitable new business without committing high levels of capital or cash. The reinsurance of our UK immediate annuity liabilities to Canada Life International Re. in February 2008 has also freed up cash from reserves whilst reducing our shareholders' exposure to risk.

To help maintain our capital position, we intend to propose the introduction of a Scrip dividend scheme at our Annual General Meeting in May. The Scrip dividend scheme is intended to replace the current dividend reinvestment plan.

Performance in 2008

Against the background of economic difficulty and uncertainty, our Group delivered a resilient financial performance:

Our operating profit was resilient in difficult markets

European Embedded Value (EEV) operating profit before tax up 6% to £933m (2007: £881m), generating a return on embedded value of 10.9% (2007: 11.5%) after making provision for customer payments to the Pension Sterling Fund

Our cash flow was robust with strong coverage of new business strain

Core capital and cash generation after tax £303m (2007: £334m)
Full year dividend of 11.77p, representing 2.3% growth
New business strain comfortably covered by capital and cash generation from existing business

We maintained our balance sheet strength

Group Embedded Value per share of 286p (2007: 285p) - stable in the face of challenging markets
International Financial Reporting Standards (IFRS) equity per share excluding intangible assets and minority interests of 151p (2007: 148p), with IFRS profit after tax attributable to equity holders of £100m (2007: £465m)
Financial Groups Directive surplus of £3.3bn (2007: £3.4bn) after allowing for the payment of the final dividend

We achieved our efficiency target

Annual efficiency target of £100m cost savings achieved one year early, and a further target of £75m set

In our UK life and pensions business, EEV operating profit before tax increased by 2% during the year to £636m (2007: £624m) despite the difficult market conditions in which sales fell by 11% to £11,928m (2007: £13,440m).

In response to a much tighter credit environment, our banking business took steps to manage liquidity - a move that was in line with many of our competitors. As a result, gross lending was reduced to £1.1bn (2007: £3.7bn). IFRS underlying profit before tax decreased by 19% to £26m (2007: £32m). The business remains well capitalised, with access to a range of funding sources, and has a high quality mortgage book.

In our healthcare business, sales rose by 14% to £25m (2007: £22m), while annualised premium income increased to £295m (2007: £284m). We launched a new product for Small and Medium Enterprises (SMEs). This allowed sales to our SMEs and corporate customers to grow by 28% compared to 2007, offsetting lower individual new business sales.

As our business celebrated its 175th year in Canada, EEV operating profit before tax was £215m, up 10% in constant currency from 2007. New business sales increased by 23% in constant currency to £2,240m (2007: £1,654m). This notable result reflected the successful repositioning of Canada's life and pensions business.

Europe had a tough year. Our business in Ireland was affected by volatile equity and property markets; in Germany, weak market sentiment along with changes in insurance contract law reduced new business volumes. Although it has been a difficult time, our back book efficiencies have significantly improved EEV operating profit, which increased by 127% to £69m in constant currency. In terms of new business, PVNBP sales for Europe were down by 26% in constant currency to £1,016m (2007: £1,179m) and we expect this area of business to remain challenging until consumer confidence is restored in the investment markets.

Asia continued to experience strong growth despite volatile market conditions. APE sales increased by 49% in constant currency to £118m as our joint ventures in China and India expanded their branch networks and recruited new agents to maximise the potential of their markets. We expect that the global economic recession will have an impact on these Asian businesses, but we believe there is still attractive growth potential in these markets.

Investment management delivered a strong underlying performance in 2008 against a background of extremely volatile and dislocated markets. It achieved strong sales through institutional channels and earnings before interest and tax (EBIT) increased by 9% to £82m, while IFRS normalised underlying profit before tax increased by 12% to £93m (2007: £83m).

>> For more details about our financial performance, see our Business review on pages 11 to 64.

Mitigating risk

Standard Life is in a good position and we are working hard to remain this way. An important part of this is anticipating what can threaten our business and planning carefully to minimise risk to our Group - both financially and from a wider perspective. Over the past year, our focus has continued to be on financial risk management, with the whole industry facing significant challenges. Standard Life has not been immune to the market falls and difficulties that have affected others, however, our limited appetite for putting our capital at risk has meant the impact has been more limited. Whilst managing financial risk remains high on our agenda, we are also focusing on enhancing our operational and regulatory risk management capabilities, as well as protecting and readying our business for changes in demographics, competition, and the legislative and the regulatory environment. You can find out more about how we manage risk on page 57.

Integrated thinking

Our aim is to develop and share core strengths and expertise across Standard Life. To do this, we've been sharing knowledge, technology, products and vision in a way that brings our teams around the world closer together and makes them more effective, as the latest results from Canada and Asia show. An example of this integrated thinking is our global IT change plan, which helps us to identify potential synergies and implement change faster. We also continued with our Group-wide approach to key processes and developing products which are relevant to customers around the world. For example, some of our healthcare and IT experts worked closely with colleagues in our Indian joint venture, HDFC Standard Life, to launch a new healthcare line, and the first product has been well received by the market. We have also been establishing Centres of Excellence - such as our Design Studio in Canada - that can provide consistent, successful and cost-effective solutions to the whole Group.

Our people

We have built a great team to take our business forward. We have been working hard to engage and inspire all of our people - taking talent seriously and nurturing it, so that individuals can achieve their full potential. To support this, we introduced a process to help our people understand how their talents and interests contribute to their performance. We also ran a Group-wide event series called Shaping our Future to share our vision of the business, helping our people to put this into practice in their daily work. It's important to measure the results of initiatives like this and I'm pleased to report a very positive trend through Gallup's Q12® employee engagement survey. Our latest overall score puts us in the top half of Gallup's database and moves us closer to our target of the top quarter by 2012.

Our customers

Understanding our customers' needs has become even more important during a year that has been worrying for anyone with investments, savings or mortgages. We are able to reassure our investors that Standard Life funds are secure, but the fact remains that markets have fallen sharply. As a result our with profits customers have seen changes to their bonus rates. However, in the UK, the broad mix of assets in the with profits fund and the impact of any smoothing and guarantees that apply have helped shield customers from the extreme investment conditions.

No organisation can protect its customers from the full extent of such extreme market falls, but we take our responsibility towards our customers very seriously. That is why we took the decision in February 2009, at a cost of around £100m to reverse the 4.8% fall in value of our Pension Sterling Fund which occurred a month earlier. This cost is reflected in our 2008 results. It became clear to us that some of the literature we provided to support this fund had fallen short of our own high standards. This meant that many customers did not understand the nature of the fund and would not have anticipated such a large drop in its value.

Taking this action reflects the importance we attach to developing long-term relationships with our customers and demonstrates our commitment to integrity and fairness in the way we run our business.

Corporate responsibility

Looking after our stakeholders, our environment and our communities has never been more important - and Standard Life aims to show just how much of a difference businesses can make. I have a personal commitment to this issue, having recently completed my year as The Prince's Ambassador for Corporate Social Responsibility in Scotland. This was a great opportunity for me to become more involved in the issues I feel strongly about - one of which is the education to employment agenda. This initiative is a key opportunity for people to develop their skills for the workplace. My ambition is for Standard Life to be recognised as an outstanding corporate citizen in the communities in which we are active. This is something we are continuing to work towards with initiatives that benefit local areas. Employee placements with charities and community groups are a good example of this - we help these organisations complete key projects at no cost to them, while giving our people the opportunity to develop their skills. We are also investing in the future of young people with a range of initiatives, including workshops that help school leavers in Scotland get off to a flying start in their employment.

>> See pages 65 to 67 to find out more about our corporate responsibility approach.

2009 and beyond

I started off by saying that 2008 was an extraordinary year - and so far 2009 has been similarly astonishing as the profound effects of the financial crisis and wider economic downturn become more apparent.

Retail investors are likely to remain cautious, preferring to allocate their funds to lower risk assets. Likewise, the retail savings environment is likely to remain subdued but we continue to see opportunities in the profitable markets in which we operate, including group pensions and fixed income investment mandates. On the institutional side, we expect our mandates to keep growing but at a slower rate than we have seen over the past five years.

As an asset managing business our revenues will inevitably be impacted by lower financial market levels. Our ongoing focus on efficiency will help mitigate the impact of this on profitability. In 2009 the Group will benefit from expense efficiencies achieved during the last year and will pursue the next phase of delivering operational excellence, targeting a total of £75m of annual efficiency savings by 2010.

With the outlook for world financial markets remaining uncertain, we will continue to follow our proven conservative strategy, with a focus on driving efficiencies while pursuing growth to an extent consistent with the prevailing conditions and our limited appetite for capital exposure. We remain determined to produce the best possible outcomes for our customers, our shareholders and our people.

Sir Sandy Crombie

Group Chief Executive

2009 priorities

Treating customers fairly and continuing to put our customers at the heart of our business as part of our culture and practices

Helping our people to give their best and realising their full potential by playing to their strengths and giving focus to delivering our strategic business goals

Operating conservatively and positioning our business to emerge strongly from the current economic crisis

Driving for operational excellence and delivering further efficiency savings through our culture of continuous improvement

Continuing to generate value for our shareholders by working to our strengths

Business review

Section	Contents	Page
1.1	Group overview	13
1.2	New business sales and profitability	21
1.3	EEV - Group	23
1.4	IFRS - Group	28
1.5	Business segment performance	30
1.5.1	UK financial services	32
1.5.2	Canada	39
1.5.3	Europe	42
1.5.4	Asia Pacific	44
1.5.5	Investment management	45
1.6	Group assets under administration	47
1.7	Capital and cash generation	48
1.8	Risk management	55
1.9	Customer satisfaction	61
1.10	Employee engagement	62
1.11	Basis of preparation	63

Key differences between the EEV and IFRS bases

EEV

IFRS

For new business, all profits expected to arise on the contract are recognised at the point of sale. Future profits are discounted to a present value using an appropriate discount rate over the lifetime of the contract.

Profit on in-force business is recognised with the unwind of the risk discount rate as future cash flows move one year nearer to realisation. Adjustments are also made to profit in order to reflect changes to current best estimate assumptions.

For new business, profits expected to arise on the contract in future years are not recognised. Not all acquisition costs are deferred and therefore the IFRS results recognise the initial cost or strain associated with writing long-term business.

Profit on in-force business is the statutory surplus for the year adjusted for the amortisation of deferred acquisition costs.

Business highlights

UKFS

Maintained our position as one of the largest pension, long-term savings and investment providers in the UK with £96bn of assets under administration
UK life and pensions EVOP increased by 2% to £636m despite lower sales
Focused on managing liquidity and the size of our loan book within our savings and mortgages business
Launched 'Corporate Healthcare' the new product for our large corporate clients
Through our acquisition of Vebnet we strengthened our position within the rapidly evolving employee flexible benefits market.

Canada

EVOP growth of 10% in constant currency from strong operational efficiency
New business up 23% in constant currency to £2,420m
Strong growth in core target markets of defined contribution and disability management
Enhanced corporate visibility, sales force and product development
Increased focus on operational synergies within Canada and within the Group

Europe

New business IRRs and payback periods have remained in line with 2007 despite the challenging market conditions
New business PVNBP decreased 26% in constant currency to £1,016m
Increased EVOP by 127% in constant currency due to active back book management, with notable efficiency and persistency improvements
Continued development of our businesses in Ireland and Germany including development of innovative new propositions and repositioning distribution

Asia Pacific

Attractive growth potential in Asia
New business PVNBP increased 17% in constant currency to £495m
Continued development in the region
Continued expansion and diversification of distribution channels

Standard Life Investments

Solid net third party sales in very difficult circumstances
EBIT up 9% to a record £82m, with revenues up 7% and costs held flat year on year
Continued to develop and expand innovative new products, like Global Absolute Return Strategies (GARS)
Restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc completed at a cost of £90m
Well positioned for a difficult year ahead

1.1 Group overview

Financial highlights

	2008	2007	Movement
Life and pensions net flows1	£2,440m	£2,769m	(12%)
New business PVNBP1,2,3	£15,679m	£16,539m	(5%)
New business contribution	£264m	£345m	(23%)
EEV operating profit before tax	£933m	£881m	6%
Return on embedded value4	10.9%	11.5%	(0.6% points)
Diluted EEV operating EPS4	29.8p	28.3p	5%
IFRS underlying profit before tax	£154m	£714m	(78%)
IFRS profit after tax attributable to equity holders	£100m	£465m	(78%)
EEV	£6,245m	£6,211m	1%
Group assets under administration	£156.8bn	£169.0bn	(7%)
Group capital surplus5	£3.5bn	£3.6bn	(3%)
EEV operating profit capital and cash generation4	£423m	£563m	(25%)
Full year dividend per share	11.77p	11.50p	2.3%

1 2007 net flows and present value of new business premiums (PVNBP) have been restated to reflect the inclusion of Sigma mutual funds. The 2008 net outflow impact is £217m (2007: £250m outflow). The 2008 PVNBP impact is £88m (2007: £116m).

2 The new business PVNBP sales are different from those previously published in the full year new business press release issued on 28 January 2009, as they incorporate year end non-economic assumption changes.

3 The Group PVNBP percentage change figures include percentage change figures for India, which are computed based on the movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group's shareholding in the joint venture during 2007 and 2008.

4 Net of tax.

5 Based on draft regulatory returns.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Standard Life has produced a solid performance during 2008 despite the unprecedented market turbulence which has impacted the global financial services industry. We also witnessed unparalleled intervention by governments around the world to help support the global banking system and to protect savers and investors. These conditions have resulted in both a significant reduction in asset values and reduced consumer confidence. Our strategy and capital structure have resulted in a balance sheet that is both strong and resilient.

Financial performance

Present value of new business premiums (PVNBP) decreased by 5% to £15,679m (2007: £16,539m). Despite lower sales and associated new business contribution (NBC), we achieved increased European Embedded Value (EEV) operating profits of £933m (2007: £881m) and a return on embedded value (RoEV) of 10.9% (2007: 11.5%). The increase in operating profit was due to strong gains from our management of the back book.

Worldwide life and pensions net flows for 2008 were £2,440m (2007: £2,769m), with the strong growth in our international operations partly offsetting the impact of continued difficult market conditions in the UK. Total Group assets under administration (AUA) reduced by 7% to £156.8bn (2007: £169.0bn). This reduction compares favourably with the fall in financial markets over the same period.

International Financial Reporting Standards (IFRS) underlying profit before tax fell by 78% to £154m (2007: £714m). Excluding significant one-off transactions in both years, IFRS normalised underlying profit before tax fell by 57% to £206m (2007: £476m). The reduction is primarily due to the weakness and volatility of investment markets during 2008. The impact of this volatility has been significant within our Canadian operations due to the way that Canadian life companies typically structure non-segregated funds, with assets backing both policyholder liabilities and the shareholder surplus. IFRS profit after tax attributable to equity holders fell by 78% to £100m (2007: £465m).

Our recently announced cash injection to the Pension Sterling Fund of approximately £100m has impacted profits in 2008. We strongly believe that the action we have taken was the right thing to do, and it reflects the importance that we attach to the long-term relationships we have with customers and business partners.

The Group capital surplus remained broadly unchanged at £3.5bn, compared to £3.6bn at 31 December 2007, despite the adverse market conditions. This demonstrates the robustness of our capital position and its relatively low sensitivity to market volatility. The insensitivity of the capital surplus reflects the structure of the Group post-demutualisation and the strategy for managing the risks of the Heritage With Profits Fund (HWPF). The strength of our capital position is further highlighted by Standard & Poor's upgrading the credit rating for Standard Life Assurance Limited to A/Positive from A/Stable in May 2008 and then raising it again in February 2009 to A+/Stable.

Cash generation has remained strong in volatile markets and although there was a reduction in operating profit capital and cash generation from £563m to £423m, this included the impact of the cash injection to the Pension Sterling Fund. Core capital and cash generation of £303m fell only £31m from 2007 levels, despite the volatile markets. New business strain (NBS) continued to be comfortably covered more than two times by capital and cash generation from existing business. We have continued our focus on selling capital-lite products, to generate profitable new business without committing high levels of capital. This strategy aims to deliver high returns on investment to support business growth.

We have remained focused on achieving operational excellence and efficiency during a time of economic uncertainty. We announced our Continuous Improvement Programme in 2007 and promised to deliver £100m of efficiencies by the end of 2009. In 2008 we met the £100m target one year earlier than planned, and exceeded it by £3m. Following the successful completion of this programme we have now launched the next phase of efficiency savings. This has a target of achieving a further £75m of efficiency savings over the next two years. In addition, in 2008 we achieved a further £7m reduction in Group Corporate Centre costs.

The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance. Dividend cover in 2008 of 1.0 times compares to 2.9 times for total dividends paid in respect of 2007.

Acquisition of Vebnet (Holdings) plc

On 10 October 2008, Standard Life made an unconditional offer to acquire 100% of the issued share capital of Vebnet (Holdings) plc (Vebnet) for a cash consideration of £26m. Vebnet has a well established position in the UK employee benefits and online reward market and has developed business activities in Europe and Asia. At 31 December 2008, Vebnet had 182 corporate clients and 340,393 employee users of its flexible benefits proposition. The transaction is consistent with Standard Life's strategy to accelerate the development of its corporate business through strengthening its customer base, opening up new routes to market and developing its existing product range.

Outlook

The economic environment continues to be very challenging and the outlook for markets remains uncertain.

While market conditions mean that the outlook for retail savings is likely to remain subdued, we continue to see opportunities in the profitable markets in which we operate, including group pensions and fixed income investment mandates.

As an asset managing business our revenues will inevitably be impacted by lower financial market levels. Our ongoing focus on efficiency will help mitigate the impact of this on profitability. In 2009 the Group will benefit from expense efficiencies achieved during the last year and will make a start on the next phase of delivering operational excellence, targeting a total of £75m of annual efficiency savings by 2010.

In these conditions, Standard Life will continue to pursue a capital-lite strategy and to operate conservatively, ensuring that balance sheet strength and cash generation remain priorities.

General industry matters

Our results are affected by general industry factors which could influence the Group's future development or performance. The principal risks facing the Group are discussed in Section 1.8 - Risk management. Below is a summary of some of the key uncertainties that may affect the Group.

	Description	Our response
Economic and market conditions	The unprecedented volatility of global stock markets during 2008, and the financial difficulty experienced by some major financial institutions, have attracted extensive media attention and heightened investors concerns about the safety of their investments. Although all industry sectors have been affected, the spotlight has primarily been on financial services.	Resilient balance sheet with a strong regulatory solvency position that is relatively insensitive to stock market movements. Robust controls in place and active management to ensure that we have access to sufficient liquidity to meet operating requirements during the current market uncertainty. Embedded risk framework ensuring wide diversification of assets, application of strictly controlled credit exposure limits and active mitigation of credit risk exposures to large counterparties.
Changes in demographics	The demographics of the market continue to have important ramifications in our key markets and are defined by: an ageing society; a society which appears to live in debt longer; diminishing state and employer pension provision; an increasingly polarised distribution of wealth; lower long-term birth rates.	Our vision is to help customers around the world feel confident about their future wealth and well-being. Our expertise in the provision of long-term savings and investments products puts us in a good position to develop valuable long-term customer relationships.
Treating customers fairly (TCF)	In July 2006, the FSA published a paper, Treating customers fairly - towards fair outcomes for consumers and outlined a framework to help us (and the senior management in firms) to understand some of the root causes of unfair consumer outcomes, and therefore reduce the risk that customers are treated unfairly.	Our approach with customers is compatible with the TCF principles and associated FSA guidance. TCF oversight is provided through 2 levels: Level 1: Business chief executive officers and executive teams are responsible for ensuring that management information, processes, controls and governance structures are implemented to deliver the Group Board's key TCF objectives and the fair treatment of customers Level 2: Oversight provided by compliance and audit activity to ensure that all relevant policy, processes and measures are applied.
Government legislation and regulatory changes	The Financial Services Authority (FSA) has published its full feedback statement on the retail distribution review, and is expected to publish its detailed proposals in the summer of 2009. The objective of this review is to change the way in which financial products are sold to encourage higher levels of saving and ensure the needs of more consumers are met. The changes will be phased in from 2010.	We have participated in this exercise, along with others from the investment industry and customer representatives. We will continue to be involved in all future stages of this exercise We are actively considering the strategic effect on our business.
	Currently a significant number of employees in the UK will retire with insufficient private pension provision. To counter this, the Pensions Act 2008 requires that employees are to be automatically enrolled into a pension scheme. This must be either a good quality private pension scheme or a new national savings scheme known as Personal accounts. This legislation also provides for the abolition of the option to build up an alternative to additional state pension within private money purchase pensions and will remove restrictions on the shape of such benefit already accrued. The government intends to commence these changes in 2012.	We will continue to monitor developments and participate in discussions so that we are able to make the most of any opportunities that may arise. We believe that our business is in a strong position to respond to such changes and that regulatory changes of this nature have the potential to add momentum to our strategy.
	The European Commission, with its member states, is currently conducting a review of the regulatory capital regime of the insurance industry, known as Solvency II. Once implemented, as is planned by year end 2012, it will change the way in which the European insurance industry manages its risk and capital and how it is regulated. In particular, Solvency II proposes: a realistic, economic value balance sheet approach; the adoption of modern risk management techniques; and the setting of regulatory capital requirements aligned with the risks firms are running.	We strongly support the Solvency II initiative and have participated in all Quantitative Impact Studies (QIS) to date, most recently QIS4. We are also active in supporting and influencing the FSA's Insurance Standing Groups and Association of British Insurers (ABI) and HM Treasury working groups. Within the Group, Solvency II applies to Standard Life Assurance Limited (SLAL), including its insurance subsidiaries, and Standard Life Healthcare.
Market Consistent Embedded Value (MCEV)	On 4 June 2008, the Chief Financial Officers (CFO) Forum of European Insurance Companies announced that MCEV reporting will be mandatory from year end 2009, and will replace the current EEV Principles and Additional Guidance which provide the basis of reporting for the EEV supplementary information included in this report. The European Insurance CFO Forum Market Consistent Embedded Value Principles ©* were designed to improve the transparency and comparability of embedded value. However, the MCEV Principles were designed during a period of relative economic stability and on 19 December 2008, the CFO Forum announced that it would conduct a review of the MCEV Principles in light of current economic conditions. * © Stichting CFO Forum Foundation 2008.	As a member of the CFO Forum, the Group will participate in this review ahead of implementation of the MCEV Principles
Corporate responsibility	The financial services industry as a whole provides a valuable service to society and there is an increasing belief and expectation that companies have a duty to do this in a responsible way.	Corporate responsibility (CR) is very important to us at Standard Life, from our organisational ambitions right through to individual roles and responsibilities. We aim to make CR an integral part of how we do business and become a leader in the financial services sector for our approach. More detail can be found in the CR section, the dedicated CR pages on our Group website or within our stand-alone CR report.

1.1 Group overview continued

Objectives and strategy

Our aim is to create a leading asset managing business which builds valuable relationships with our customers around the world and generates progressive and sustainable returns for our shareholders. Our strategic objectives and how we performed against them are illustrated below.

(Diagram removed for the purposes of this announcement) .

Further detail on how our businesses performed can be found in Section 1.5 - Business segment performance. Our strategic objectives and ultimately our ability to generate value for our shareholders may be subject to financial risks. Principal risks and our risk management approach are discussed in more detail in Section 1.8 - Risk management.

Key performance indicators

In 2008, the Group's strategy was underpinned by focusing on a number of key performance measures. The key measures that are used to assess performance at a Group level are set out below.

Net flows and assets under administration

As an asset managing business, net flows and assets under administration (AUA) are key drivers of shareholder wealth.

Total Group AUA reduced by 7% from £169.0bn to £156.8bn as a result of downward pressure on financial markets during the year. Despite the instability in financial markets, total life and pensions net flows, excluding Asia Pacific, decreased by only 12% to £2,440m (2007: £2,769m) and third party investment management net new business amounted to £3,395m (2007: £7,944m).

New business PVNBP

By developing and diversifying distribution through enhancing relationships in existing channels, developing new relationships and exploring new markets, we can increase the volume of new business and grow PVNBP.

The Group's new business performance has delivered a 5% decrease in life and pensions PVNBP sales to £15,679m (2007: £16,539m). The new business results reflect solid performance against a backdrop of economic uncertainty and volatile markets and a strong comparative period. A fall in UK sales levels was partially offset by strong growth in Canada and Asia Pacific.

Internal rate of return (IRR) and discounted payback period

By measuring the rate of return on new business investment and how long it takes to recover the capital outlay, we demonstrate our success in writing capital efficient new business.

IRR decreased by 3% points to 16% (2007: 19%). At the same time, the payback period for new business remained stable at 8 years (2007: 8 years). Both measures have remained resilient in the current economic climate, demonstrating the benefit of our capital-lite approach.

EEV operating profit capital and cash generation

This is a measure of our ability to generate capital and cash from our business. This allows for further investment in the business and the payment of dividends to our shareholders.

EEV operating profit capital and cash generation decreased by 25% to £423m (2007: £563m). The reduction is primarily due to lower cash released from the back book in 2008, including the negative impact in respect of the Pension Sterling Fund cash injection.

Return on embedded value (RoEV) and EEV operating profit before tax (EVOP)

This is a measure of our ability to manage our existing book of business effectively and write profitable new business.

EEV operating profit before tax increased by 6% to £933m (2007: £881m) and RoEV fell by 0.6% points to 10.9% (2007: 11.5%). A reduction in core profits from lower new business contribution was offset by an increase in profits from back book management.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report for details of the basis of calculation.

IFRS underlying profit before tax and dividend cover

Underlying profit, in association with distributable reserves, demonstrates our ability to deliver high quality returns for our shareholders and provides a measure of our dividend paying capability.

Underlying profit before tax fell by 78% to £154m (2007: £714m) and dividend cover reduced to 1.0 times (2007: 2.9 times). Excluding significant one-off transactions in both years, IFRS normalised underlying profit before tax fell by 57% to £206m (2007: £476m). This decrease was primarily caused by the impact of adverse market conditions in 2008. The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance.

Group capital surplus

This reflects the surplus capital within the Group and is a measure of the strength of the business.

The Financial Groups Directive (FGD) capital surplus of £3.5bn at 31 December 2008 (31 December 2007: £3.6bn) has remained largely insensitive to volatile market movements, with a period end solvency cover of 218% (31 December 2007: 166%). The insensitivity of the FGD surplus reflects the structure of the Group

post-demutualisation and the strategy for managing the risks of the HWPF. Our FGD surplus remains strong in the event of further market weakness.

Total shareholder return (TSR)

This is a measure of the overall return for shareholders, taking account of both share price movements and dividends during the year.

The TSR of negative 16% (2007: negative 12%) reflects difficult market conditions during the year but represents a significant outperformance compared to the FTSE 100 Index which recorded a TSR of negative 28% in 2008.

Customer satisfaction

We strive to create exceptional customer experiences by always acting in the customers' best interests. To do this, it is important that we understand their needs and respond to them in a way which builds loyalty and helps our business to grow.

The UK tracking study is carried out quarterly with customers being asked how satisfied they are overall with Standard Life as a company. In 2008, overall satisfaction scores were 74% (2007: 75%), reflecting consistency with the scores from recent years. We aim to continue building on these positive scores in the future.

Employee engagement

We believe that highly engaged people are more productive and have a positive effect on profit and shareholder value.

Global engagement scores measured in our annual employee surveys increased to 3.91 out of 5 (2007: 3.79). Between November 2007 and June 2008, all of our staff attended a one-day 'Shaping our Future' event on Group strategy. The feedback on this and other initiatives has been very encouraging, and has helped to enhance understanding amongst our people on how the Group strategy connects to individual and team objectives.

1.2 New business sales and profitability

New business highlights

	2008	2007	Movement
Net flows1	£2,440m	£2,769m	(12%)
New business PVNBP1,2	£15,679m	£16,539m	(5%)
New business APE2,3	£2,007m	£2,006m	(1%)
Investment - third party net new business	£3,395m	£7,944m	(57%)
New business contribution	£264m	£345m	(23%)
Internal rate of return	16%	19%	(3% points)
Discounted payback period	8 years	8 years	-

2 The percentage change figures include percentage change figures for India, which are computed based on the movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group's shareholding in the joint venture during 2007 and 2008.

3 2007 APE has been restated to reflect the inclusion of Sigma mutual funds. The 2008 impact is £9m (2007: £12m).

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Net flows

Group assets under administration as at 31 December 2008 were £156.8bn compared to £169.0bn at 31 December 2007. The reduction is mainly due to a fall in asset values following adverse market movements during the year. As a result of the challenging economic conditions in which we have been operating, total life and pensions net inflows (excluding Asia Pacific) decreased by 12% to £2,440m and third party investment management net new business amounted to £3,395m.

New business sales

The Group's new business performance has delivered a 5% decrease in life and pensions PVNBP sales to £15,679m (2007: £16,539m).

UK life and pensions sales at £11,928m were 11% lower than the prior year (2007: £13,440m) with sales impacted by negative market movements on incoming transfer values and lower consumer confidence. Gross lending in our banking business reduced to £1.1bn (2007: £3.7bn). This was driven by a number of strategic measures to manage liquidity and is in line with many of our competitors. Our healthcare sales rose by 14% to £25m (2007: £22m).

PVNBP sales in Canada increased by 23% in constant currency to £2,240m (2007: £1,654m) and reflect the continued repositioning of the business.

In Europe, PVNBP sales decreased by 26% in constant currency to £1,016m (2007: £1,179m). Our business in Ireland continues to be affected by the volatile Irish equity and property markets. In Germany, customer uncertainty in the face of market volatilty negatively impacted sales. Conditions were further exacerbated by changes in German insurance contract law which reduced new business volumes.

Operations in Asia continued to have attractive growth potential. PVNBP sales increased by 17%2 in constant currency as branch expansion and agency recruitment continued in our joint ventures in China and India.

Against a backdrop of difficult markets, investment management sales of third party gross new business decreased by 21% and net new business by 57%. Excluding volatile flows into our money market funds, third party net inflows were £4,741m (2007: £6,853m). Third party assets under management (AUM) decreased by 5% to £45.5bn (2007: £47.7bn). Excluding the impact of the reinsurance of UK immediate annuities which resulted in £6.7bn of funds outflow, total AUM decreased by 9% during 2008. This reduction compares favourably with the fall in financial markets during the period.

	NBC £m		PVNBP margin %		IRR %		Discounted payback (years)
	2008	2007	2008	2007	2008	2007	2008	2007
UK	212	282	1.8	2.1	18	20	8	7
Canada	34	37	1.5	2.3	17	23	8	5
Europe	18	26	1.8	2.2	11	11	13	13
Total	264	345	1.7	2.1	16	19	8	8

New business profitability

New business profitability has been impacted by the adverse market conditions. New business contribution (NBC) decreased by 23% to £264m. The total internal rate of return (IRR) for the Group was 16% (2007: 19%) and the discounted payback period remained at eight years. We remain committed to our strategy of focusing on capital-lite products which deliver high capital returns and fast recovery of investment.

In the UK, NBC fell by 25% to £212m (2007: £282m) due to lower sales volumes and a reduction in margins resulting from sales mix including larger transactions secured at low margins. The UK IRR decreased from 20% to 18% for the full product range and the payback period has extended from seven to eight years.

In Canada, NBC decreased by 8% to £34m. PVNBP margin and IRR reduced from 2007 levels and payback period increased. These trends were mainly due to lower margin sales required in the current market and an increase in acquisition costs incurred as part of the strategy to reposition the business.

In Europe, NBC reflects lower sales due to the particularly difficult market conditions in Ireland and customer uncertainty in the face of market volatility in Germany, which was exacerbated by their recent contractual law changes. IRR and payback period were maintained at prior year levels.

Further analysis of the individual segment results can be found in Section 1.5 - Business segment performance.

1.3 EEV - Group

EEV highlights

	2008	2007	Movement
EEV operating profit before tax	£933m	£881m	6%
Return on embedded value	10.9%	11.5%	(0.6% points)
Diluted EEV operating EPS	29.8p	28.3p	5%
EEV (loss)/profit before tax	(£158m)	£838m	(119%)
EEV	£6,245m	£6,211m	1%

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

EEV profit before tax

The EEV consolidated income statement, in the supplementary EEV financial statements section of this report, presents the total EEV result showing both operating and non-operating items. Total EEV loss before tax of £158m (2007: £838m profit) arose as a result of the reduction in non-operating profits. This fall was driven by the significant market volatility during the year and in particular lower than expected investment returns. We believe that EEV operating profit (before non-operating items) provides a more meaningful indication of the underlying performance of the Group. Non-operating profits and losses are mainly market driven and occur as a result of short-term investment performance being different from the long-term return anticipated in the opening EEV. Further details on the operating profit and non-operating loss are given below.

EEV operating profit before tax - core, efficiency and back book management

We analyse our EEV profits by three components that reflect the focus of our business effort - core, efficiency and back book management.

Core

Core elements comprise new business contribution (NBC), expected return on in-force business, non-covered business profits and development costs for covered business other than those directly related to back book management.

The core element of our operating profit decreased by 13% to £685m (2007: £791m). The fall primarily reflected the adverse impact of market conditions on NBC which decreased by £81m. Expected return from the Group's in-force business increased by 7% to £431m (2007: £401m). £16m of this increase was due to favourable exchange rate movements.

There were losses in our Asia Pacific business of £35m (2007: £12m) on an IFRS basis reflecting the continuing increase in operational activity. The operating profits of our investment management and healthcare businesses remained resilient in the face of tough market conditions. However, banking profits were impacted and fell by £6m compared to 2007, predominantly due to lower interest margins.

NBC is covered in detail in Section 1.2 - New business sales and profitability, while non-covered business is analysed in the segmental analysis of EEV operating profit and is discussed in greater detail in the relevant business segment sections of this report.

Efficiency

These gains reflect our continued focus on cost control and have contributed towards the achievement of our 2008 expense targets.

Back book management

EEV operating profit before tax from back book management has increased significantly from a loss of £19m in 2007 to a profit of £184m for 2008.

Management of the back book focuses on reducing risks and enhancing the value of expected shareholder profits as well as capturing the impact of changes in insurance experience and assumptions. The two major insurance risks to which shareholders are exposed are lapses and mortality.

	UK	Canada	Europe	HWPF TVOG	2008 Total	2007 Total
	£m	£m	£m	£m	£m	£m
Lapses	(17)	(25)	3	-	(39)	(249)
Mortality and morbidity	49	4	2	-	55	(95)
Tax	38	38	-	-	76	56
Deferred annuities	96	-	-	-	96	191
UK annuity reassurance	96	-	12	11	119	-
Pension Sterling Fund	(108)	-	-	-	(108)	-
Other	(32)	21	(4)	-	(15)	78
Back book management	122	38	13	11	184	(19)

Total variances from lapse experience and assumption changes were negative £39m, an improvement of £210m compared to 2007, which reflected increased lapse activity following A-day. In our UK business, a £17m loss from lapses was primarily due to a strengthening of paid up assumptions across our UK pension business as customers postponed payments into their pension scheme during the current volatile market conditions. Lapse experience for onshore bonds was in line with long-term assumptions and was favourable compared to our short-term provision for unit linked onshore bonds established at the end of 2007. In Canada, assumptions were strengthened to reflect overall deteriorating economic conditions.

Positive mortality and morbidity experience variances and assumption changes of £55m represent an improvement of £150m on 2007 and primarily reflects the adoption of updated assumptions for UK assurance and annuity business.

During the year we made £96m of EEV profit from the release of provisions held in the UK deferred annuity business. This release was made possible following a further review of our annuity data in 2008. This compares with £191m of EEV profit from improved deferred UK annuity data modelling in 2007.

As reported in our 2008 Interim results, during the year we reinsured £6.7bn of pre-demutualisation UK immediate annuity liabilities. This represents a significant step in reducing shareholders' exposure to annuitant mortality risk and contributed £119m towards the EEV operating profit before tax. The additional profit arose mainly due to the impact of lower risk discount rates arising from the reduction in longevity risk.

On 11 February 2009, we announced that we would be making an immediate cash injection into the Pension Sterling Fund to reinstate the value of customers' units following an earlier decision to reduce the value of units to take account of market movements in the underlying assets. The cost of this on an EEV basis was £108m before tax and represents the £78m after tax charge included in the original announcement grossed up at a rate of 28%.

EEV operating profit before tax - by segment

Against volatile market conditions, EEV operating profit before tax increased by 6% to £933m (2007: £881m).

Our UK life and pensions business, excluding Heritage With Profits Fund time value of options and guarantees (HWPF TVOG), accounted for the majority of the £52m increase in total Group EEV operating profit. This was primarily due to back book management gains which included £96m of profits from the reinsurance of UK immediate annuities, a £260m improvement in lapse experience and assumption changes and £47m gains from mortality assumption changes (2007: negative £52m). These positive movements were partially offset by a £108m before tax charge for the Pension Sterling Fund payment and a £70m decrease in NBC. In addition, £96m of EEV profit, resulted from the release of provisions in relation to UK deferred annuities during 2008, compared with £191m EEV profit in 2007 from improved deferred annuity data modelling.

Operating profit for Canada increased by £37m to £215m. This increase included higher than expected returns from in-force business, within which £13m of the £21m increase was due to favourable exchange rate movements. Positive tax experience gains of £38m compared to £25m in 2007 represent a benefit from previously unclaimed tax assets. Operating assumption changes were positive £24m (2007: £21m) and included efficiency gains and positive modelling changes offset by negative lapse assumptions of £25m to reflect overall deteriorating economic conditions. NBC was £3m less than 2007.

Europe EEV operating profit increased by 127% in constant currency, despite an £8m decrease in NBC. Lapse assumption changes of negative £1m in 2008, compared to negative £22m in 2007, when Irish lapse assumption changes were made to align to long-term assumptions. A £12m assumption change impact was as a result of improved risk margins following the reinsurance of UK immediate annuities. Expected return on existing business also increased by £7m, £3m of which was due to favourable exchange rates.

Losses in our Asia Pacific business on an IFRS basis reflect continued market expansion.

HWPF TVOG produced an £11m increase in back book operating profits, which was predominantly due to the benefit arising from reinsurance of UK immediate annuities.

The operating profit from our non-life and pensions operations was £16m (2007: £41m). This result reflects resilient operating results from our investment management and healthcare businesses despite the adverse market conditions. Operating profit for the investment management business excludes the non-operating loss related to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. Our banking business operating profits fell by £6m, which predominantly reflected lower interest margins. Other non-covered business includes operating losses which reflect lower investment returns in money market funds in Standard Life plc.

Further comments on the operating profits of each of the businesses noted above are provided in Section 1.5 - Business segment performance.

EEV operating profit after tax

EEV operating profit after tax increased by 5% to £649m (2007: £617m). The attributable tax rate was 30% in 2008 (2007: 30%).

Return on embedded value (RoEV)

RoEV was 10.9% in 2008 compared to 11.5% in 2007. Back book management contributed 2.1% to total RoEV compared to negative 0.2% in 2007. This movement in back book management RoEV was primarily driven by an improvement in lapse variances and assumption changes which contributed 3.0%. In addition, the reinsurance of UK immediate annuities contributed 1.5% to the movement in back book management RoEV. These increases were partially offset by the charge to the Pension Sterling Fund which had a negative impact of 1.4%, and a smaller contribution from UK deferred annuities.

Diluted EEV operating earnings per share (EPS)

The diluted EEV operating EPS grew from 28.3p in 2007 to 29.8p in 2008. The basic EEV operating EPS also increased from 28.9p in 2007 to 29.8p in 2008.These positive movements were largely driven bythe 5% improvement in operating profit after tax compared to 2007. EPS is based on operating profit after tax and on 2,176m shares for basic EPS (2007: 2,138m) and 2,180m shares for diluted EPS (2007: 2,177m).

1.3 EEV - Group continued

EEV non-operating loss

Total non-operating loss was £1,091m in 2008 (2007: loss £43m), an increase of £1,048m from 2007, primarily reflecting lower than expected investment returns arising from the volatile markets during the year. Our life and pensions businesses produced a non-operating loss of £839m (2007: profit £4m). This included long-term investment variances of negative £849m (2007: negative £17m) and economic assumption changes of positive £48m (2007: positive £27m).

Non-life non-operating losses include £90m of total losses borne by our investment management business in relation to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. Total investment management losses in relation to this sub-fund include a £51m loss relating to the fair value movements of assets brought directly onto the balance sheet prior to 23 September 2008. On 23 September 2008, a contract was signed between Standard Life Investments and UK life and pensions which transferred future market risk on part of this sub-fund to UK life and pensions in exchange for a risk premium. Under this agreement a further loss of £73m is included within investment return and tax variances within covered business.

Included within restructuring and corporate transactions costs is £45m incurred under our Continuous Improvement Programme. Volatility arising on different asset and liability valuation bases includes unrealised fair value losses on derivatives of £94m (2007: loss £39m) in respect of non-qualifying economic hedges in our banking business.

Non-operating loss after tax

The non-operating loss after tax was £783m (2007: loss £30m). The attributed tax rate in 2008 was 28% compared to 30% in 2007.

EEV (loss)/profit after tax

Profit after tax fell from £587m in 2007 to a loss after tax of £134m in 2008.

Reconciliation of EEV

12 months to 31 December 2008	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Group EEV
	£m	£m	£m	£m	£m
Opening	2,204	680	2,884	3,327	6,211
Adjustment to opening EEV	-	-	-	32	32
Operating capital and cash generation	377	46	423	-	423
Non-operating capital and cash generation	(131)	44	(87)	-	(87)
PVIF income statement	-	-	-	(470)	(470)
(Loss)/profit after tax	246	90	336	(470)	(134)

Dividends	(257)	-	(257)	-	(257)
Other non-trading movements	155	74	229	164	393
Closing	2,348	844	3,192	3,053	6,245

Group embedded value

Overall our Group embedded value remained broadly unchanged at £6,245m. Before taking into account dividends paid to shareholders, other non-trading movements and the adjustment to opening EEV, Group embedded value decreased by £134m, of which positive £423m was from operating capital and cash generation and negative £87m was from non-operating capital and cash generation. Core capital and cash generation of £303m represents a £31m decrease from 2007 under tough market conditions. Efficiency capital and cash generation contributed £7m. Capital and cash generation from back book management of £113m was largely as a result of the reinsurance of UK immediate annuities and release of provisions in relation to UK deferred annuities, offset by a charge for the Pension Sterling Fund.

This is discussed in more detail in Section 1.7 - Capital and cash generation.

Before taking into account other non-trading movements, the present value of the in-force (PVIF) business net of cost of capital has decreased by £470m predominantly due to an expected return of negative £239m and adverse investment return and tax variances of £708m, offset by an increase from NBC written in the year of £413m.

Included within the PVIF net of cost of capital is the TVOG for the Group. This includes the UK and Europe HWPF TVOG which reflects the value of the shareholder exposure to the policyholder guarantees within the HWPF. This has increased significantly during 2008 to £220m from £41m for 2007, primarily due to adverse market movements. TVOG in Canada and Europe has also increased due to adverse market movements.

The HWPF is discussed in more detail in Section 1.7 - Capital and cash generation.

The net worth of our Group has increased from £2,884m to £3,192m due to resilient operating capital and cash generation. PVIF net of cost of capital has decreased from £3,327m to £3,053m, largely due to the impact of adverse market movements, giving a small increase in Group EEV from £6,211m to £6,245m.

1.4 IFRS - Group

IFRS highlights

	2008	2007	Movement
IFRS underlying profit before tax	£154m	£714m	(78%)
IFRS profit after tax attributable to equity holders	£100m	£465m	(78%)
Diluted IFRS underlying EPS1	11.7p	33.3p	(65%)
Dividend cover2	1.0 times	2.9 times	(66%)

1 Diluted IFRS underlying EPS is based on 2,180m shares (2007: 2,177m shares) and the IFRS underlying profit after tax of Standard Life plc of £254m (2007: £725m).

2 Dividend cover is calculated as IFRS underlying profit after tax and minority interest for the year divided by the full year dividend.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

IFRS profit

IFRS profit for the year was £17m (2007: £576m). This comprises profit after tax attributable to equity holders of £100m (2007: £465m) and losses attributable to minority interest of £83m (2007: profit £111m). The IFRS result included a 78% decrease in underlying profit before tax from £714m to £154m as well as the impact of a number of volatile items not included within the underlying profit. The decrease in underlying profit before tax was due to a lower value of one-off items benefiting the result in 2008 compared to 2007 and the impact of volatile markets in the period, and is explained in more detail below.

IFRS underlying profit before tax

Our IFRS statutory income statement, which shows IFRS profit after tax attributable to equity holders and the reconciliation to underlying profit is shown in the Group IFRS financial statements section of this report. We believe that the IFRS profit before tax adjusted for non-operating items provides a more meaningful analysis of the underlying business performance.

Movement in IFRS underlying profit

Underlying profit has been adversely impacted by the unprecedented market conditions and includes certain items which are one-off in nature. In 2007 these items increased underlying profit by £238m and included a reserving change on deferred annuities, additional mortality reserves on annuity business, a release of reserves relating to the adoption of the FSA's Policy Statement PS06/14 and other assumption/modelling changes.

For 2008, the one-off items totalled a charge of £52m. These included a £105m release of reserves following the reinsurance of £6.7bn of UK immediate annuities, as announced in February 2008, and a £98m release of reserves in relation to deferred annuity business. Offsetting these one-off benefits was a £102m cash injection into the Pension Sterling Fund and a charge of £29m recognised during the year relating to the reinsurance of certain contracts held by our business in Canada. In addition, as reported in April 2008, we also restructured a sub-fund of Standard Life Investments (Global Liquidity Funds) plc during the year. The total cost of this to the Group was £163m3. Of the total costs, £124m related to the fair value movement on assets brought directly onto the balance sheet, and this is included in the underlying profit for the year.

3 In our Interim Management Statement released on 30 April 2008, we reported that the expected net of tax impact of the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc would be £37m. This represented the after tax effect of £62m restructuring costs less the £10m guarantee already provided for by Standard Life plc as at 31 December 2007. Since 30 April 2008, an additional £101m cost has been recognised representing further fair value movements for the period to 31 December 2008. The total cost to the Group of £163m has been recognised in our investment management business (£90m) and in our UK life and pensions business (£73m). The cash cost to the Group was £24m before tax (£17m after tax) with the balance of the cost being due to marked-to-market movements.

Prior to 23 September 2008, all fair value risk associated with the assets taken directly onto the balance sheet in connection with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc was borne by our investment management business. On 23 September 2008, a contract was signed between Standard Life Investments and UK life and pensions which transferred future market risk on part of this sub-fund to UK life and pensions in exchange for a risk premium. Losses of £51m prior to the contract being signed have been recognised in our investment management business and since then losses of £73m have been recognised in our UK life and pensions business.

Excluding the one-off transactions noted above, the normalised underlying profit decreased by 57% to £206m (2007: £476m) with profitability being significantly impacted by the weakness and volatility of investment markets during 2008. The impact of this volatility has been significant within our Canadian operations due to the way that Canadian life companies typically structure non-segregated funds, with assets backing both policyholder liabilities and the shareholder surplus. Mark-to-market value adjustments in respect of surplus assets coupled with reserve increases in respect of tax and guarantees have reduced Canadian normalised underlying profit by £187m compared with the prior year. In the UK, bond impairments and defaults resulted in investment related losses of £32m. Management charges decreased by £38m due to a fall in asset values and profitability was further impacted by increased new business development costs of £23m. Operational efficiencies and strict control of expenditure in the Group Corporate Centre (GCC) had a positive impact on profitability of £7m.

Segmental analysis of IFRS underlying profit

Total life and pensions

Total life and pensions underlying profit before tax decreased by 82% to £112m (2007: £614m). UK life and pensions underlying profit before tax fell by 53% to £184m

(2007: £395m). Excluding one-offs in both periods, profit increased by £34m to £156m (2007: £122m). Canada recorded an underlying loss of £102m driven by investment losses and reserve increases resulting from rising bond yields and equity market volatility. Europe underlying profit increased by 3% to £65m (2007: £63m). The life and pensions result also included a £35m underlying loss for the Asia Pacific business as we continue to invest in its development.

Non-life business

Profits from our non-life businesses fell by 38% to £79m (2007: £128m). The decrease was primarily due to the £51m fair value adjustment related to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, which impacted the results of the investment management business. Excluding this impact and despite the market turbulence, the normalised IFRS underlying result for the investment management business increased by 12% to £93m (2007: £83m) due to solid revenue growth and tight cost control.

Like many of our competitors, the profitability of our banking business was affected by the significant level of dislocation in financial markets. Underlying profit within our banking business reduced by 19% to £26m (2007: £32m). The underlying result excludes unrealised fair value losses on derivatives of £94m (2007: loss £39m) in respect of non-qualifying economic hedges.

Underlying profitability in our healthcare business decreased to £11m (2007: £13m) with an increase in earned premiums being offset by lower investment income.

Group Corporate Centre costs and other

GCC costs reduced by £7m to £50m (2007: £57m) reflecting continued operational efficiency and 'other' decreased by £16m to £13m (2007: £29m), primarily due to lower return on investments in money market funds held by Standard Life plc.

Please see Section 1.5 - Business segment performance for further detail on the IFRS underlying result for our businesses.

1.5 Business segment performance

Business segment overview

Our performance across the Group demonstrates our commitment to meeting the objectives and delivering on our strategy highlighted in Section 1.1 - Group overview.

(Diagram removed for the purposes of this announcement)

UK financial services

UK financial services (UKFS) investment and capital management policies have resulted in a balance sheet that is both strong and resilient despite the market turbulence experienced during the year. The combining of UK life and pensions, savings and mortgages, and healthcare businesses in 2007 has allowed the bringing together of capabilities across these lines of business to maximise efficiencies within the core UK market. Due to the innovative product set, reputation for customer service, and strong distribution relationships the UK business is well placed to benefit from the recovery in financial markets and the wider economy.

Life and pensions

UK life and pensions is one of the largest pension, long-term savings and investment providers in the UK with £96bn of assets under administration. The UK business offers a broad range of insurance and investment wrappers, with particular strength in the accumulation market. In 2008, further developments were made to the existing Wrap platform and self invested personal pension (SIPP) product range, including increasing on-line functionality for customers. Further developments will continue to be made to the award-winning products and innovative propositions to ensure that they remain relevant to customers' lives and their changing financial needs.

Key performance indicators

	2008	2007	Movement
Net flows1	£1,480m	£2,182m	(32%)
New business PVNBP1,2	£11,928m	£13,440m	(11%)
New business APE1	£1,588m	£1,675m	(5%)
New business contribution	£212m	£282m	(25%)
Internal rate of return	18%	20%	(2% points)
Discounted payback period	8 years	7 years	(1 year)
EEV covered business operating profit before tax3	£668m	£648m	3%
EEV non-covered business operating loss before tax4	(£32m)	(£24m)	(33%)
IFRS underlying profit before tax	£184m	£395m	(53%)

1 The 2008 figures include Sigma mutual funds. The 2007 figures have been restated to reflect the inclusion of Sigma mutual funds. The 2008 impact is: PVNBP of £88m, APE of £9m and net outflows of £217m. The 2007 impact is: PVNBP of £116m, APE of £12m and net outflows of £252m.

2 The new business PVNBP sales are different from those previously published in the full year new business press release issued on 28 January 2009 as they incorporate year end non-economic assumption changes.

3 Includes Heritage With Profits Fund (HWPF) time value of options and guarantees (TVOG).

4 Includes UK defined benefit pension scheme charge and Wrap platform result.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Net flows

Net flows for the year were 32% lower at £1,480m (2007: £2,182m). Insured and non-insured pension flows were 8% lower. Institutional trustee investment plan (TIP) net inflows fell by £407m to £616m in 2008 (2007: £1,023m). Savings and investments net outflows of £663m were £161m higher than last year (2007: £502m), mainly due to lower investment bond inflows following the capital gains tax (CGT) changes introduced earlier in the year, and the impact of market uncertainty. This was partially offset by strong offshore bond inflows which increased by £345m to £632m compared to 2007.

New business sales

Total PVNBP sales were £11,928m (2007: £13,440m) a fall of 11%. Individual pensions, which includes SIPPs and increments to existing policies, decreased by 18% to £4,334m (2007: £5,302m). Within this, individual SIPP sales were £3,719m (2007: £4,536m), a fall of 18% driven by a strong comparative in 2007 and the impact of negative market movements on incoming transfer values, however, during the year we increased SIPP customer numbers by over 19,000 (2007: 21,000). Group pensions sales including retail TIP, fell by 8% to £2,600m (2007: £2,817m) reflecting lower asset values and increment levels, however, the number of scheme members increased by 20,000 during the year. Savings and investments sales decreased by 4% to £2,690m (2007: £2,788m). Within this, offshore bond sales increased by £377m to £661m (2007: £284m), due to the success of our International portfolio bond. This was offset by lower onshore bond sales, which fell by 29% to £1,298m (2007: £1,824m) due to CGT changes introduced earlier in the year, and ongoing market uncertainty. Mutual funds sales increased by 8% to £731m (2007: £680m). Protection was closed to new business at the end of 2007, with 2008 sales representing pipeline business in place at the end of 2007.

New business profitability

	NBC £m		PVNBP margin %		IRR %		Discounted payback (years)
	2008	2007	2008	20071	2008	2007	2008	2007
Individual pensions	56	123	1.3	2.3	16	29	8	5
Group pensions	55	60	2.1	2.1	13	14	12	12
Institutional pensions	20	17	1.1	0.8	>40	>40	<3	<3
Savings and investments	6	34	0.2	1.3	8	11	24	12
Annuities	74	54	15.8	11.0	Infinite	Infinite	Immediate	Immediate
Protection	1	(6)	8.2	(23.7)	*	*	*	*
UK Total	212	282	1.8	2.1	18	20	8	7

* Discontinued

1 2007 PVNBP margin has not been restated to include Sigma mutual funds.

Throughout 2008, we continued to focus on profitable areas of the market where our brand and customer service give us sustainable competitive advantage. New business contribution (NBC) decreased to £212m (2007: £282m), with a new business margin of 1.8% (2007: 2.1%), which was mainly driven by lower sales during the year. Overall the internal rate of return (IRR) reduced to 18% (2007: 20%) and the discounted payback period was marginally extended to eight years (2007: seven years). New business profitability by product is analysed as follows:

Individual pensions (SIPPs and increments on existing policies): NBC fell to £56m (2007: £123m), while the PVNBP margin decreased from 2.3% to 1.3%. This was due to lower SIPP sales during the year particularly as a result of lower transfer values. The overall IRR on individual pensions reduced to 16% (2007: 29%), and the discounted payback period extended to eight years (2007: five years).

Group pensions: NBC fell to £55m (2007: £60m) while PVNBP margin remained stable at 2.1% (2007: 2.1%) with payback remaining in line with 2007 at 12 years and IRR falling marginally to 13% (2007: 14%).

Institutional pensions: NBC increased to £20m (2007: £17m) and the margin increased to 1.1% (2007: 0.8%). This was due to improved modelling of the margin, including looking through to the margins earned by our investment management business. As the capital requirements of this business are small, the IRR is very high at over 40% (2007: >40%) and the payback period is less than three years (2007: <three years).

1.5 Business segment performance continued

1.5.1 UK financial services continued

Savings and investments: NBC was £6m (2007: £34m), with a reduced margin of 0.2% compared to 1.3% in 2007. Overall IRR on savings and investments was 8% in 2008 (2007: 11%), with a payback period of 24 years (2007: 12 years). The fall in margin, payback period and IRR was mainly due to lower onshore bond sales and lower margin bulk deals as previously reported. This was partially offset by an increase in offshore bond margin which benefited from an increase in the scale of our offshore bond operations. We have taken action to improve PVNBP margin on our onshore bond and will launch a new capital-lite onshore bond in 2009.

Annuities: NBC was £74m in 2008, significantly up on the 2007 figure of £54m, due to an improved margin of 15.8% in 2008 compared to 11.0% in 2007. The rise in bond yields has been the main contributor to the increase in PVNBP margin. We have not recognised any additional margin in respect of the further widening of bond spreads in the second half of 2008. On our EEV NBC assumptions our annuity business is cash generative.

Protection: Protection was closed to new business at the end of 2007. The NBC in 2008 reflects the contribution from existing pipeline business at the end of 2007.

Business development

One of our driving strengths in becoming a leading asset managing business has been our ability to react to changing UK market dynamics through our customer propositions. In the current market conditions consumers are seeking solutions that will provide financial security both before and after retirement.

During the year we have developed our e-commerce capabilities with SIPP online, which enables Independent Financial Advisers (IFAs) to submit SIPP applications online. We have also continued to invest in the development of our Wrap and Fundzone operations to ensure that we are able to continue capitalising on opportunities for growth and efficiency. At the same time, our current platforms have allowed our customers to make the most of market developments by making it easier for them to transfer monies from protected rights. We continue to work on developing a variable annuity proposition but are waiting for market conditions to improve before launching.

Our strength in the corporate pensions market is demonstrated by several recent large scheme wins. We recently announced that we were successful in securing the British Telecom plc scheme. This involves the transition of 20,000 employees currently in a trust based defined contribution scheme to a tailored Corporate self invested personal pension plan (CSIPP). We believe this scheme sets a new benchmark for group contract based schemes, and demonstrates the strength of our offering within the corporate pension marketplace.

Our offering will also be further enhanced through our acquisition of Vebnet, which has a well established position within the UK flexible employee benefits and online reward market. This acquisition is part of our strategic vision to strengthen our position within the rapidly evolving employee flexible benefits market. Vebnet brings an added layer of choice and flexibility to Standard Life's existing and future propositions, while enabling us to further develop our platform internationally.

Performance

Capital efficiency

As reported in our 2008 Interim Results, we reinsured £6.7bn of immediate annuity liabilities, more than half of the total annuity book of £12bn. The transaction substantially reduces longevity risk, while providing a significant increase to embedded value. It also generated a release of cash, creating a release of capital, which allows us to keep investing in profitable growth. We anticipate further improvement in our capital position in the medium term as we continue to move towards less capital-intensive products such as non-guaranteed unit linked business.

Wrap and Fundzone

As at 31 December 2008, we had 16,900 Wrap customers compared to 8,100 at 31 December 2007 and the number of IFA firms using the platform had grown to 409 compared to 209 at 31 December 2007. With total funds on the platform increasing to £1.8bn compared to £1.1bn as at 31 December 2007, we expect momentum in Wrap and Fundzone to continue building through 2009 and beyond.

EEV operating profit before tax

UK EEV operating profit including HWPF TVOG and non-covered business increased by 2% during the year to £636m (2007: £624m). Core profit of £487m was the main contributor to operating profit in the year and comprised NBC, expected return on in-force business, non-covered business losses and new business development costs. The main driver of the £72m reduction in Core compared to 2007 was a fall in NBC of £70m. Efficiency contributed £26m (2007: £77m) to operating profit which was generated from ongoing cost control and efficiencies. Back book management of £123m (2007: negative £12m) was boosted by a £107m one-off positive impact as a result of the reduction in risk discount rate following the reinsurance of £6.7bn of UK immediate annuities. The £107m benefit is stated after sharing the benefits of the transaction with the with profits policyholders. An allowance has also been made for the loss of look-through margins in Standard Life Investments in respect of covered business. In addition, an EEV operating profit benefit of £96m (2007: £191m) arising from a review of our deferred annuity data in 2008, was offset by a charge of £108m on an EEV basis in relation to the recently announced cash injection into the Pension Sterling Fund.

Overall the result of persistency experience variance and assumption changes was negative £17m. The negative impact is primarily due to a strengthening of paid up assumptions across the pensions book, including the anticipated impact of lower levels of customer contributions into their pension during the current volatile market conditions. Lapse experience on onshore bonds was in line with long-term assumptions and was favourable compared to our short-term provision for unit linked onshore bonds established at the end of 2007.

In 2008, development costs were £33m compared to £11m in 2007. The increase in development costs is due to investments in pensions, bonds and Wrap, including technology enhancements to SIPP online, the development of our variable annuity proposition and implementing legislation changes.

IFRS underlying profit before tax

UK life and pensions IFRS underlying profit before tax was £184m (2007: £395m). As outlined in Section 1.4 - IFRS - Group, included in the result is a £73m adverse impact following the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. In addition, the result also includes a £102m charge for the recently announced cash injection into the Pension Sterling Fund. The result in 2008 also includes two positive one-off items, being a £98m (2007: £143m) release of reserves in relation to deferred annuity business and a £105m reserve release following the £6.7bn reinsurance of UK immediate annuities. The 2007 result also benefited from a reserve release of £136m due to the one-off impact of adopting the FSA's Policy Statement PS06/14, and was reduced by other reserve changes of £6m. Excluding one-off operating items, the normalised underlying IFRS profit was £156m (2007: £122m), an increase of £34m.

The results exclude the impact of volatility, which arises due to the accounting mismatch of subordinated liabilities being measured at amortised cost, while the associated assets are measured at fair value, and restructuring costs relating to the Continuous Improvement Programme.

1.5 Business segment performance continued

1.5.1 UK financial services continued

Savings and mortgages

The savings and mortgages business offers retail savings and mortgage products in the UK, via intermediaries and also direct to customers, all through telephone and internet-based platforms. The focus during 2008 has been on managing liquidity and the size of the mortgage book appropriately in response to ongoing volatile market conditions.

Key performance indicators	2008	2007	Movement
Mortgages under management	£9.7bn	£11.3bn	(14%)
Gross lending	£1.1bn	£3.7bn	(70%)
Savings and deposits	£5.0bn	£4.6bn	9%
IFRS underlying profit before tax	£26m	£32m	(19%)
Return on equity after tax	6.1%	6.6%	(0.5% points)
Interest margin	54bps	60bps	(6bps)
Cost income ratio1	58%	60%	2% points

1 Cost income ratio calculated as total operating expenses (excluding impairment provisions) divided by total underlying income.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

New business

Savings balances increased by 9% to £5.0bn (2007: £4.6bn) with SIPP and Wrap balances growing to £1.5bn (2007: £0.6bn). Our savings business benefited from the uncertain stock markets, as customers choosing to hold cash over other assets took advantage of our competitive products.

Competition in the UK mortgage market declined during 2008 due to the continuing effects of the global credit crisis, which has driven up costs of funding, resulting in reduced availability of mortgage products as lenders look to control their level of mortgage exposure. The market also came under pressure from falling house prices and rising unemployment as the economy began to slow down. As a result, gross lending reduced to £1.1bn (2007: £3.7bn) as we focused on strategic measures to reduce liquidity risk and manage profitability in response to market conditions. This strategy was in line with many mortgage lenders, with gross lending across the entire industry reducing by 30% to £256bn in 2008 (2007: £364bn), according to the Council of Mortgage Lenders (CML).

Funding

We remain well capitalised with a high quality mortgage book and have access to a range of funding sources. We have actively reduced our funding requirements during 2008 and did not draw down on any committed facilities. All regulatory liquidity and capital ratios remained within target ranges during the year. £1.8bn of maturities within the Lothian securitisation programme were successfully refinanced during 2008 with no further securitisation maturities until 2011.

We continue to look to diversify our funding base, launching a 5bn Euro covered bond programme on 9 July 2008. To date £2.1bn of covered bonds have been issued, all bonds being retained on the balance sheet for use as collateral in funding operations. Subsequent to the year end we received approval as an eligible institution under the UK Government 2008 Credit Guarantee Scheme which provides for HM Treasury to guarantee specific debt instruments issued by banks and building societies. In February 2009, we launched our Euro Medium Term Note programme and issued £500m of AAA rated debt covered by the Credit Guarantee Scheme.

Performance

Our savings and mortgage business produced a resilient performance in a year of adverse market conditions, with the

priority being to manage profitability whilst ensuring liquidity requirements were met. IFRS underlying profit before tax (excluding volatility in respect of non-qualifying economic hedges) decreased by 19% to £26m (2007: £32m).

Return on equity in 2008 was 6.1% (2007: 6.6%), with our ability to achieve our 15% target continuing to be impacted by the effects of the credit crisis.

In line with many of our competitors, adverse funding conditions have reduced interest margins, which fell to 54 basis points in 2008 (2007: 60 basis points), although careful balance sheet management helped mitigate this impact.

Cost income ratio improved in 2008 to 58% (2007: 60%) due to efficiency gains which led to reductions in operational expenses.

Despite deteriorating economic conditions, characterised by reduced consumer confidence, rising unemployment and falling house prices, we continue to maintain a high quality mortgage portfolio, with arrears figures low in comparison to the CML average. Only 0.40% of total mortgages were three or more months in arrears or in repossession at the end of 2008, less than a fifth of the CML industry average of 2.09%. Although impairment charges increased to £4.5m in 2008 (2007: £0.1m credit), net write-offs for 2008 were only £0.7m (2007: £0.2m), further testament to the high quality of our mortgage portfolio.

Healthcare

The healthcare business offers a range of private medical insurance (PMI) and other health and well-being solutions to individuals, families, small businesses and companies, and is the fourth largest PMI provider in the UK.

Key performance indicators
	2008	2007	Movement
New business	£25m	£22m	14%
In-force premium income	£295m	£284m	4%
IFRS underlying profit before tax	£11m	£13m	(15%)
Underwriting profit	£12m	£2m	500%
Return on equity after tax	8.6%	7.7%	0.9% points
Claims ratio	68.8%	70.8%	2.0% points

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

New business

Our overall new business sales increased by 14% to £25m (2007: £22m), while in-force premium income increased to £295m (2007: £284m) despite the impact of adverse economic conditions. This was achieved whilst adhering to our strategy of writing only profitable business. Building on our developments in 2007 we launched a new modular product for Small and Medium Enterprises (SMEs). This allowed sales to our SME and corporate customers to grow by 28% compared to 2007, offsetting lower individual new business sales.

Performance

IFRS underlying profit before tax was £11m (2007: £13m), before taking into account one-off costs relating to integration of the PMI business acquired from FirstAssist in 2006, and project costs associated with the development of a new computer system. The £2m fall in IFRS underlying profit for the year was due to poor investment returns, where abnormal market conditions in the second half of the year led to reductions in the market value of investments in money market funds.

The significant increase in underwriting profit compared to 2007 was due to improvements in the claims ratio and an increase in earned premium. Return on equity for 2008 was 8.6% (2007: 7.7%).

UK financial services operational efficiencies

We have worked hard through our Continuous Improvement Programme to grow our business and control costs across UKFS. This has made us more efficient, generated additional productivity savings in 2008 and allowed us to reduce headcount during the year. We will continue to focus on realising productivity gains across UKFS in 2009.

UK financial services looking ahead

In the year ahead our customers are likely to be affected by tough economic conditions, while financial market volatility will continue to impact transfer values for customers consolidating their existing assets into our individual SIPP and group pension schemes. We expect the UK savings and mortgages market to continue to be impacted by reduced mortgage funding liquidity, and the healthcare market to continue to be impacted by tough economic conditions.

However, our market leading proposition within the group pensions marketplace, and our award-winning individual SIPP, combined with our Wrap platform, will allow us to take advantage when markets and the wider economy recovers. We will continue to focus on writing profitable business across UKFS and on providing first class customer service while maximising the opportunities from having a combined operating model. This will allow us to generate profitable returns in the markets in which we operate.

1.5.2 Canada

Standard Life Canada demonstrated a continued resilience in the face of challenging market conditions, keeping the emphasis on growth across its range of savings, retirement and insurance products. A commitment to operational and capital efficiency remained a key feature in achieving these results within the context of the distressed capital markets in the second half of 2008. Standard Life Canada currently has £18bn of assets under administration. In 2008, Canada held a series of events to commemorate the 175th anniversary of the business and to further strengthen the brand.

Key performance indicators

	2008	2007	Movement
Net flows	£340m	£39m	772%
New business PVNBP1	£2,240m	£1,654m	35%
New business APE	£195m	£157m	24%
New business contribution	£34m	£37m	(8%)
Internal rate of return	17%	23%	(6% points)
Discounted payback period	8 years	5 years	(3 years)
EEV operating profit before tax	£215m	£178m	21%
IFRS underlying (loss)/profit before tax	(£102m)	£168m	(161%)

1 The new business PVNBP sales are different from those previously published in the full year new business press release issued on 28 January 2009 as they incorporate year end non-economic assumption changes.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Net flows and new business sales

Net flows have increased eightfold in constant currency to £340m (2007: £39m). This was underpinned by strong sales growth following the successful repositioning of the business, and higher inflows across group savings and retirement products, which exceeded scheduled annuity payments.

PVNBP sales increased by 23% in constant currency to £2,240m (2007: £1,654m). Group savings and retirement sales increased by 24% in constant currency to £1,138m, despite aggressive competition within the market. We strengthened our leadership in our core target market segment of mid-to-large defined contribution business with various enhancements to our offering, highlighting our investment programme, servicing capabilities and operating platform. Sales of mid-to-large defined contribution business represented more than half of total group savings and retirement sales, and were up 62% in constant currency to £612m. Members in our defined contributions plans increased by 6% to more than 587,000. This includes our successful retention of policyholders who have transferred out of a group scheme into our roll-over programme, Standard Life Advantage, with an increase of 16% to 71,000 members. The increase in PVNBP sales was also driven by a large defined benefit administration mandate secured in the second quarter. The constant currency reduction in individual insurance, savings and retirement sales reflects the difficult market conditions for retail investment funds. Sales of mutual funds were severely impacted by the volatile equity markets, and decreased 27% in constant currency. In group insurance, sales volumes increased by 168% in constant currency, largely due to modelling changes regarding renewal assumptions. Excluding these changes, sales increased by 29% in constant currency, reflecting the continued success of our differentiated value proposition in the disability insurance segment. Sales in this core segment of long-term disability insurance increased by 164%2 in constant currency, including £26m in sales of Consultaction, our innovative capital-free disability and absence management consulting product.

2 APE basis

New business profitability

New business contribution (NBC) decreased to £34m (2007: £37m) and PVNBP margins were 1.5%, down from 2.3% in 2007. This is consistent with our strategy to price products more competitively where we are still able to attain an attractive internal rate of return (IRR). The large defined benefit mandate mentioned previously was secured at a low margin with an IRR of 23%. Overall IRR reduced to 17% (2007: 23%) and the payback period extended to eight years (2007: five years), due largely to higher acquisition expenses incurred as a result of our efforts to improve market visibility and re-start growth.

Business development

We have set out to increase our distribution and sales capabilities, most notably in our retail line, and strengthen our corporate visibility in Canada, while maintaining our commitment to product innovation and profitability. We have made investments in staff and training and increased our sales force since the end of 2007. Most of the impact of this enhanced capability in our retail line was counteracted by the adverse market conditions. Our visibility campaign was successful, with enhanced presence in media across Canada. Our global design studio again delivered top quality and innovative material, highlighted by three Insurance and Financial Communicators Association awards for the quality of our media and print campaigns.

We continued to enhance our group savings and retirement offering with new product features, better customer service and improved transactional capabilities, including electronic solutions. We refined our client strategy and approach and were able to maintain a good retention rate of assets and clients, despite the volatile market conditions. Our new leading-edge website, which helps members manage their retirement assets and gives sponsors one-stop access to information and

self-service, was another strong enabler of growth and client retention. We have entered into an alliance with a distributor to offer creditor insurance, reinforcing our traditional group insurance products. We actively pursue cross-selling initiatives within our group lines and delivered further sales during the year. We expanded our retail offering with new funds, and further leveraged our global fund management expertise by introducing new international funds in the Canadian marketplace. We also leveraged our recognised institutional fund management expertise by positioning it within our retail market proposition, introducing marketing tools that enhance the interaction between our fund management experts and our sales force and distributors. This increased collaboration will enable us to bolster the positioning of our funds in a crowded marketplace. Investment management performance was solid in 2008, with close to 70% of our retail funds ranking in the top two quartiles for one year returns1.

1 Comparatives based on Morningstar Canada database.

Performance

EEV operating profit before tax

EEV operating profit before tax amounted to £215m (2007: £178m). In constant currency, EEV operating profit before tax increased by 10%, with increases in all operating profit elements. The core element accounted for £146m compared to £126m in 2007, an increase of 6% in constant currency. This was driven by an improvement in total expected return of £22m to £113m (2007: £91m). This increase was offset by a £3m decrease in NBC to £34m (2007: £37m). The efficiency result amounted to a gain of £31m (2007: £25m). The back book management operating result was a gain of £38m (2007: £27m). Positive changes from tax management of £38m and modelling and assumption changes in group insurance of £27m were offset by a £25m charge to operating assumptions to prudently safeguard against overall deteriorating economic conditions.

IFRS underlying profit before tax

IFRS underlying profit before tax decreased by 161% to a loss of £102m (2007: profit £168m), largely driven by investment losses resulting from unfavourable bond returns in line with rising bond yields and equity market volatility. Whereas most losses from assets supporting policyholder liabilities are offset by corresponding changes to those liabilities, volatility on assets supporting shareholder capital directly impacts earnings, and such losses totalled £43m (2007: gains of £44m). We have and will continue to take action to reduce volatility from our balance sheet. Equity and interest related charges due to policy guarantees and a strengthening of policyholder liabilities because of lower asset values, amounting to £42m and £58m respectively, were also recognised as a result of the challenging financial conditions. IFRS underlying profit before tax was further impacted by a one-off increase in policyholder liabilities of £29m in relation to a reinsurance treaty. Other movements included a fall in fee income related to lower asset values, increased investment in relation to re-starting growth and other reserving increases in 2008. The business had no material exposure to troubled US financial institutions and faced no asset-backed commercial paper or sub-prime issues.

Looking ahead

Investment was made in 2008 to enhance our corporate visibility and position ourselves as a leader in the retirement market. While we expect all our product lines to be impacted by the weakening economy, our numerous product improvements in group savings and retirement and continued strong push into the disability segment in group insurance provides a stronger position for growth. We maintain an active pipeline and the business recently secured a large defined contribution mandate expected to transition in the second quarter of 2009. In group insurance, our disability risk management differentiated value proposition is recognised by the industry and will position us favourably to win market share with plan sponsors as they seek to contain employee costs in the current economic context. Retail markets are expected to remain challenging for the foreseeable future.

1.5 Business segment performance continued

1.5.3 Europe

The operations in Europe consist of Standard Life Ireland and Standard Life Germany, which operates in both Germany and Austria. The European businesses offer a range of investment and pension solutions and currently have £7bn of assets under administration. 2008 has been a difficult trading year for new business but back book efficiencies have significantly improved EEV operating profit. Looking forward, the European businesses intend to strengthen operations by repositioning distribution in existing markets and then expanding into new markets, exploiting the opportunities presented by changing regulations and the growing demand for wealth management solutions across Europe.

Key performance indicators

	2008	2007	Movement
Net flows	£620m	£548m	13%
New business PVNBP	£1,016m	£1,179m	(14%)
New business APE	£106m	£125m	(15%)
New business contribution	£18m	£26m	(31%)
Internal rate of return	11%	11%	-
Discounted payback period	13 years	13 years	-
EEV operating profit before tax	£69m	£26m	165%
IFRS underlying profit before tax	£65m	£63m	3%

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Net flows and new business sales

Total net flows for 2008 in Europe have fallen slightly in constant currency with the strength of German gross inflows offsetting the weakness in the Irish market during the first three quarters of the year. Total new business sales in Europe decreased by 26% in constant currency to £1,016m (2007: £1,179m).

In Germany, PVNBP sales of £602m (2007: £722m) were 28% lower than 2007 in constant currency. The German market was adversely impacted by customer uncertainty in the face of market volatility and exacerbated by changes in insurance contract regulations at the beginning of 2008 and the mid-year introduction of transparency rules. This has resulted in poor market sentiment and a lower than normal peak in sales volumes at year end.

PVNBP sales in Ireland fell 22% in constant currency to £414m (2007: £457m). The Irish market had an extremely difficult year with total market sales down 30% including trustee investment plan (TIP) business and single premium sales down 48%. Based on a number of new product launches, we reversed the trend in the market in the last quarter by achieving an increase of 38% (excluding TIP business) relative to Q4 2007. We also strengthened our position in the single premium pensions market.

New business profitability

New business contribution in Europe fell in 2008. However, overall internal rate of return (IRR) and discounted payback period remained in line with 2007. In Germany, the IRR remained stable with stronger underlying profitability compensating for reduced sales volumes. The IRR in Ireland has increased reflecting improved capital efficiency.

Business development

Across Europe we are focused on strengthening our existing operations and improving efficiency while also responding to the difficult market conditions with innovative solutions for customers and distributors.

In Germany, we have a pipeline of planned product enhancements that will increase the capital efficiency of the business while also strengthening our position in the corporate and wealth management markets.

In Ireland, the continued development of our self investment Synergy product range, particularly our extensive deposit options, has now positioned our platform as the most comprehensive in this space.

Performance

EEV operating profit before tax

EEV operating profit before tax increased by127% in constant currency to £69m (2007: £26m), despite the impact of lower

new business levels. This was mainly due to active back book management in both Germany and Ireland, with notable efficiency and persistency improvements.

IFRS underlying profit before tax

IFRS underlying profit before tax decreased by 11% in constant currency to £65m (2007: £63m) with Germany contributing £62m (2007: £56m) and Ireland contributing £3m (2007: £7m). The small constant currency reduction in Germany was primarily due to the pre-determined decreasing transfer of profit to shareholders from the Heritage With Profits Fund being largely offset by increased profits emerging from the post-demutualisation business. In Ireland, the IFRS result benefited from lower strain as a result of lower new business sales but was also impacted by reduced revenue due to investment market performance.

Looking ahead

Market and economic conditions in Europe continue to be challenging and we expect this will put pressure on sales during 2009. Until confidence is restored in investment markets we expect sales to be lower in both Germany and Ireland. Despite this, we believe assets under administration will continue to grow due to strong inflows from our in-force book in Germany.

In the short term, we are transforming our European operations into an asset managing business. This means launching new products, re-engineering our current product range to improve capital efficiency, aggressively managing our cost base and continuing to offer innovative solutions to the individual wealth management and corporate markets. We expect growth to be delayed while the business is transformed and new propositions are established.

In the medium and longer term, prospects for Europe are good. We are well positioned to build on our strength in distribution, market leading platform propositions and range of investment solutions to grow in both existing and new markets.

1.5 Business segment performance continued

Asia Pacific

Standard Life has a growing position in the Asia Pacific life and pensions market with joint venture companies in India and China and a wholly owned subsidiary in Hong Kong all showing good levels of sales growth.

Key performance indicators

	2008	2007	Movement
New business PVNBP1	£495m	£266m	24%
New business APE1	£118m	£49m	57%
IFRS underlying loss before tax	(£35m)	(£12m)	(192%)

1 The percentage change figures include percentage change figures for India which are computed based on the movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group's shareholding in the joint venture during 2007.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

New business

Despite difficult trading conditions towards the end of the year, Asia continued to achieve good growth, with total PVNBP sales up 17%1 in constant currency terms to £495m (2007: £266m). APE sales were up 49%1 in constant currency to £118m (2007: £49m).

In India, HDFC Standard Life Insurance Company Limited (HDFC SL) delivered good results with PVNBP of £345m (2007: £187m), growth of 4%1 in constant currency terms. APE sales were up 40%1 in constant currency to £93m (2007: £38m). The number of financial consultants appointed by the joint venture has increased by approximately 70,000 during the year to 202,000 (31 December 2007: 132,000) and the number of branches increased by 70 to 606 (31 December 2007: 536).

In China, Heng An Standard Life Insurance Company Limited (HASL) performed well with PVNBP up by 69% in constant currency terms compared to 2007. This reflects strong growth in group products, bank distribution and continued business expansion in major cities within existing provinces. HASL is now in 25 cities, across 7 provinces, after establishing a presence in a further 11 cities during the year.

Performance

Asia Pacific IFRS underlying loss at £35m (2007: £12m) was higher than the prior year as we continued to invest in developing and expanding operations in this region. We expect our investment in strategic growth to have a continued impact on the IFRS underlying result.

Looking ahead

We expect that the global economic recession will have an impact on markets in general and hence affect our Asian businesses. As the economies in India and China are still growing and insurance penetration is low, we believe there is still attractive growth potential for us.

In India, we will continue to drive growth through the individual sales channel and also aim to penetrate other channels. However, we expect alternative channel volumes to decrease as banks set up their own insurance companies. We will also continue to drive efficiencies as products and processes become more established.

In China, HASL plans to increase the strength and scale of its business by continuing to expand into new cities. We expect to diversify distribution channels further and to continue to penetrate the group pensions market.

Growth in our Hong Kong business will be driven by strong relationships with key brokers and strong product and marketing support.

1.5.5 Investment management

The focus at Standard Life Investments is to deliver superior investment performance, supported by an exceptional client experience. Standard Life Investments operates as a global team, with its investment process underpinned by its 'focus on change' philosophy which has proved itself to be robust and repeatable in both good and bad market conditions. Over the past 10 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued in 2008 despite the very difficult market conditions.

Key performance indicators

	2008	2007	Movement
Third party assets under management (AUM)	£45.5bn	£47.7bn	(5%)
Total assets under management	£123.8bn	£143.4bn	(14%)
Third party gross new business	£8,897m	£11,327m	(21%)
Third party net new business	£3,395m	£7,944m	(57%)
Earnings before interest and tax (EBIT)	£82m	£75m	9%
IFRS normalised underlying profit before tax1	£93m	£83m	12%
IFRS profit before tax	-	£100m	(100%)
EBIT margin	30%	30%	-

1 IFRS normalised underlying profit before tax excludes all costs associated with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, including £51m within the Group's IFRS underlying profit statement in the Group IFRS financial statements section of this report.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Standard Life Investments delivered a strong underlying performance in 2008, against a background of extremely volatile and dislocated markets. The sales momentum of past years continued in 2008 with solid net sales of third party business largely offsetting the very substantial fall in market values. Revenue grew by 7%, the average revenue yield continued to strengthen and costs were held flat against 2007. EBIT grew by 9% to £82m and a strong EBIT margin of 30% was maintained. We have focused throughout the year on maintaining high levels of customer service and protecting existing relationships while managing our current revenue streams and cost base very tightly. We have also continued to invest in building our capabilities, particularly in global equities, global fixed income, global property and global absolute return strategies, in order to build future revenue streams and emerge stronger from the current downturn. Our IFRS profit before tax was impacted by a one-off decision to restructure a sub-fund of Standard Life Investments (Global Liquidity Funds) plc at a total cost of £90m. The business broke even at the pre-tax level after this charge.

Financial market overview

During 2008, the UK industry experienced substantial net outflows of funds. As in previous market downturns, this was particularly felt at the retail end of the market. Standard Life Investments' business model, with around 80% of our third party AUM coming from institutional clients, has provided substantial protection against the worst impacts of the current market conditions. Outflows across the business were broadly comparable to 2007 and no major institutional clients were lost. Revenue levels were therefore maintained and strengthened at a time when others are expected to have experienced substantial falls.

Investment performance

Despite a dip in short-term UK equity performance due to market volatility, we continued to deliver good investment performance over the longer term. The money-weighted average investment performance over three, five and ten year periods continues to be comfortably above median and remains a key driver of our strong institutional sales and pipeline of new business. The strength of our investment process across a range of open-ended investment companies (OEICs) and unit trusts is demonstrated by the high proportion of eligible and actively managed funds (19 out of 25) rated 'A' or above by Standard & Poor's, including the complete range of eligible fixed income OEIC funds.

Net flows and new business

Standard Life Investments has performed well during 2008 despite the economic uncertainty, with third party net new business sales of £3,395m (2007: £7,944m). Excluding volatile flows into our money market funds, third party net inflows were £4,741m (2007: £6,853m), representing 11% of opening third party AUM excluding money market funds. Strong sales were recorded for segregated business and private equity through institutional channels. Retail sales were relatively flat for the year, a considerable achievement when the market as a whole has experienced substantial net outflows.

Third party AUM remained resilient in the face of extremely volatile markets, decreasing by just 5% to £45.5bn (2007: £47.7bn). In-house AUM fell by 18% to £78.3bn (2007: £95.7bn) due to a combination of adverse market movements, continuing outflows from with profits business and the reinsurance of £6.7bn of UK immediate annuities by the Group in order to reduce the long-term risk borne by shareholders.

As a result, total assets managed by Standard Life Investments decreased by 14% to £123.8bn (2007: £143.4bn).

Performance

Financial performance was robust in 2008, despite the difficult trading conditions with EBIT up 9% to £82m (2007: £75m). Revenue growth remained solid despite the impact of reduced AUM from lower markets, the reinsurance of UK immediate annuity liabilities and the challenging economic environment. Total revenue rose 7% (£17m) to £270m driven by new business sales, increased penetration of high margin products such as global absolute return strategies and a revision to certain management fees applied to in-house assets. Costs were tightly managed throughout the year and were held flat compared to the prior year at £184m (2007: £184m). We were, however, still able to continue to invest in key areas of the business to sustain our longer term growth.

IFRS normalised underlying profit before tax increased by 12% to £93m (2007: £83m). This excludes all restructuring costs, principally those associated with the one-off restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. The total impact of the restructuring on Standard Life Investments' IFRS profit before tax in 2008 was a charge of £90m. This consists of restructuring costs of £39m, representing a cash injection into the funds, and a mark-to-market adjustment of £51m, representing the fair value movements of assets brought on to the Group's balance sheet following the restructuring. Our IFRS profit before tax was £nil (2007: £100m).

Looking ahead

We expect 2009 to be challenging for all players in the industry, including Standard Life Investments. Equity markets are down substantially year on year, and unless there is a marked and rapid recovery, this will impact our revenue streams during 2009. On the other hand, we continue to see a good volume of requests for proposals and our pipeline of confirmed third party new business is strong, driven substantially by institutional funds with opportunities skewed towards fixed interest and liability driven investment mandates, due to the current market conditions.

Against this background we will continue to pursue our strategy of increasing the diversity of our earnings by growing our capability in selected product areas and increasing our global reach. We will also maintain tight control over our costs to drive further efficiencies and allow for necessary investment to support future growth.

We remain confident in the solid underlying performance of the business.

1.6 Group assets under administration

Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included in the balance sheet. In addition, certain assets are excluded from the definition, for example deferred acquisition costs, intangibles and reinsurance assets.

Analysis of Group AUA

For the year ended 31 December 2008

	Opening at 1 January 2008	Gross inflows	Redemptions	Net flows	Market /other movements	Closing at 31 December 2008
	£bn	£bn	£bn	£bn	£bn	£bn

UK1	106.7	12.8	(11.3)	1.5	(12.4)	95.8
Europe	6.1	1.2	(0.6)	0.6	0.6	7.3
Canada	17.9	2.4	(2.1)	0.3	(0.2)	18.0
Asia Pacific	0.4	-	-	-	0.1	0.5
Total worldwide life and pensions	131.1	16.4	(14.0)	2.4	(11.9)	121.6

Banking	13.1	1.1	(2.7)	(1.6)	(0.2)	11.3
Other businesses	1.4	-	-	-	0.3	1.7
Standard Life Investments third party assets under management (AUM)	47.7	8.9	(5.5)	3.4	(5.6)	45.5
Group adjustments1,2	(24.3)	(4.1)	2.3	(1.8)	2.8	(23.3)
Group assets under administration	169.0	22.3	(19.9)	2.4	(14.6)	156.8

Group assets under administration managed by:
Standard Life Group entities	158.2					138.5
Other third party managers	10.8					18.3
Total	169.0					156.8

1 The opening balance has been restated to reflect the inclusion of Sigma mutual funds.

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. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.

During the year, positive net flows of £2.4bn were offset by negative market/other movements of £14.6bn due to falling equity, property and fixed interest security values. As a result Group AUA fell by 7% to £156.8bn. Positive net flows were achieved in each of the life and pensions territories. However, worldwide life and pensions AUA fell by £9.5bn due to the adverse market movements experienced in 2008. Third party AUM remained resilient in the face of extremely volatile equity markets with a fall of just 5%. AUA in our banking business fell by £1.8bn reflecting measures taken to manage our mortgage exposure during difficult market conditions. The UK immediate annuity reinsurance transaction resulted in £6.7bn of assets being reinsured to Canada Life. This transaction reduced AUA managed by Group entities and correspondingly increased AUA managed by other third party managers.

1.7 Capital and cash generation

Capital and cash generation highlights

	2008	2007	Movement
EEV operating profit capital and cash generation1	£423m	£563m	(25%)
Group capital surplus2	£3.5bn	£3.6bn	(3%)
Group solvency cover2	218%	166%	52% points
Realistic working capital: Heritage With Profits Fund	£0.5bn	£1.5bn	(67%)
EEV	£6,245m	£6,211m	1%
IFRS equity attributable to equity holders of Standard Life plc	£3,407m	£3,282m	4%

1 Net of tax.

2 Based on draft regulatory returns.

Please refer to Section 1.11 - Basis of preparation and the Glossary of this report.

Group capital and cash generation

	2008			2007
	Free surplus movement	Required capital movement	Net worth movement	Free surplus movement	Required capital movement	Net worth movement
	£m	£m	£m	£m	£m	£m
New business strain	(266)	42	(224)	(272)	47	(225)
Capital and cash generation from existing business	546	-	546	561	(12)	549
Covered business capital and cash generation from new business and expected return	280	42	322	289	35	324
Covered business development expenses	(27)	-	(27)	(16)	-	(16)
Non-covered business core, capital and cash generation	8	-	8	26	-	26
Core	261	42	303	299	35	334
Efficiency	9	(2)	7	22	(2)	20
Back book management	107	6	113	200	9	209
Operating profit capital and cash generation	377	46	423	521	42	563
Capital and cash generation from non-operating items	(131)	44	(87)	45	(8)	37
Total capital and cash generation	246	90	336	566	34	600

All figures are net of tax. Net income directly recognised in the EEV balance sheet, including exchange differences and distributions to and injections from shareholders, are not included as these are not trading related cash flows.

The Group's IFRS cash flow statement, included in the Group IFRS consolidated financial statements section of this report, shows that our net cash inflows from operating activities were £2,304m (2007: £2,828m). This statement combines cash flows relating to both policyholders and equity holders, but the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital. As a result, we analyse cash flow within the Group on a number of additional bases, and take the view that an analysis of the movement in the EEV shareholders' net worth is more representative of underlying shareholder capital and cash flow than the IFRS cash flow statement. Under existing EEV principles, we are also required to identify required capital for all covered business. Increases/(decreases) in required capital will not reduce the shareholders' net worth because no external cash flows are made, but will decrease/(increase) the free surplus.

The analysis on the previous page highlights the most significant influences on free surplus and shareholders' net worth, including investment of shareholder capital in new business, or new business strain (NBS) and the amount of capital and cash emerging from existing business. Our covered business capital and cash flows from new business and expected return have remained stable during a year of economic volatility at £322m (2007: £324m). NBS is covered two times by capital and cash flow from existing business. In overall terms, our operating profit capital and cash generation decreased from £563m to £423m.

We also analyse capital and cash generation in the three components that reflect the focus of our business effort - core,

efficiency and back book management. Core and back book management were the main contributors to our capital and cash generation during the year. The core capital and cash flows of £303m, primarily reflect robust capital and cash generation from new business and expected return, and after-tax profits from non-life operations, partially offset by development expenses. The back book management capital and cash flows of £113m largely arise from the impact of the UK immediate annuities reinsurance and profits from the release of provisions in relation to UK deferred annuities, partially offset by the charge in relation to the Pension Sterling Fund. Capital and cash generation from efficiency of £7m represent ongoing cost control and efficiencies.

Non-operating capital and cash generation of negative £87m (2007: positive £37m) is driven by £138m of non-operating losses in the non-life businesses and includes unrealised fair value losses on derivatives, losses relating to restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and non-life restructuring costs. Life business non-operating capital and cash generation remained positive at £93m (2007: £70m) and reflected net worth investment variances and assumption changes after negative £27m of restructuring expenses (2007: negative £4m). Non-operating capital and cash generation also includes an after tax Group consolidation adjustment for the Canadian subordinated liability of negative £42m.

Holding company capital and cash flows

In addition to the movement in capital and cash on an EEV basis, the following summary has been provided to show an analysis of holding company cash flows and capital, in relation to the Group's holding company, Standard Life plc. The capital position is based on the Company balance sheet, excluding its investments in operating subsidiaries.

	2008	2007
	£m	£m
Opening capital 1 January	502	555
Dividends received from subsidiaries	436	273
Additional investments in subsidiaries	(54)	(168)
Group Corporate Centre costs	(50)	(57)
Dividends paid to shareholders	(257)	(197)
Other	46	96
Closing capital 31 December	623	502

The capital and cash held in the holding company is managed at a level to fund the dividend obligations and strategic investments of the Group. During 2008, Standard Life plc's capital, excluding its investment in subsidiaries, increased by £121m, primarily as a result of receiving £436m of dividends from subsidiaries offset by dividends paid to shareholders of £257m and a further investment in subsidiaries of £54m.

Standard Life plc's ability to pay dividends to shareholders is determined by the distributable reserves of the Company which broadly comprise its retained earnings and special reserve. The Board must also consider the Group's future business plans, market conditions and regulatory solvency when determining the level of dividends.

1.7 Capital and cash generation continued

Dividends

During the year, the Group paid the final dividend for 2007 of 7.70p per share, amounting to £168m, and the 2008 interim dividend of 4.07p per share, amounting to £89m. The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance.

Capital management

Objectives and measures of Group capital

The process of capital and risk management is aligned within the Group to support the strategic objective of driving sustainable, high quality returns for shareholders. The different measures of capital reflect the regulatory environment in which we operate and the bases that we consider effective for the management of the business.

Sustainable high quality returns for shareholders

(Diagram removed for the purposes of this announcement)

Financial Groups Directive

	2008	2007
	£bn	£bn
Shareholders' capital resources	2.6	2.9
Capital resources arising from subordinated debt	2.2	1.9
SLAL long-term business funds	1.7	4.4
FGD Group capital resources	6.5	9.2
FGD Group capital resource requirement	(3.0)	(5.6)
FGD Group capital surplus	3.5	3.6
FGD Group solvency cover	218%	166%

2008 figures above based on draft regulatory returns.

The Group is classified as a 'financial conglomerate' as defined by the Financial Groups Directive (FGD). The FGD surplus has only decreased by £0.1bn during the year, reflecting the insensitivity to equity market movements which suffered global falls in 2008. This insensitivity of the FGD surplus reflects the structure of the Group post-demutualisation and the strategy for managing the risks of the Heritage With Profits Fund (HWPF). Group capital resources decreased mainly because of ongoing investment in the business and negative market movements during the year which reduced the capital resources of the HWPF. However, this was offset by a corresponding reduction to the capital resource requirements of the HWPF. As the Group capital resource requirement has decreased by a greater relative percentage than the change in capital resources, the overall Group solvency cover has increased from 166% at 31 December 2007 to approximately 218%.

After allowing for payment of the final dividend of £168m (2007: £168m), our year end FGD surplus would be £3.3bn (2007: £3.4bn).

Analysis of movement in Group capital surplus

The following table illustrates the key movements in the regulatory capital surplus for the year ended 31 December 2008:

	2008	2007
	£bn	£bn
Opening capital surplus	3.6	3.4
Movement in capital resources of long-term business funds	(2.7)	0.8
Movement in capital resource requirements of long-term business funds	2.7	(0.8)
Net movement in capital surplus of long-term business funds	-	-
Movement in capital resources of shareholder funds:
Annuity reinsurance change	0.1	-
New business	(0.2)	(0.3)
Transfers from HWPF to shareholder funds	0.4	0.7
Dividend payments	(0.3)	(0.2)
Other factors	-	0.3
Movement in capital resource requirements of shareholder funds	(0.1)	(0.3)
Closing capital surplus	3.5	3.6

The significant factors affecting the capital surplus were:

Shareholder funds:

- The Group reinsured £6.7bn of pre-demutualisation UK immediate annuities in February 2008. The benefits of this included a release of cash from reserves in 2008 and a reduction in the Individual Capital Assessment (ICA) capital requirements
Ongoing investment of shareholder capital in the business through writing new business offset by the recourse cash flows emerging from pre-demutualisation business
Profits earned by the non-life operations included within other factors above
Payment of £257m of dividends to shareholders during the year

Long-term business funds:

Impact of changing financial conditions on the capital resources and capital resource requirement of the HWPF

The FGD limits the amount of capital that can be recognised in Group capital resources, where that capital is held by a UK long-term business fund. This limits the capital resources within a long-term business fund to the level of the capital resource requirement for that fund and results in a restriction of approximately £1.3bn at 31 December 2008 (31 December 2007: £1.8bn).

The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), and its regulatory position reflects capital resources including long-term business funds. While SLAL's capital resources have decreased, the solvency cover has increased to approximately 274% from 190% due to a relative decrease in the capital requirements of the HWPF, as explained previously.

The capital resources of SLAL include the residual estate of approximately £0.5bn (31 December 2007: £1.5bn). The reduction in the estate over the year largely reflects both the direct and indirect effects of movements in corporate debt, property and equity markets, the impact of which has been exaggerated by technical changes in the way that realistic liabilities are calculated. The impact on the residual estate of further falls in equity markets continues to be mitigated by the hedges we have in place. The impact of most other adverse asset movements would, in the first instance, be met by policyholders with indirect impacts on shareholders via higher guarantee costs, and hence higher burnthrough cost. Shareholder exposure is also limited by the structure of the capital support mechanism set up at demutualisation, with shareholder support being obtained by withholding the furthest out cash transfers from the HWPF to shareholders.

Reconciliation of key capital measures

The following diagram illustrates the key differences between the regulatory, IFRS and EEV capital measures at 31 December 2008:

(Diagram removed for the purposes of this announcement)

The Group's capital, as measured by the FGD, can be split into three elements:

Shareholder capital, used to invest in the strategy of the Group, covers the capital requirements borne directly by shareholders and manages risk borne by shareholders
Capital arising from the subordinated debt issued by the Group, amounting to £2.2bn at 31 December 2008, which is used to provide capital support to SLAL and Standard Life Bank
A restricted amount of policyholder capital (£1.7bn at 31 December 2008), which matches the capital resource requirements of that business, and includes the HWPF

While these latter two elements provide capital support for the Group, they do not form part of the shareholders' regulatory capital. Shareholder capital can be measured under each of the Group's reporting bases - regulatory, IFRS equity and EEV net worth. Each of these is a comparable measure of the net assets attributable to equity holders of the Group. In some cases, the regulatory rules for valuing assets and liabilities differ from IFRS accounting rules, resulting in a valuation adjustment of £0.8bn. Similarly, the EEV balance sheet recognises certain valuation adjustments to give the EEV net worth, resulting in an equivalent adjustment of £0.2bn to IFRS equity holder funds. The total EEV of the Group relates to the net worth adjusted for the cost of capital of £0.3bn and increased by the value of the present value of in-force business (PVIF) of £3.3bn to give the total EEV of £6.2bn at 31 December 2008.

Capital management policy

Matters related to management of the Group's capital are reserved for the Board of Standard Life plc. The scope of the liquidity and capital management policy is wide ranging and forms one pillar of the Group's overall management framework. It operates alongside and complements the Group's other policies and processes, in particular its risk policies and strategic planning process, and provides a framework for the effective and consistent management of capital. The Group continues to develop its Enterprise Risk Management (ERM) framework to link robustly the processes of capital allocation, value creation and risk management.

Debt, facilities and liquidity

The Group's capital structure has been developed to provide an efficient capital base by using a combination of equity holders' funds, subordinated debt and capital within the HWPF.

The Group uses subordinated debt to provide capital to our life assurance and banking businesses
Further analysis of Group borrowings and subordinated liabilities is provided in Note 33 - Borrowings and Note 34 - Subordinated liabilities respectively
Note 46 - Capital statement in the financial statements shows the external subordinated debt and internal loans made across life and other operations
Further information on how the Group and its subsidiaries manage liquidity is provided in the financial statements in Note 39 - Risk management

The Group has robust plans in place to ensure that it has access to sufficient liquidity to meet operating requirements during the current market uncertainty.

Following the second maturity from the Lothian securitisation programme on 24 October 2008, there are no securitisation maturities until 2011. Our banking operation remains well capitalised with a very high quality mortgage book, has access to a range of funding sources and has actively reduced its funding requirements during the year.

Bond default allowances

In UK and Europe annuity liabilities of £1.5bn are backed by £0.55bn of gilts and supranationals, £0.25bn of index linked bonds and £0.7bn of corporate bonds. There were no defaults in respect of assets backing UK and European annuity liabilities in 2008. In light of economic conditions, our provision for future defaults was increased to £40m as at 31 December 2008 (31 December 2007: £20m). The long-term annual default assumption across the corporate bond portfolio has been increased to 87bps (31 December 2007: 37bps). Canada have £5.1bn of bonds, of which £2.1bn are corporate bonds. There were no corporate bond defaults within the bond portfolio in Canada during 2008. In 2008 the corporate bond default assumption in Canada was maintained at 35.5bps. The total provision for corporate bond defaults in Canada amounted to £90m at the end of 2008 (31 December 2007: £71m).

Financial assets valuation and exposures

Asset-backed securities

Standard Life's total investment (including third party funds) in the asset-backed securities markets across both short-term treasury instruments and long-term fixed interest is approximately £5.3bn or 3.3% (31 December 2007: £7.7bn or 4.6%) of Group assets under administration (AUA), predominantly in UK securities. Of the total of £5.3bn, £1.3bn relates to shareholder funds, of which £1.2bn is AAA rated. The overall level of asset-backed securities has reduced compared to 31 December 2007 as a result of a number of securities reaching maturity and also due to market movements. The Group has continued to actively manage its exposure to asset-backed securities and the portfolio remains a high quality credit portfolio with no direct exposures to the US mortgage market, minimal exposure to leveraged structures, no current direct exposure to Monolines and very modest exposure to credit within a Monoline wrapper. Following the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, shareholder funds now have a total exposure of £83m (31 December 2007: £27m) to assets within a Monoline wrapper or leveraged structures, representing 0.3% (31 December 2007: 0.1%) of shareholder financial assets.

Shareholder asset exposures

At 31 December 2008, shareholders had direct exposure to equity, debt securities and investment property of £9.6bn. This included exposure to equity securities of £0.4bn. The exposure to debt securities was £8.3bn and consisted of government debt securities of £3.7bn, corporate bonds of £4.3bn and other debt securities including supranationals of £0.3bn. The exposure to investment property amounted to £0.9bn.

The total shareholder exposure to equity securities, debt securities and investment property of £9.6bn includes £6.6bn of assets held by non-segregated funds in Canada. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than £6.6bn because changes in the value of assets are typically offset by a change in the value of the related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees which may be triggered.

In addition, shareholders had direct exposure to loans and receivables of £11.7bn which included £9.5bn in respect of the retail mortgage book of Standard Life Bank and £2.2bn in respect of the commercial mortgage book of the business in Canada. Both mortgage books are deemed to be of very high quality. For further information on the Standard Life Bank mortgage book see Section 1.5.1. The mortgage book in Canada had an average loan to value ratio of 44%, the value of mortgages where the loan to value ratio exceeded 70% amounted to just £31m and there were no mortgages three or more months in arrears or in repossession at the end of 2008.

Credit ratings

External credit ratings agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for SLAL are A1/Stable and A+/Stable from Moody's and Standard & Poor's respectively. The only changes from the position at 31 December 2007 was the Standard & Poor's outlook, which was raised to A/Positive from A/Stable in May 2008 and then raised again to A+/Stable in February 2009. The change in the credit rating was in part due to the strength of the capital position.

1.8 Risk management

Risk management is an integral part of the Group's corporate agenda. The Group's risk strategy statement links value and risk in a concise expression of our objectives, aligned with our corporate purpose.

The Group's corporate purpose

To generate sustainable, high quality returns for our shareholders.

The Group's risk strategy

We recognise the need to manage long-term value creation, cash flow and risk in a holistic manner in order to make informed decisions to create and protect value in the Group's activities.

We are proactive in understanding and managing the risks to our objectives at every level of the Group and ensuring that capital is delivered to areas where most value can be created for the risks taken.

The Group's Enterprise Risk Management (ERM) framework

We have developed and embedded an ERM framework that enables the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically. The key components of the ERM framework are:

-	Risk control process
-	Emerging risk management
-	Risk and Capital models
-	Strategic risk management
-	Risk culture

The strength of the Group's framework was recognised by Standard & Poor's in April 2008 when we received an 'adequate with positive trend' rating from the agency.

Over the course of 2008, the Group has further enhanced its framework, addressing and strengthening all the key elements and aligning it with external best practice models.

Risk culture

Risk governance structure

The establishment of the Enterprise Risk Management Committee (ERMC) in 2007 represented a significant strengthening of the risk culture of the Group. The ERMC is now well embedded and has proven to be a highly effective and responsive executive forum for the management of risk over the course of a particularly challenging year.

Developments continue to take place to the Group's governance and committee structure. In 2008, the decision was taken to reconstitute the ERMC. The committee now consists of the members of the Group Executive Committee as well as the Chief Risk Officer and Group Strategy and Corporate Finance Director. The Committee meets at least monthly, and usually in conjunction with the Group Executive.

Three Lines of Defence

The Group has adopted the Three Lines of Defence model, which provides clearly defined roles and responsibilities:

First line: day-to-day risk management is delegated from the Board to the Group Chief Executive and, through a system of delegated authorities and limits, to business managers;

Second line: risk oversight is provided by the Group Chief Risk Officer (CRO) and established risk management committees. These management committees are supported by the specialist risk management and compliance functions across the Group; and

Third line: independent verification of the adequacy and effectiveness of the internal risk and control management systems is provided by the Group Audit, Risk and Compliance Committee. This Board committee is supported by the Group Internal Audit function.

The Group's risk committee structure

Enterprise Risk Management Committee (ERMC)

- Responsible for overseeing compliance with the Group's ERM Framework

- Supports the CEO in the management of risk across the Group

- Supported by Group Risk Forums and Group Risk management

Financial Risk and Capital Forum

- Responsible for assurance, assistance and advice to the ERMC

- Ensures principles and standards of risk management are maintained and applied consistently across the Group

- Reviews financial risk management information from business units

- Supported by Group risk management

Operational Risk Forum

- Responsible for assurance, assistance and advice to the ERMC

- Ensures principles and standards of risk management are maintained and applied

- Reviews operational risk management information from our businesses

- Supported by Group risk management

Group and business unit risk functions

- Responsible for ensuring the financial and non-financial risks inherent in the businesses' activities are identified and managed in accordance with the appetite and limits approved by the Group and relevant business boards

- Monitor compliance with business unit risk management policies

- Provide reports to boards and risk committees

Qualitative risk appetites

The Group has defined qualitative risk appetite principles and statements; these are intended to provide guidance to our businesses and help to drive our strategy in line with the Group's appetite for risk.

Risk appetite: general principles

The Group has no appetite for unrewarded risk
The Group has no appetite for any risk that is not consistent with the delivery of our strategic objectives
The Group's appetite for accepting risk is dependent on the expected return exceeding the cost of capital
The price charged for accepting risk should seek to maximise risk/reward profile; prices charged for our products should fully reflect all risks

The qualitative statements of our appetite for specific classes of risk are shown alongside the definitions set out below.

Risk metrics and profile

The Group has in the past profiled its risks and established quantitative risk appetite by reference, in general, to regulatory capital measures. Risk appetites are now set by reference to both excess working capital and shareholder value.

	Excess working capital	Shareholder value
Definition	Shareholder cash that is in excess of regulatory requirements, target solvency requirements, and any further operational constraints.	The value of shareholders' economic interest in the Group's assets; i.e. the present value of cash earnings on a particular enterprise or activity.
Management objective	Management of the primary source of funding for the business, for the strategic activities of the Group and for distributions to shareholders.	Management of the financial strength of the Group and delivery of long-term shareholder value.
Exposure measurement	The loss (after allowing for solvency capital, statutory buffer and respectability capital) that a business might expect to see as a consequence of a defined risk event.	Loss in value of cash flow that a business might expect to see as a consequence of a defined risk event.

These metrics have been chosen to provide consistency in the measurement of risk and capital across the Group's diverse range of businesses, activities and projects. They are intended to supplement, rather than replace, the wide range of metrics currently employed throughout the Group, and where appropriate, make allowance for local regulatory capital considerations.

The Group's risk profile is assessed regularly and reviewed by the relevant executives and the Group risk management committees.

Quantitative risk appetites

Considerations taken into account when quantifying the Group's appetite for any specific risk include:

The general principles outlined above
Qualitative statements of risk appetite
The quantum of loss absorbing capital available to the Group, and
Possible alternative uses for that capital

Our approach for assessing risk exposures and for establishing appetites for risk is outlined in the Risk and capital models section.

Other quantitative metrics

The Group will continue to monitor and assess its financial position on a full range of relevant metrics (including Financial Groups Directive (FGD) surplus, IFRS and Embedded Value, to which the concept of shareholder value is directly linked).

ERM reporting

The content of management information delivered to governance committees has been reviewed, developed and enhanced over the course of the last year.

We expect further enhancements to be made to management information to strengthen our risk management capability and to further embed the core value metrics noted above.

Risk control processes

Risk control processes are the practices by which we manage risk within the Group. The processes support the identification, assessment, control and monitoring of risk and are defined within, and implemented by, the Group's policy framework.

IDENTIFY	Identify major sources of risk which may affect equity holder returns and/or the interests of the Group's policyholders, customers and other stakeholders.	Internal/external events and losses
		Risk register and policies
		Risk profile and ownership
		Key processes and ownership
		Risk metrics/indicators
		Gross and net risk assessment
		Key controls
		Benchmarks

ASSESS	Assess exposures to each major source of risk, using qualitative and quantitative techniques as appropriate.	Limits: thresholds/tolerances

CONTROL	Establish a defined response to risk. Management selects the risk responses, which may include avoiding, accepting, reducing or transferring the risk exposure.	Assurance mechanisms: Control self assessment/policy compliance/2nd line oversight/audit reviews

MONITOR	Current exposure to identified risks is monitored and reported as required.	Reporting to committees and Boards

Policy framework

The policy framework supports the Group's corporate purpose by providing a consistent, high level approach to managing the key risks faced by the Group, and assists in ensuring that all businesses operate effectively, efficiently and in compliance with all applicable laws and regulations.

The policy framework operates on three levels:

Governing principles: articulate the Group's approach to managing our key risks at the highest level, and communicate how the policy framework supports the Group Strategy

Policies: support the governing principles and contain clear standards stating what business units are required to do, and

Procedures, controls and communications: designed and implemented by business units to meet the policy standards in a manner appropriate to that individual business unit

Emerging risk management

The Group has defined a clear and simple process for the identification and management of emerging risks. The process provides for:

The identification of emerging financial and non-financial risks
The creation of action plans and identification of early warning indicators
The effective management of emerging risks by the appropriate committee, and
The passage of any risks identified into 'business as usual' processes where appropriate

The Group's emerging risk management process

(Diagram removed for the purposes of this announcement)

Risk and capital models

Extensive work has taken place to enhance our internal risk and capital models. The principal objective of this initiative is to improve the degree of consistency applied to the quantitative measurement of risk and capital usage across all businesses.

Within our model, the capital of the Group is quantified according to a number of metrics (principally, but not exclusively, those outlined above (see Risk culture section)). Businesses plan capital consumption using internally agreed targets, set to ensure that strategic objectives can be delivered under a wide range of market and trading conditions.

The risk exposures of the business units are assessed on the basis of the expected variance in key metrics in response to specific risk events, covering the full range of risks to which the Group is exposed.

Strategic risk management

Strategic risk management forms an integral part of the strategic planning process and is directly linked to the Group's corporate objectives. It provides a Group-wide overview that links all business units within the single framework. This process provides enhanced capability to assess strategic allocation of capital and the ability to identify, monitor and manage emerging risks.

1.8 Risk management continued

Risks facing the Group are:

Risk type	Key risks	Key risk controls	Qualitative appetite statement
Demographic and expense The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected, which for the purpose of risk management includes liabilities of insurance and investment contracts.	Longevity Persistency Morbidity/mortality (assurances) Expenses	Regular reviews of experience Reinsurance and risk transfer Business planning process Specified underwriting limits Testing of claim values, reinsurance recoveries, and the survival of annuitants	The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group's overall strategic objectives.
Credit The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of corporate bonds due to a widening of corporate bond spreads.	Counterparty/bond default Spread widening Concentration of exposure	Regular monitoring of risk exposures to ensure that risks remain within approved risk appetite Specific limits on counterparty exposure, based on credit rating, approved by the Group Board Group companies establish and maintain adequate controls to manage exposure within these specified limits	The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the risk adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and will therefore establish robust risk limits which must be adhered to by Group companies.
Market The risk that arises from the Group's exposure to market movements which could result in the value of income, or value of financial assets and liabilities, or cash flows relating to these, fluctuating by differing amounts.	Equity and property risk Interest rate risk Foreign currency risk	Investment benchmarks, and risk tolerances around these benchmarks, set regularly for each major liability based on the nature of that liability to ensure that risk remains within Group's appetite Regular monitoring of asset mixes and the exposure of Group companies to market risk to ensure that they remain within the above tolerances Limits for foreign currency set by the Group Board	The Group has no appetite for market risk exposures except where exposures arise as a consequence of core strategic activity (principally as a consequence of exposure of revenue streams to market risks).
Liquidity The risk that businesses 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 costs.	Diversification of funding sources Quality of funding sources Depth and liquidity of particular markets	Businesses maintain contingency funding plans which operate on a continuous basis and are fully documented Regular monitoring against forecast data, accompanied by cash flow scenarios Regular monitoring of exposure to liquidity risk to ensure they remain within agreed tolerances	The Group has no appetite to fail to meet its liabilities as they fall due.
Operational The risk of loss, or adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or from external events.	Fraud or irregularities Regulatory or legal Customer treatment Business interruption Supplier failure Planning Process execution People, e.g. loss of key people	Regular risk assessment to identify the potential cause of the risk The transfer, acceptance, reduction or transfer of risk within risk appetite	The Group has an appetite for operational risks where exposures arise as a consequence of core strategic activity. The Group will seek to put effective controls in place to reduce operational risk exposures except where the costs of such controls exceed the expected benefits.

The Group may also suffer loss or opportunity costs arising as a consequence of reputational risks or regulatory censures; the Group has an extremely low appetite for such risks.

For further information please refer to Note 39 - Risk management.

1.9 Customer satisfaction

UK financial services

We remain committed to building strong customer and adviser relationships. We consider this to be the keystone of our drive to provide all customers with exceptional experiences when dealing with Standard Life. Our relationship with our customers is continually monitored and our constant focus on these areas of business has been recognised during the year with these awards:

Life and pensions

People's Choice Award from Pensions Management Administration and Service Awards
Money Marketing Awards:
- Company of the Year (ninth consecutive year)
- Best Pension Provider (fifth consecutive year)
Financial Adviser Life & Pensions Awards:
- Best Group Pensions Provider
- SIPP and/or SSAS Provider of the Year (third consecutive year)
- Best Income Drawdown Provider (second consecutive year)
- Best Alternatively Secured Pension Provider (second consecutive year)
Financial Adviser Service Awards:
- Life and Pensions Provider 5-Star Award (13th consecutive year)
- Special Outstanding Achievement Award in recognition of winning the 5-Star Award for 13 consecutive years
People's Choice Award for the company with the best technology, administration and service in our industry from Pensions Management Administration and Service Awards (second consecutive year)
Life Assurance Company of the Year and Multi-Asset Manager of the Year for 2008 from Professional Pensions - UK Pension Awards

Banking

5-Star Award in the Mortgage Providers and Packagers category at the FTAdviser Online Services Awards

Healthcare

Gold Standard Award at the Gold Standard Awards (sixth consecutive year)

Canada

High quality customer service is the basis of our growth strategy, which focuses on high retention and strong customer relationships. Our client retention level, based on internal methodology, was 94.6% in 2008 (2007: 95.7%). We continually invest in technology, training and processes as part of our efforts to meet the service expectations of our customers. In addition, we have enhanced web-based functionality across our group lines to ease administration of our products from both the sponsor's and participant's perspective.

A survey is carried out at least once a year with Group Insurance plan members being asked if they would recommend Standard Life services to others. In November 2008, this was 97% (January 2008: 97%). In Group Savings and Retirement, plan sponsors are asked once a year to grade the company on how likely they would be to recommend us to others; based on the Net Promoter® score methodology. The number of responses in the top 20% categories exceeded those in the bottom 60% categories by a margin of 24% (2007: 16%).

Standard Life Investments

Our business remains underpinned by our strong longer term investment performance, delivered through the rigorous application of our 'focus on change' investment philosophy, and by our continuing commitment to very high levels of client service. High quality support by our client service teams, combined with strong investment performance from our fund management teams, has been recognised with a record 15 awards in 2008, including:

Multi-Asset Manager of the Year at the Professional Pensions UK Pension Awards 2008
5-Star Award in the Investment category at the FTAdviser Online Service Awards
Best Overall Group Lipper Award in the Non UK Equity Large category at the Lipper Fund Awards 2008
Standard Life Investments' UK Smaller Companies Fund won the UK Smaller Companies category at the Investment Week Awards 2008
Harry Nimmo, backed by his award-winning UK Smaller Companies team, was ranked Citywire's Number One Fund Manager of the Year 2008
Best Private Equity Trust award won by Standard Life European Private Equity Trust fund at the Money Observer Investment Trust Awards 2008
Gold ranking at the Ethical Investment Association (EIA) Transparency Awards

1.10 Employee engagement

Our Group-wide engagement score for 2008, as measured by the Gallup survey, increased to 3.91 out of 5 (2007: 3.79).

This places us in the top half of companies within the Gallup global database. Results were encouraging across most of our key businesses.

The involvement of all our people in the action planning process is key to progressively developing the engagement of teams at all levels. Local action plans are supported by a Group-level engagement plan, and these combined, support our objective to be in the top performing quartile of the Gallup global employee engagement database by 2012.

We believe that highly engaged people are essential to building, and maintaining, valuable customer relationships, in turn helping to promote business growth and shareholder value.

All of our businesses recognise the importance of attracting, developing and retaining individual skills and talent, as a means to support delivery of business goals.

We are committed to ensuring that all our people understand, and have the opportunity to apply, their own unique strengths within their roles. Additionally, we support the engagement of our people through the selection and development of our leaders, and through promoting a working environment where feedback is given and received, and performance is rewarded fairly and appropriately.

1.11 Basis of preparation

Overview

Our Business review for the period to 31 December 2008 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). Under Section 417 of the Companies Act 2006 and DTR 4.1.8, the Group is required to provide a fair review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 - Group overview. Principal risks are detailed in Section 1.8 - Risk management and Note 39 of the IFRS Group financial statements section of this report. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles (GAAP) measures, which we have used in the Business review, together with other measures that are calculated in accordance with IFRS, are useful for both management and investors and make it easier to understand our Group's performance.

The most important non-GAAP measures in the Business review include European Embedded Value (EEV) information and IFRS underlying profit.

All non-GAAP measures should be read together with the Group's IFRS income statement, balance sheet and cash flow statement which are presented in the IFRS Group financial statements section of this report.

EEV and IFRS reporting

The financial results are prepared on both an EEV basis and an IFRS basis. All EU listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies and is designed to give a more accurate reflection of the performance of long-term savings business. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the CFO forum. The CFO forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to 'covered' business, which mainly comprises the Group's life and pensions business. Non-covered business is reported on an IFRS basis. The EEV financial results in Section 1.3 of the Business review and in the EEV financial statements section of this report have been prepared in accordance with the EEV methodology applied by the Group in Note 16 of the EEV financial statements section of this report for 2008, and in the relevant EEV methodology note included in the 2007 Annual Report and Accounts in respect of the comparative period. The IFRS financial results in Section 1.4 of the Business review and in the IFRS Group financial statements section of this report have been prepared on the basis of the IFRS accounting policies applied by the Group in the IFRS Group financial statements section of this report.

EEV operating and IFRS underlying profit

The segmental analysis of IFRS underlying profit before tax presents profit before tax attributable to equity holders adjusted for non-operating items. The 2008 EEV consolidated income statement presents EEV profit showing both operating and non-operating items. In doing so, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group. The 2008 EEV consolidated income statement and the 2008 IFRS reconciliation of Group underlying profit to profit before tax are presented in the relevant financial statements sections of this report.

Directors' responsibilities for preparing the financial statements

The following statements, which should be read in conjunction with the statement of auditors' responsibilities included in the independent auditors' reports, are made to help shareholders distinguish the respective responsibilities of the Directors and the auditors in relation to the financial statements for 2008.

The Directors are responsible for preparing the Annual Report and Accounts 2008 and Summary Financial Report 2008. The Directors are required by company law to prepare financial statements for each financial year, giving a true and fair view of the state of affairs of the Company and of the Group at the end of the financial year, and of the profit or loss of the Company and the Group for the financial year. The financial statements of the Group must be prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board, as adopted for use in the European Union, the Companies Acts 1985 and 2006, the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority and Article 4 of the IAS Regulation. The Directors have elected to prepare the Company's financial statements on the same basis.

The Directors consider that, in preparing the financial statements on a going concern basis, the Company has used appropriate accounting policies, that these have been consistently applied and supported by reasonable and prudent judgements and estimates, and that all applicable accounting standards have been followed.

The Directors have responsibility for ensuring the maintenance of proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Directors' remuneration report comply with the Companies Acts 1985 and 2006, the DTR and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and for taking reasonable steps to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group's website. Legislation in the UK governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.

Directors' responsibility statement

We confirm to the best of our knowledge that:

the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and
the Business review, which is incorporated into the Directors' report, includes the information required by DTR 4.1.8 and DTR 4.1.9, namely a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

By order of the Board

Gerry Grimstone, Chairman	David Nish, Group Finance Director
12 March 2009	12 March 2009

Corporate governance

(Extract from section included for the purposes of this announcement)

Going concern

After making enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.

END OF PART 1 OF 6

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